Thread by @pstAsiatech

#October7Surprise China’s domestic semiconductor manufacturing equipment (SME) industry is perhaps the most overlooked party to the October 7 export control package.
A Thread.

I wrote about the overall semiconductor industry in China, government strategies and policies, including the tool maker segment here: americanaffairsjournal.org/2021/02/the-fu…

As @JPKleinhans and @JohnLee laid out nicely in their piece here: thediplomat.com/2021/09/mappin… Chinese domestic tool makers are well behind global counterparts, which is not surprising given their late entry to the market, and innovative capacity of US, Dutch, and Japanese leaders.

The new US controls are designed to both slow the domestic Chinese tool making industry, and prevent workarounds by extending US persons requirements to semiconductor manufacturing equipment.

One of new key areas of controlled US person support activities is aimed squarely at newly controlled SME intended for use in producing advanced node semiconductors + software/hardware/technology required for the development or production of such equipment, now also controlled.

The US persons support control has already forced Chinese companies to begin looking for domestic alternatives to Applied Materials, Lam, and KLA, YMTC China’s largest memory chip maker, has issued at least 20 tenders for a broad range of chipmaking equipment.

Also, while YMTC has not cancelled or postponed already placed equipment orders, the company has suspended any plans to expand. CXMT, YMTC’s smaller rival focused on DRAM, has also put some expansion plans on hold.

“The current strategy is that if there is workable domestic semiconductor production equipment, even though [the suppliers] need help, we will buy from Chinese companies. If not, we shop from non-US vendors, mostly Japanese,” said a senior YMTC engineer. ft.com/content/01bd6d…

To make matters worse, Chinese chip producer loss of access to certain US-made tools has stopped majority of construction projects for production facilities that drive domestic SME market. There are more than a dozen new fabs under construction in China that could be affected.

Chinese equipment makers thus face a double whammy. In addition to expansion plans put on hold, they also rely on imports of key semiconductors to make the equipment that makes semiconductors.

“Only the assembly part of our products is completely based in China, while the rest requires foreign technology and components . . . just limitations on components can easily choke us,” said a senior engineer at AMEC.

The future mix of SME available in China from foreign + domestic sources will depend in large part on ability of US officials to convince the Dutch and Japanese governments to implement similar restrictions on their leading SME firms, such as ASML and TEL. ft.com/content/4a060f…

Advanced Micro-Fabrication Equipment (AMEC) and Naura Technology Group manufacture a range of semiconductor production systems, including oxidation, epitaxy, laser annealing, etching, and chemical vapor deposition (CVD) systems.

In addition, Chinese tool makers face a major potential brain drain, as engineers seek higher-paying jobs in semiconductor design houses and manufacturers. The current complex situation facing these firms is also forcing them to collaborate to seek solutions.

Highlights how new rule differs from other U.S. export controls: it applies to commercial items like SME that are used at stages farther upstream in production chain than traditionally covered by multilateral controls more directly related to production of military systems/WMD.