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US-Japan alliance to do ‘great harm’ to China’s chip ambitions

US-Japan alliance to do ‘great harm’ to China’s chip ambitions
An evaluation sample of a chip-on-wafer used for the 2.5D package, developed by the JOINT2 consortium displayed at the Semicon Japan exhibition in Tokyo, Japan, on Wednesday, 14 December 2022. (Photo: Kiyoshi Ota/Bloomberg)

Japan’s decision to join the US and Netherlands in restricting exports of chipmaking gear to China is giving the allies powerful new weapons to deploy in the escalating technology war.

Japan’s trade ministry said last week that suppliers of 23 types of chip technology will need government approval to export to countries including China as early as July. That affects a broad range of companies that have been central to China’s efforts to build a domestic chip industry, including Tokyo Electron, Nikon and Screen Holdings.

While not as high-profile as their counterparts in the US or Netherlands, Japanese companies control key steps in the semiconductor supply chain, which could be used as potential choke points against China. Screen, for instance, is the leading producer of wafer cleaning equipment. Lasertec Corp is the sole supplier of machines needed to inspect designs for the world’s most advanced chips, using extreme ultraviolet lithography chipmaking.

“The goal of these new controls is to cut off Chinese firms from a broad array of advanced chipmaking tools with the aim of making it more difficult for Chinese firms to manufacture advanced chips for artificial-intelligence purposes,” said Chris Miller, an economic historian and author of Chip War: the Fight for the World’s Most Critical Technology. The idea is to slow down China’s tech development to help widen the gap between China’s military capabilities and that of the US and its allies, he said. 

When the Biden administration unveiled its sweeping restrictions on chip-related exports to China in October, American companies such as Applied Materials Inc were directly affected by the rules. With the addition of the Netherlands and now Japan, all the major countries that produce chip making equipment are participating in the China blockade. The restrictions cover the most advanced machines, including those that make logic chips at 16 nanometers or more advanced geometries.  

“Japan joining the export curbs will do great harm to China’s ability to make and develop chips smaller than 16 nanometers,” said Akira Minamikawa, analyst at research company Omdia.

The three-country alliance will certainly compel Beijing to step up efforts to develop Chinese supplies of chipmaking equipment and materials, so it’s no longer reliant on foreign suppliers. But that will take years and increase the cost of producing semiconductors for the Chinese market. 

“Even if China develops its own chip technology, the standards will be completely different from those of the rest of the world,” said Toyo Securities analyst Hideki Yasuda. “That’s going to mean more costly chips that lower its tech competitiveness.” 

Over the weekend, China’s Foreign Minister Qin Gang urged his Japanese counterpart to refrain from supporting US efforts to suppress the Chinese semiconductor industry. Qin said a chip blockade will only strengthen Beijing’s resolve to achieve self-reliance. On Tuesday evening, China’s Ministry of Commerce issued a statement saying the country had “grave concern” over Japan’s plans. 

Chinese chip-related stocks surged amid optimism that they will benefit from Beijing’s semiconductor efforts. Ingenic Semiconductor Co jumped 13% on Monday and another 10% on Tuesday.

Yoshimasa Hayashi, Japan’s minister of foreign affairs, declined to make any such commitments during his trip to Beijing, instead pressing Qin for the swift return of a Japanese citizen detained by Beijing. 

The country’s stance will likely cost Japanese companies in lost sales. Nikon, for example, gets about 28% of its revenue from China and it has been banking on strong demand for its immersion lithography machines in China to help finance its next technological bet, aimed at closing the gap with Dutch rival ASML Holding NV.

“This forces Nikon to go back to the drawing board on its China strategy for immersion lithography machines,” said Kazuyoshi Saito, senior analyst at Iwai Cosmo Securities.

Nikon is now evaluating the impact of Japan’s chip curbs on its earnings, a spokesperson said. “We will follow all regulations and work to maximise our performance within any given framework.”

Japan is home to dominant makers of photoresist coaters and developers and mask inspection equipment needed to make the most advanced chips, as well as the single biggest source of silicon wafers and many of the fine chemicals necessary.

Many have grown with the Chinese economy, helping to fuel their customers’ technological ascent. Some even benefited from the geopolitical rivalry between Washington and Beijing, as that spurred more Chinese customers to pay a premium for Japanese equipment, bolstering Japan chip gear exports to its biggest trading partner last year, despite a slowdown in the overall semiconductor market.

Screen gets about a quarter of its revenue from China now, helped by a surge in demand from chipmakers such as Semiconductor Manufacturing International Corp. But if Chinese customers can no longer buy its gear they will have to turn to less proven alternatives. 

Prior to Japan’s announcement, it had said it expected that proportion to fall to around 20% for 2023. The company said it would follow the Trade Ministry instructions.

Yokohama-based Lasertec holds a unique place in the semiconductor supply chain. It’s the only supplier of machines that do design inspections for extreme ultraviolet, or EUV, lithography chipmaking, the most advanced process for making chips. Its shipments to China were already constrained due to a ban on ASML’s EUV lithography machine shipments.

Japan’s new restrictions — which don’t affect exports bound for favoured trading partners Taiwan, South Korea and Singapore — are an about-face that is resetting expectations throughout the country’s $30 billion semiconductor equipment making industry. 

Tokyo Electron, which gets about 25% of its sales from mainland China, could see that drop by five to 10 percentage points, according to Bloomberg Intelligence analysts Masahiro Wakasugi and Brian Moran. 

Tokyo Electron will act appropriately after assessing any new regulations, a spokesperson said.

While China will try to develop its own technologies, historically it’s been difficult to catch up in semiconductor technology due to the rapid improvement in processing power in rivals’ integrated circuits, said Miller. 

“Japan’s new restrictions make it much harder for China,” he said. BM/DM

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