Chips make it difficult for the United States to leave China

In May, Idaho-based chip maker Micron Technologies was hit hard as part of the technology war between the US and China. The Chinese government has banned companies that handle sensitive information from buying Micron chips, saying the company failed a cybersecurity review.

Micron said Change can destroy approximately one-eighth of its global revenue. However, in June, the chip maker announced that it would increase its investment in China – adding $600 million to expand a chip packaging facility in the Chinese city of Xi’an.

“This investment project demonstrates Micron’s unwavering commitment to its business and team in China,” said an announcement posted on the company’s Chinese social media account.

Global semiconductor companies find themselves in a very difficult position as they try to drive a growing rift between the United States and China. The semiconductor industry has become ground zero for the technology rivalry between Washington and Beijing, with new restrictions and punitive measures imposed by both sides.

US officials say US products have fueled Chinese military and surveillance programs that run counter to US national security interests. They have imposed increasingly tight limits on the type of chips and chip-making equipment that can be sent to China, and are offering new incentives, including grants and tax breaks, to chipmakers who choose to build new operations in the United States.

But it can take years to build factories, and relationships between companies remain strong. China is a major market for chips, since it is home to many factories that make chip-rich products, including smartphones, dishwashers, cars and computers, which are exported around the world and bought by consumers in China.

Overall, China accounts for nearly a third of global semiconductor sales. But for some chip makers, the country accounts for 60 percent or 70 percent of their revenue. Even when chips are made in the US, they are often sent to China for assembly and testing.

“We can’t just flip a switch and suddenly say you have to get everything out of China,” said Emily S. Weinstein, a research fellow at the Georgetown Center on Security and Emerging Technology.

The industry’s dependence on China highlights how the close – but highly contentious – economic relationship between Washington and Beijing poses challenges for both sides.

Those tensions were reflected during Treasury Secretary Janet L. Yellen’s visit to Beijing this week, where she attempted to walk a fine line by criticizing some of China’s practices while insisting that the United States does not seek to sever ties with the country.

Ms. Yellen criticized China’s recent punitive measures against foreign companies, including limiting the export of some metals used to make chips, and suggested that such measures were the reason the Biden administration tried to make US manufacturers less dependent on China. But she also emphasized that the relationship between the United States and China is strategic and important.

“I made it clear that the United States does not seek a complete decoupling of our economies,” Ms. Yellen said during a roundtable with US companies operating in China. We seek diversification, not separation. Decoupling the world’s two largest economies would destabilize the global economy, and it would be virtually impossible to do so.”

The Biden administration is preparing to start investing heavily in US semiconductor manufacturing to lure factories out of China. Later this year, the Commerce Department is expected to begin distributing funds to help companies build US chip facilities. The money will come with strings: companies that receive funding must refrain from expanding high-tech manufacturing facilities in China.

The administration is also considering more restrictions on chips that can be sent to China, as part of a push to expand and end sweeping restrictions it issued last October.

Those measures could include potential restrictions on sales to China of advanced chips used in artificial intelligence, new restrictions on Chinese firms’ access to US cloud computing services, and restrictions on US venture capital investments in the Chinese chip sector, according to people familiar with the plans.

The administration is also considering halting licenses it has granted to some US chipmakers that allowed them to continue selling products to Chinese telecoms firm Huawei.

Japan and the Netherlands, home to companies that make advanced chipmaking equipment, have also imposed new restrictions on their sales to China, in part at the urging of the United States.

China has issued restrictions of its own, including new controls on exports of metals used to make chips.

Amid tougher regulations and new incentive programs from the United States and Europe, global chip companies are increasingly looking outside of China as they choose the locations for their next major investment. But it is likely that these facilities will take years to build, which means that any changes in the global semiconductor market will appear gradually.

John Neufer, president of the Semiconductor Industry Association, which represents the chip industry, said in a statement that the continued escalation of controls poses a significant risk to the global competitiveness of US industry.

“China is the world’s largest market for semiconductors, and our companies simply need to do business there to continue to grow, innovate and stay ahead of global competitors,” he said. “We urge solutions that protect national security, avoid inadvertent and permanent damage to the chip industry, and avoid future escalations.”