Introduction

Recently, there has been a lot of concern about the impact of doing business with Chinese companies after new announcements were made by the Bureau of Industry and Security (BIS) of the US Commerce Department.

On October 7, 2022, a total of 31 persons were added to the UnVerified List (UVL) and 28 additions were made to the Foreign Direct Product Rule (FDPR) list. Not only will it have a massive effect on China, but it has the potential to substantially disrupt the electronics ecosystem including semiconductors, software, electronic assemblies, and semiconductor manufacturing equipment.

The details and impacts may still be dynamic, and it is still too early for a comprehensive and part-level analysis, however, it’s critical that we highlight potential issues which we will have to address as the picture becomes clear.

What We Know to Date

The new ruling relates to the export, re-export, or transfer of goods within China, which is now becoming more restricted by the US government and eventually will require applications for licenses by suppliers. It targets 3 main industries: Semiconductor Manufacturing, Advanced Computing, and Supercomputers. It comes in a variety and gradations of regulations.

• The UnVerified List is raising a red flag, no prohibition yet, but be careful in doing business.
• If investigations determine that a listed entity on the UVL list is not ‘bonafide’ (legitimacy and reliability relating to the end use and end user of items subject to the EAR), it will move them to the Entity List, which is a list of persons where specific licenses are required and it is (almost)prohibited to conduct business with.
• Foreign Direct Product Rule is an additional rule in which companies using US content(equipment, software, technology) are also subject to US export control laws, even if the product is made outside of the US; so far, Huawei and its affiliates (e.g., HiSilicon) are the only semiconductor companies on the list.

Restricted Transactions

Customers supplying to the Chinese semiconductor manufacturing industry may be impacted by building products or supplying products to Chinese semiconductor facilities that match the below characteristics:

• Logic ICs using a non-planar transistor architecture or with a “production” technology node of 16/14 nanometers or less (see note on ASML below).
• NAND memory integrated circuits with 128 layers or more.
• Dynamic random-access memory (DRAM) integrated circuits using a “production” technology node of 18-nanometer half-pitch or less.

A non-exhaustive list of semiconductor manufacturing companies that match the above are:

• HuaLi, Shanghai: Logic in 14nm
• SMIC, Shanghai: Logic in 14nm and below (see graph from Omdia; only a small portion of SMIC’s revenue is in 14nm)
• SMIC, Shenzhen: Logic in 14nm and below (see graph from Omdia)
• TSMC, Nanjing: Logic in 16nm à 13th of Oct received a 1yr license to continue ordering American chip-making equipment
• YMTC, Wuhan: NAND in >= 128layer
• Samsung Electronics, Xi’an: 3D NAND, layers TBD; in 14nm or below
• SK Hynix Semiconductor, Wuxi: DRAM in below 10nm à received a 1yr license to continue ordering American chip-making equipment

Update from October 17, 2022: both Samsung and SK Hynix have received a waiver and can still use US equipment for their China sites.

Preliminary Assessment of the Effects to Semiconductor Parts Supply

A new ECCN (Export Control Classification Number) has been introduced that is related to ICs, meaning a license is required for the export, re-export, and transfer (in-country) to or within China and embargoed countries.

This new ECCN 3A090, will replace the existing ECCN and controls ICs that meet the specific criteria. Examples of this are graphical processing units (GPUs), tensor processing units (TPUs), neural processors, in-memory processors, vision processors, text processors, co-processors/accelerators, adaptive processors, field-programmable logic devices (FPLDs), application-specific integrated circuits(ASICs).

Historical Facts and How This Will Further Affect the Future of the Semiconductor Industry

An essential factor in the determination and limitation of growth in the China semiconductor industry relates to the Dutch company ASML, the only company that produces lithography equipment for both mature and the most advanced chip technologies below 7nm.

The US campaign to restrict this EUV export already began in 2018, after the Dutch government gaveASML, a license to sell its most advanced machines (EUV) to a Chinese customer, most probablySMIC. After multiple rounds of talks between US and Dutch officials, the Dutch government decided not to renew the export license. The Chinese companies that were almost immediately affected are SMIC, the #5 foundry company, and Yangtze Memory Technologies Inc.

Both companies were focused in producing advanced chips, using technologies lower than 10nm (that is typically the tipping point between DUV (Deep UltraViolet) and EUV (Extreme UltraViolet). However, a couple of months ago, it was reported by an independent source that SMIC had produced a chip for Bitcoin mining that appears to be made in 7nm technology, while not having access to EUV lithography.

The question remains whether the production process is running in an economically viable way in terms of yield. Eventually, not having access to EUV lithography equipment will put a ceiling on further growth in this high-end semiconductor foundry market for China, unless China finds another way.

However, it took ASML 17 years to develop EUV, and now sells for $150M each, and supports almost all deep submicron processing technologies.

Because of this, Chinese and other design houses working on High-Performance computing, and mobile systems on a chip and requiring state-of-the-art lithography will have to engage with non-Chinafoundry companies that have access to the technology of 7nm and below. Such foundry companies are limited: TSMC (factories in Taiwan and future in EU and US), Samsung (S Korea), and Intel (US & EU).On top of this, three (3) Memory (DRAM and NAND) suppliers use the most advanced technologies: Micron (Taiwan now and US & Japan in the future), SK Hynix (S Korea), and Samsung (S Korea).

Breaking – Comment from ASML

“We are assessing the potential implications of the new regulations, if any, and cannot comment at this moment,” the company said in a reaction to questions.

Knowing that DUV can do nodes of 16/14nm, which are restricted technologies as per above, we need to closely follow the possible repercussions on the export of DUV to China as well. This is lithography for 10nm and above. If that is strictly maintained (no waiver) then that will significantly reduce the semiconductor growth in China specifically and possible global expansion, since this was already an underinvested technology area.

We realize it is still early in the process and we only have our insights on the immediate impact, however, it is important as lithography maker ASML, records 20% of its sales to China.

Key Takeaways

• These new regulations will put limitations on semiconductor development and production in China.
• Restrictions are included for all levels of the electronics industry products and services (capital equipment, ICs, assemblies, software).
• This has the potential impact of immense curbs on China’s attempts for semiconductor self-sufficiency.
• The regulations create additional export regulations and a critical impact on adherence.
• The exceptionally dynamic environment right now, with a lot of uncertainties, while this is developing, we will be keeping this at the forefront of our attention.

If you have any questions or need additional information, please do not hesitate to contact me (rudi_palmans@jabil.com) directly.