America’s China Hawks Get Their Way; Chinese Chip Makers Get the Money

The U.S. ban on selling advanced microchips and chip-making equipment to China has been a huge success—for China.

• Over the last 12 months, revenues of Chinese semiconductor equipment companies—they make the machines that make the chips– grew almost 40%; sales of U.S. and other western companies subject to the export ban declined by 0.6%
• Forced to roll their own, Chinese chip makers have advanced their skills so rapidly they are now just one generation behind their leading western rivals.
• The most important U.S. and allied semiconductor companies are losing not only billions in revenue but millions in unit volume. This slows their ascent on the learning curve—the driver of Moore’s law—which produces a 20-30% reduction in costs for every accumulated doubling of volume.

This data came from the invaluable Robert Castellano, entrepreneur of the Information Network, a leading source on the state of the semiconductor industry. He noted cautiously that the stagnation in U.S. revenues is more the result of the global chip slump than any competition from China. In China, there is no such slump. Castellano attributed most of the growth of the top four Chinese equipment companies to “failed U.S. sanctions, prompting Chinese semiconductor companies to buy from local companies,” in his special report, Mainland China’s Semiconductor and Equipment Markets.

Remember Huawei, the Chinese maker of telecom equipment that was often the first choice of U.S. telecom networks. Under Trump, Huawei equipment was banned from the West on the unsupported—and ridiculous—claim that the Chinese would use secret “back doors” in the Huawei chips to copy your texts and maybe even your sexts.

One more lie

The secret spy device claim has long been abandoned by the U.S. government that foisted it—along with so many lies of late–on its own citizens and imposed it as a loyalty test on its allies. The Huawei ban was nothing but protectionism directed at a company that routinely outperformed western rivals.

The ban did hurt Huawei… for about five minutes. Then the Chinese company responded by building in-house skills far exceeding what it had before the U.S. attack. Above all, Huawei, once a multi-billion-dollar customer of the Western semiconductor industry now makes its own chips, including at the elite “7 nanometer” mode. (The quotation marks are because “X nm” is no longer a measurement, but a label for a technology generation.)

The “7 nm” generation is at most one and a half steps behind the leading processes in the industry, with “5 nm” having been commercially available just since 2020 and “3 nm” just coming online at Taiwan Semiconductor (NYSE:TSM). Intel (NASDAQ: INTC) did not offer a 5nm chip until this year.

Soon, probably within a year, China’s leading chip manufacturer, Semiconductor Manufacturing International Company (SMIC) will be manufacturing at the 5nm mode. How do we know this? Easy. As Castellano reveals, Chinese equipment makers are already making the machines needed for 5nm production—and selling them to western companies that could buy from any equipment maker on earth, yet prefer the Chinese makes.

A ban intended to keep China from importing elite equipment made China an exporter of that equipment.

Boggling is our regulators’ ignorance of the technology they presume to oversee. One reason the Chinese got to 7nm so quickly was that U.S. regulators approved Chinese imports of equipment to make chips in the older “14 nm” generation. As Castellano points out, apparently no one ever told our bureaucrats the same machines could be adapted for 7nm.

Dumb and Dumber

Moreover, because bans on new devices are announced before becoming effective, the Chinese, who reportedly invented the abacus and know about counting, simply double up on orders ahead of the ban and stockpile the devices. Castellano, who also can count, documents this with revenue numbers from the top U.S. chip makers.

Gosh, those regulators are smart.

The next shoe to drop? Currently the most important chip company in the world is America’s Nvidia (NASDAQ: NVDA). Nvidia invented the chips essential to Artificial Intelligence (AI) and continues to lead the technology. Its sales have more than quadrupled since 2020 to $45 billion and are projected to more than double again to $92 billion by 2025. That would far surpass Intel and sum to more than three times the projected sales of third-place Advanced Micro Devices (NASDAQ: AMD).

The United States has banned Nvidia from selling its latest and greatest AI chips to China, including the current sales leader, the H100, and the next generation H200. Without the ban, China, already the world’s largest importer of chips, would likely become NVDA’s leading customer.

Instead, within two years some Chinese company will be making a chip to rival NVDA’s. That company may owe Nvidia billions in fines for patent infringement. But with the United States making war on the Chinese chip industry, why would they pay?