Semiconductors

Semiconductors in the context of integrated circuits and microelectronics are electronic devices that power and enable everything from televisions sets to cars and computers. Semiconductors are critical for the creation and functioning of various defense modernization efforts and emerging technologies with defense applications.[1] As such, the United States and other states have prioritized both domestic production of these items and acted to secure their own supply lines to these critical devices. Broadly, the design and manufacturing of cutting-edge semiconductors is structured in such a way that designers of cutting-edge integrated circuits, sometimes referred to as chips, outnumber the number of manufacturers of cutting-edge integrated circuits. Taiwan-based TSMC is a leading manufacturer of cutting devices and center for much of the semiconductor discourse.[2] Various designers, such as Intel and other leading semiconductor companies contract the actual building of devices to TSMC and other fabrication plants.

China likely does not have the capability to produce small feature size (sub 10nm) semiconductors at commercial scale. While there are a number of barriers to this, one main barrier is the need for precision specialist production equipment which is only manufactured by one company – ASML in the Netherlands. In the absence of this, Chinese entities also outsource production of sub 10 nm products to the only companies with semiconductor fabs capable of manufacturing such devices: TSMC and Samsung.

That said, China does have mainland producers of semiconductors as indigenous integrated circuit technology is a top priority of the Five-Year Plans. The largest foundry in the PRC is Semiconductor Manufacturing International Corporation (SMIC) which has processes ranging between 14 nm and 0.35 micron.[3] In December 2020 SMIC announced a new venture, SMIC Beijing which would increase the number of 12-inch wafers per month. That same month the U.S. Bureau of Industry and Security (BIS) added SMIC to the Entity List due to its relationship with the PRC military.[4] SMIC joined dozens of other semiconductor related entities to be restricted in recent years. While this may slow down slightly the rate of innovation in this field by the PRC, there is also a risk to US market share when restrictions are only applied unilaterally. While these restrictions prevent US companies from engaging with the inevitable Chinese semiconductor market, it may be ceding that market share to competitors in countries like South Korea or Japan. This has also, in turn, largely decoupled the semiconductor industry in China from the US which limits various forms of market-based leverage. Most recently, in 2022 TechInsights reported that 7nm SMIC technology was found in bitcoin mining technology and represents a leap in indigenous production by the PRC, despite sanctions.[5] In the follow up report by TechInsights released in August, analysts concluded that the SMIC technology had advanced to levels that can rival Intel, TSMC, and Samsung. In the report, many comparisons are made between SMIC’s design and that of TSMC. [6]

Outside of specific fabrication limitations, design information and know-how is one area the PRC lacks. However, joint ventures have served as a means for the PRC to access such technology. Namely, China acquired the British firm Imagination Technologies and has a joint venture with ARM in Japan to cover many of these gaps. According to some studies, 95% off Chinese chips incorporated IP licensed from ARM.[7]

Russia has striven to upgrade its capacity to build a domestic alternative to foreign semiconductors vital to the functioning of a modern society. Before TSMC ceased cooperation with Russia had been partially successful in less advanced semiconductor manufacture and could [8] produce up to 28nm chips with cooperation of outside fabs. i.e. the devices are designed in Russia and were manufactured in Taiwan.[9] That is no longer possible with the current trade restrictions. One of the more advanced of these Russian designed chips, the Elbrus 16s CPU however, is still behind the latest CPUs designed by Intel or AMD. The Elbrus and Baikal processors were produced by TMSC and are used in Russia’s military, intelligence and government systems as replacements for Western semiconductor devices which their military, intelligence and government systems are currently reliant on. Reliable Russian media reports indicate that many of these chips [10]have poor quality control and are [11] Russian semiconductor producers are discussing moving to the Russian chip manufacturer Mikron (not to be confused with the U.S.-headquartered Micron), whose manufacturing capability of 65nm means Russia will be domestically producing slower, less powerful chips in the near future. [12]mid 2000s, meaning that Russia’s indigenous semiconductor manufacturing capability lags around two decades behind the global marketplace.[13]

In August 2022, the US began implementing the CHIPS and Science Act which is aimed at increasing domestic production capacity of advanced microchips. In addition to the act itself being signed into law, President Biden has signed an executive order to jumpstart the effects of the legislation by investing in American chip producers and chip research.[14]  This law does have direct implications for industry and the military as reliance on a foreign chip producer can undermine military readiness.[15] Lastly, the US reportedly implemented additional new restrictions on Nvidia and AMD which would bar sales to Russia and China of high-end chips.[16] This includes Nvidia’s A100 and H100 integrated circuits. AMD reported that they have been ordered to stop selling the MI250 chip used in high performance computers. Interestingly, they are not barred from selling the MI100 chip to China. While these measures were not formally announced by US officials, a spokesperson was quoted saying that more measures are likely underway to curb MCF programs in China.[17]

Takeaways

It is a strategic priority for China to indigenize production of small feature size semiconductors and, in the interim, to acquire semiconductor devices from the international marketplace. China will seek semiconductor manufacturing equipment including lithography designed for the Extreme Ultraviolet Wavelengths and associated manufacturing equipment and chemicals. China will also continue to seek to recruit individuals and send staff overseas to acquire semiconductor manufacture know-how. Companies should consult with their national authorities concerning approaches for any of these. China will also seek to acquire high end semiconductors including by 1) outsourcing production to any of the fab as a service semiconductor manufacturers such as TSMC in Taiwan; 2) by acquiring specialist devices from companies who produce them (i.e. by companies who could themselves use semiconductor fabs), and 3) through distributors of manufactured devices. Companies should undertake due diligence on any approaches in these categories with the goal of ensuring that the Chinese entities involved are not linked to military or strategic programs and will not use the devices for military or strategic ends. Companies should work closely with their national authorities to this end.

The Russia case is somewhat more straightforward. As a result of Russia’s invasion of Ukraine, most countries have decided to restrict or prohibit the export of semiconductors and semiconductor manufacturing equipment to Russia. Given this, any approach from a Russian entity should be referred to national export control authorities. Russia can be expected to seek to evade the semiconductor restrictions including by attempting to acquire goods through third countries including in Russia’s near abroad. Given this, companies should undertake due diligence particularly to ensure that transactions are not destined for Russia. Companies should also avoid using untrusted distributors in Russia’s near abroad.