One reason the US can’t quit China? Chips

Micron said the change could destroy roughly an eighth of its global revenue. Yet in June, the chipmaker announced that it would increase its existing investments in China – adding $600 million to expand a chip packaging facility in the city of Xian.

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

Global semiconductor companies are finding themselves in an extremely tricky position as they try to straddle 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.

U.S. officials say American products have fed into Chinese military and surveillance programs that run counter to the national security interest of the United States. They have imposed increasingly tough restrictions on the kind of chips and chipmaking equipment that can be sent to China, and are offering new incentives, including grants and tax credits, for chipmakers who choose to build new operations in the United States.

But new factories can take years to construct, and corporate ties between the countries still remain strong. China is a major market for chips, because it is home to many factories that make chip-rich products, including smartphones, dishwashers, cars and computers, that are both exported worldwide and purchased by consumers in China.

Discover the stories of your interest

Overall, China accounts for roughly a third of global semiconductor sales. But for some chipmakers, the country accounts for 60% or 70% of their revenue. Even when chips are manufactured in the United States, they are often sent to China for assembly and testing. “We can’t just flip a switch and say all of sudden you have to take everything out of China,” said Emily S. Weinstein, a research fellow at Georgetown’s Center for Security and Emerging Technology.

The industry’s reliance on China highlights how close – but contentious – economic relations between Washington and Beijing are posing challenges for both.

Those tensions were reflected during Treasury Secretary Janet Yellen’s visit to Beijing this week, where she tried to walk a fine line by faulting some of China’s practices while insisting the United States was not looking to sever ties with the country.

Yellen criticized punitive measures China has recently taken against foreign firms, including limiting the export of some minerals used in chipmaking, and suggested that such actions were why the Biden administration was trying to make U.S. manufacturers less reliant on China. But she also affirmed the U.S.-China relationship as a strategic, important one.

“I have made clear that the United States does not seek a wholesale separation of our economies,” Yellen said during a roundtable discussion with U.S. companies operating in China. “We seek to diversify, not to decouple. A decoupling of the world’s two largest economies would be destabilizing for the global economy, and it would be virtually impossible to undertake.”

The Biden administration is poised to begin investing heavily in American semiconductor manufacturing in an effort to lure factories out of China. Later this year, the Commerce Department is expected to begin handing out funds to help companies build new U.S. chip facilities. That money will come with strings: Firms that take funding must agree to refrain from expanding high-tech manufacturing facilities in China.

The administration is also weighing further curbs on the chips that can be sent to China, as part of a push to expand and enact sweeping restrictions it issued last October.

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

The administration has also been considering halting the licenses it has extended to some U.S. chipmakers that have allowed them to continue selling products to Huawei, a Chinese telecom firm.

Japan and the Netherlands, which are home to companies that make advanced chip manufacturing equipment, have also put new restrictions on their sales to China, in part because of urging from the United States.

China has issued restrictions of its own, including new export controls on minerals used in chip manufacturing.

Amid tighter regulations and new incentive programs from the United States and Europe, global chip companies are increasingly looking outside China as they choose locations for their next major investments. But these facilities will probably take years to construct, meaning any changes to the global semiconductor market will unfold gradually.

John Neuffer, president of the Semiconductor Industry Association, which represents the chip industry, said in a statement that the continuing escalation of controls posed a significant risk to the global competitiveness of the U.S. 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 lasting damage to the chip industry, and avert future escalations.”