The Biden administration has for several months been working to tighten its grip on U.S. exports of technology that China needs to make advanced chips, with the goals of both hurting China’s current manufacturing ability and also blocking its future access to next-generation capabilities.
According to two people familiar with the administration’s plans, President Joe Biden’s approach is based around choking off access to the tools, software and support mechanisms necessary to manufacture a specific type of technology that is one of the fundamental building blocks of modern microchips: the transistor.
To achieve its objectives, the administration has elected to work to block China’s access to transistors that use a specific design called FinFET. The plans include blocking domestic exports of tools that are capable of printing chips with FinFET transistors, while also preventing the tool makers — such as Applied Materials, Lam Research and KLA — from servicing or supporting equipment they have already sold to various Chinese companies, according to the sources.
Big chip manufacturers achieved high-volume production of the transistor technology targeted by the Biden administration roughly eight years ago, but it is still widely used today to manufacture advanced chips designed for servers and iPhones alike. China’s largest chipmaker, SMIC, disclosed in 2019 it recently began high-volume production of FinFET-based chips.
“Officials walk a very fine line between too much control and too little control,” William Reinsch, senior adviser and Scholl Chair in International Business at the Center for Strategic and International Studies, told Protocol. “You control too little, and then bad guys can get stuff you don't want them to have. You control too much, and what you end up doing is kneecapping your own industry, because you deny them the revenue they need to invest in next-generation production.”
By using a specific, fundamental building block of chip design as the basis for the overall policy, the White House hopes to both tighten existing controls and avoid the pitfalls around trying to block a generation of manufacturing technology.
Yet in some corners of the industry, the administration targeting of FinFET transistors hasn’t been clear. Prior reports have pointed to the Biden administration’s plans to choke off China’s access to tech used to make chips with a 14-nanometer or below manufacturing process, which has led to industry insiders questioning how effective that approach might be.
According to chip industry experts, using the nanometer naming conventions as the basis to block tech exports has a key problem: At one point the names referred to the size of a specific feature on a chip, but today they are just marketing terminology. Intel’s 22-nanometer manufacturing process used FinFET transistors, for example, while TSMC and Samsung didn’t adopt FinFET designs until they produced chips with a 14-nanometer process or 16-nanometer process.
“How do you actually classify equipment and say, this can process 14-nanometer and smaller — because there is a lot of equipment that can also process 28 nanometers,” Gartner analyst Gaurav Gupta said. “And if the same tool can also process a smaller node, does it really qualify within that export control or not? That's why when you set up these definitions, there are obviously some loopholes.”
The Biden administration’s feature-specific approach for logic chips — the type of silicon that powers data centers, smartphones and PCs — narrows the Trump-era strategic decisions. Under former President Donald Trump, the White House and federal agencies largely continued policies the Obama administration had begun, such as adding SMIC to the U.S. entities list, according to one former Commerce Department official.
The Trump administration also worked to block China from obtaining a technique called extreme ultraviolet lithography, used for next-generation chipmaking. EUV tools are exclusively manufactured by Dutch firm ASML, but the administration was able to convince the Netherlands to block ASML from selling the equipment to China because one of the vital submodules is made in California. Without that component, ASML can’t build the EUV machines.
“There's a certain part of technology intellectual property which belongs to the U.S.,” Gupta said. “And that's why they're able to control and stop ASML. But they're also pushing [the Dutch government and ASML] to stop exporting [deep ultraviolet lithography] to China, but the U.S. doesn’t really have control over the IP.”
Adding similar restrictions for the EUV’s older sibling, deep ultraviolet lithography — machines made by ASML but also Japanese competitors — will likely be more difficult. Despite reports indicating the Biden administration intends to halt DUV equipment sales to China, it’s not clear if the U.S can succeed with that objective, Gupta said. One of the people familiar with the administration's plans said the White House is attempting to get allies on the same page to block FinFET equipment.
Everyone wants tools
The portion of the chip industry that will feel the restrictions most acutely is the collection of businesses that build the various manufacturing tools and systems. China is a big chunk of U.S. equipment makers’ business, representing roughly 30% of revenue for companies such as KLA, Applied Materials and Lam Research.
Part of that China revenue derives from the service and support necessary to keep the advanced tools humming along, pumping out working chips. As the tools become increasingly complex, they require more service, and teams from the tool makers are frequent visitors to chipmaking factories around the world. That’s not to mention software upgrades and other optimization that equipment requires. In its most recent quarter, for example, Applied Materials reported that about 22% of overall revenue came from its services and support operation.
Of the major U.S. tool makers, two — KLA and Lam Research — recently disclosed in earnings calls that they had received notification from the Commerce Department about tool exports to China. Though Applied hasn’t yet disclosed that it has received a notification letter, industry sources said that it likely has or will soon. The notifications were something of an opening effort, according to one of the people familiar with the administration’s plans, and the White House intends to follow the notification letters it has already sent out with an additional export control rule in the coming weeks and months.
Despite the likelihood of the U.S. government implementing further restrictions, Wall Street isn’t too worried about the potential damage to the tool makers’ business in either the short or the long run.
“I think it's fairly neutral because the demand is going to be there — so whatever can’t be built in one geography [is] going to get built into a different one,” Baird analyst Tristan Gerra said. “I think that it's going to be fairly neutral for the equipment companies, but the Chips Act is clearly going to really drive an expansion of capacity in the U.S.”