According to Nikkei Asia, Semiconductor Manufacturing International Corporation, the nation’s leading contract chipmaker, is enlisting its customers—chip developers who use its production services—to assist in screening, verifying, and adopting local suppliers of wafers, chemicals, gases, and other materials. This initiative has been gaining momentum since last year.
ChangXin Memory Technologies, China’s foremost producer of DRAM, has embarked on a vigorous campaign to assess local suppliers and invoke national policies to supplant foreign ones.
SMIC found itself on Washington’s entity list, a trade blacklist, in late 2020 and has been seeking domestic supply alternatives to maintain uninterrupted production ever since.
The current localisation effort extends beyond more domestic chipmaking equipment, directly affected by stringent US regulations, to include the supply of hundreds of chemicals, materials, and gases, potentially displacing foreign suppliers from the market.
Chipmakers typically are reluctant to transition to new sources and chemical formulations, as such changes might diminish production yields the proportion of functional chips yielded from a specified quantity of wafers. Washington is hopeful that allies like Japan will implement further restrictions on China’s access to advanced materials.
Industry executives disclosed to Nikkei Asia that established chipmakers customarily afford new chemical and materials producers two opportunities to present samples for verification. However, Chinese suppliers now have nearly limitless possibilities, as chipmakers are eager to diminish their dependence on foreign supplies.
One of Nikkei Asia’s deep throats said: “There are subsidies not only for these materials and chemical producers. Chipmakers that utilise local suppliers can also receive credits,” one of the individuals mentioned. “The most significant shift resulting from the US’s continuous tightening of export controls is the vigorous drive to eliminate foreign suppliers if local alternatives exist.”
Another industry executive remarked that chipmakers are preserving connections with foreign chemical suppliers to prevent any abrupt detriment to production quality. Nevertheless, the substantial incentives provide an advantage to Chinese materials suppliers, who have minimal opportunity to serve the semiconductor industry.
Wafer manufacturer National Silicon Industry Group is becoming a formidable rival to industry leaders such as Shin-Etsu Chemical, Sumco, and GlobalWafers.
China is also augmenting its domestic procurement of key materials like sputter targets, polishing pads, slurry, and ultra-purity chemicals and gases — all vital components in chip manufacturing and previously dominated by foreign suppliers like 3M, DuPont, and Sumitomo Chemical.
Several lesser-known materials and chemical producers have risen as so-called national champions.
The impetus is initially applied to less sophisticated 55-nanometre and 40nm chip production processes but is anticipated to progress to 28nm and beyond, sources indicated.
The initiative coincides with China’s push for carmakers to increase domestic chip utilisation significantly. Foreign chip enterprises across various supply chain segments have already felt the impact of China’s localisation drive.
Due to robust local competition, numerous foreign entities providing chip packaging and testing services have withdrawn from the Chinese market. Since 2021, over five companies — ASE Tech Holding, Qorvo, Powertech, Western Digital, and King Yuan Electronics — have divested majority stakes in their Chinese operations. China’s outsourcing sector for chipmaking packaging and testing services is currently the world’s second-largest, trailing only Taiwan’s.
“It’s harsh that once China succeeds in developing local solutions, it promptly marginalises foreign suppliers, particularly now that they consider supply security,” a chip packaging executive whose firm sold its Chinese facilities conveyed to Nikkei Asia.
All this means that in the long term, China will become independent from US chipmakers and their supply chains, leaving the Western politics out of any agreements China wishes to make. If China manages to get parity with US chipmakers, there would be nothing to stop it selling them to North Korea, Russia and Iran. It would have been better to keep China dependent on the US, but both the Trump and Biden administrations feared the rise of Chinese power and made short term decisions based on that.