Beijing chooses targets carefully as it goes on offensive in US chip wars

When Washington introduced expansive controls in October restricting chip and equipment exports to China, Beijing accused the US of “bullying” its tech sector and “violating the spirit of co-operation”. 

Such responses, amounting to little more than verbal bluster in response to a slow strangling of semiconductor supplies, reflected its industry’s reliance on foreign chip technology and the need to tread carefully with any retaliatory measures.

But 10 days ago, Beijing finally went on the offensive, with the Cyberspace Administration of China announcing an investigation on national security grounds into Idaho-based memory chip manufacturer Micron Technology. The CAC said it would review imports of Micron’s products to ensure the security of its information infrastructure.

Industry insiders say that Micron, which generates 11 per cent of its revenue in mainland China and another 5 per cent in Hong Kong, was an obvious first target for Beijing, because its tech would be more easily replaced with competitors’ chips if China ultimately decided to ban it. The US group had also been downsizing some of its operations on the mainland while increasing investment in the US.

However, industry experts believe any further retaliation will be limited, given Chinese reliance on artificial intelligence chips made by Nvidia and other processors manufactured by the likes of Intel and Qualcomm.

Mark Li, senior semiconductor analyst at Bernstein, said “memory chips are standardised, so it is easy to change suppliers from US to non-US”, adding that South Korean groups Samsung and SK Hynix would mop up most of Micron’s orders in China.

Beijing views Micron as having played “an unfriendly role in the country’s semiconductor industry”, said Wang Lifu, a chip analyst at Shanghai-based research firm ICwise. He pointed to Micron’s legal action against Chinese competitors for intellectual property theft and its perceived role in “lobbying Washington to impose sanctions against China”.

Paul Triolo, an expert on China tech at consultancy Albright Stonebridge, said Micron was seen as “supporting specific controls” that “severely restricted China’s memory leaders YMTC [Yangtze Memory Technologies Corp] and CXMT [ChangXin Memory Technologies] from obtaining semiconductor manufacturing gear to remain competitive in the memory sector”. 

Last year, the US put restrictions on the export of technology to manufacture Nand memory chips with 128 layers or more — the level of YMTC’s most advanced chips.

Stocks of Chinese memory chipmakers rallied this month following news of the Micron probe, but analysts say domestic rivals will not receive much of a boost from the investigation. “There is no Micron equivalent in China. There are only small memory companies which make lagging and niche products,” said Li.

“We are in communication and co-operating fully with the CAC,” said Micron in a statement. “Product shipments, engineering, manufacturing, sales and other functions are operating as normal. Micron is committed to conducting all business with uncompromising integrity and we stand by the security of our products and our commitments to customers.”

Carolyn Bigg, head of law firm DLA Piper’s cyber security team in Hong Kong, said that “launching a cyber security investigation into a company in connection with other underlying issues is a well-trodden path for Chinese authorities”.

The CAC investigation could culminate in Micron having its operations curtailed in China. Unlike in Europe, where companies are hit with a fine if they breach cyber security rules, in China, they could also “lose their operating licence or have their platforms taken offline”, she said.

Analysts say the commercial impact on Micron would be limited if it was cut out of the Chinese market. “Micron can easily redirect elsewhere. Memory chips are standardised, so chips for example reserved for Lenovo could easily be redirected to Dell,” said Li.

Last year, Micron shut down a Dram chip design unit in Shanghai, with its engineers reportedly being asked to relocate to the US or India. It also announced a $20bn investment in a new US chip factory, in a significant rebalancing of its global manufacturing that will see its most advanced production move back to the US.

However, the company still has a staff of about 3,000 in China, most of them working at an assembly and test facility in the city of Xi’an in central China.

In the longer term, industry insiders say this is a clear signal from Beijing for its tech industry to accelerate efforts to de-Americanise its supply chains. “People are talking about a cold war. It is clear that Chinese tech companies have no choice but to find different sources of supply where they can,” said one senior executive at a Chinese artificial intelligence group.