On December 2, the U.S. Department of Commerce's Bureau of Industry and Security (BIS) announced new export control measures targeting China's semiconductor industry.

On the same day, China’s Ministry of Commerce responded through its official website, noting that they had observed the U.S.'s actions regarding semiconductor export controls. The spokesperson highlighted that these measures further tighten restrictions on semiconductor manufacturing equipment and storage chips, adding 136 Chinese entities to the export control entity list, while also extending reach to interfere with Chinese trade with third countries. This behavior has been characterized as economic coercion and a non-market practice.

Senior analyst Li Xuan from Haitong Securities emphasized the intricacy of the global semiconductor industry, which spans various stages such as research and development (R&D), design, manufacturing, material supply, semiconductor manufacturing equipment (SME), testing and packaging, electronic design automation (EDA), core intellectual property (IP), distribution, and end-user applications.

"Different countries and regions play distinct roles in the global semiconductor supply chain; no single entity can completely control or dominate the entire chain," Li stated.

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The U.S. Strategy of "Fortress America"

According to the BIS announcement, the newly introduced regulations aim to further weaken China's ability to produce advanced node semiconductors needed for next-generation weapon systems, artificial intelligence (AI), and advanced computing technologies. The U.S. Department of Commerce described these announcements as emblematic of its "Fortress America" strategy.

More specifically, the U.S. will:

(1) Impose controls on 24 categories of semiconductor manufacturing equipment and three types of software tools for developing or producing semiconductors, such as etching machines, deposition equipment, photolithography machines, ion implantation equipment, annealing equipment, measurement and testing tools, and cleaning equipment;

(2) Regulate high-bandwidth memory (HBM), which is critical for large-scale AI training and inference and a vital component of advanced computing integrated circuits (ICs);

(3) Establish new Red Flag Guidance regarding export compliance and evasion risks;

(4) Expand the entity list by adding 140 entities and modifying 14 others;

(5) Introduce two new foreign direct product (FDP) rules and associated minimum requirements;

(6) Implement new software and technology controls.

Li Xuan also noted that the addition of semiconductor equipment and material manufacturers to the entity list presents opportunities for domestic production of upstream components and materials. Furthermore, the inclusion of HBM under regulatory scrutiny could encourage the rise of domestic storage manufacturers, accelerating the development of an autonomous and controllable semiconductor industry in China. While this poses short-term challenges to the industry, over the long term, it is expected to yield benefits and gradually transition towards a more self-sufficient framework.

The Global Nature of the Semiconductor Industry

Li further explained that decades of technological convergence have ultimately promoted the globalization of the semiconductor industry and its supply chains. The major hubs for the global semiconductor industry are the U.S., Europe, Japan, South Korea, and China, which represent approximately 95% of production capacity, nearly 100% of products, and 98% of the market share. However, the ongoing strategic competition and gaming in this technological domain are ushering the global semiconductor sector into a more regionalized era, leading to a fragmentation of the industry chain and market.

According to the World Trade Organization's "Global Value Chain Development Report 2023," the degree of globalization in semiconductor products is significant, often requiring between 70 cross-border transports to complete production. From an industrial division perspective, the U.S. dominates areas such as EDA, core IP, and logic chip design, while East Asia is responsible for wafer manufacturing, packaging, testing, and material supply. Europe exerts significant influence in semiconductor manufacturing equipment and automotive chips.

Specifically, the U.S. leads in semiconductor design, EDA software, core IP, and certain equipment supply. Europe boasts a critical position in high-end equipment (such as ASML's EUV lithography machines) and automotive semiconductors. Japan holds a leading role in material and equipment supply, with wafer manufacturing capacity accounting for about 16% of the global total. South Korea excels particularly in memory chips, controlling an impressive market share with major players like Samsung and SK Hynix.

The aforementioned report indicates that the intricate division of labor within the semiconductor supply chain implies that no country can fully be self-sufficient. Even the technologically advanced U.S. still relies on East Asia for wafer manufacturing capabilities and Europe for crucial equipment.

East Asian wafer manufacturers, such as TSMC and Samsung, have established deep trust and collaboration with U.S. design companies and European equipment suppliers. Any disruption to this mutually dependent supply chain could have profound repercussions on the global economy.

Chad P. Bown, a senior fellow at the Peterson Institute for International Economics, also commented that the semiconductor supply chain features a high degree of globalization and complexity, with production processes dispersed across multiple nations and regions. "If the supply chain is not diversified and resilient, semiconductor trade can easily face stagnation," he warned.

The report further states that this heightened interdependence arose partly from cost and efficiency considerations. The capital investment required to establish chip manufacturing facilities is exorbitant—exceeding $20 billion in 2020—making it feasible only for a select few firms. To mitigate risk, many companies have opted to concentrate on discrete segments of design or manufacturing.

Moreover, this trend has benefited from technological and specialization demands, policy support, regional advantages, and shifting market needs.

However, in recent years, the semiconductor industry has faced increasing levels of policy intervention and geopolitical risk. Bown contends that starting in 2019, the U.S.-China trade friction, technology disputes between South Korea and Japan, and export control measures targeting specific industries have all posed threats to the stability of the semiconductor supply chain.

He stated, "Altering the geographic distribution of the supply chain to mitigate this interdependence may trigger new vulnerabilities."