US expands curbs on China’s AI memory and chip tools, raising supply chain concerns

The US has announced sweeping new measures targeting China’s semiconductor sector, restricting the export of chipmaking equipment and high-bandwidth memory. This move has sparked concerns over potential supply chain disruptions.

The rules impose export restrictions on equipment from manufacturers in countries including Israel, Malaysia, Singapore, South Korea, and Taiwan, while granting exemptions to firms in Japan and the Netherlands.

Among those exempted are Japan’s Tokyo Electron and the Netherlands’ ASML, two leading chipmaking equipment manufacturers>. This exemption reportedly resulted from extensive negotiations between their governments and Washington.

High-bandwidth memory (HBM), critical for AI chips and including versions like HBM 2, is produced by companies such as South Korea’s Samsung and SK Hynix, alongside US-based Micron.

The updated measures have also added 140 Chinese entities to a blacklist, targeting firms seen as pivotal to Beijing’s ambitions for semiconductor self-sufficiency through advanced manufacturing technologies.

“We are constantly talking to our allies and partners as well as reassessing and updating our controls,” Alan Estevez, Under Secretary of Commerce for Industry and Security, said in a statement. “Today’s announcement represents the next step in that ongoing work.”

Closing regulatory loopholes

The latest rules broaden restrictions to include 24 additional types of chipmaking tools previously outside their scope.

“A key feature of the new sanctions is the ‘Foreign Direct Product Rule,’” which allows the US to impose export controls on foreign-made products containing US technology, increasing the scope of restrictions,” said Manish Rawat, semiconductor analyst at TechInsights.

This is significant, as major US toolmakers have responded to the restrictions by ramping up efforts to expand manufacturing outside the US, according to a recent report by Gregory Allen, an AI expert at the Center for Strategic and International Studies (CSIS).

“Both KLA Corporation and Applied Materials have committed to major expansions of their Singapore manufacturing facilities, while LAM Research has built out its largest manufacturing site in Malaysia,” Allen wrote.

Lam Research has said on its website that its initial assessment suggests the impact of the newly announced measures on its business will align largely with its earlier expectations.

Impact on AI chip development

The latest restrictions target AI chip manufacturing, reflecting concerns over the potential military applications of the technology in China.

The measures seek to limit Beijing’s access to advanced memory and chipmaking tools, further tightening control over critical semiconductor technologies.

“However, in practice, the inability to import high-end memory and chip manufacturing equipment risks putting much of Asia at a temporary disadvantage as Chinese-based vendors and manufacturers are cut off from basic chipmaking equipment in the short term, and factories outside of China have maxed out their production capacity,” said Hyoun Park, CEO and chief analyst at Amalgam Insights.

While exemptions granted to Dutch and Japanese firms soften the blow, the restrictions intensify challenges for other Asian nations. Malaysia, Singapore, South Korea, and Taiwan are now under pressure to align with either the US or China in the global semiconductor supply chain.

“Samsung, in particular, is in a bind as it has struggled to gain a foothold in AI and now has to give up one of its largest markets in China,” said Park, referring to the significant share of Samsung’s HBM chip sales generated in the Chinese market.

The inclusion of memory manufacturers also marks a shift in focus from semiconductor fabrication to critical components which are essential for AI chip production – targeting China’s ability to scale its AI capabilities, Rawat added.

Supply chain implications

Restrictions on critical AI components, such as HBM and advanced chips from Samsung, SK Hynix, and Micron, are expected to disrupt AI research and development efforts.

“Tech firms, especially those involved in AI training and inference, may experience delays and higher costs in acquiring these essential components,” Rawat said. “Similarly, server and PC chip shortages are exacerbated by restrictions on chipmaking tools, making it harder for Chinese manufacturers to produce advanced chips for servers and high-performance systems, potentially leading to delays or reliance on less advanced nodes.”

The resulting supply constraints could drive up chip prices, squeezing profit margins for enterprise technology companies or increasing costs for customers, ultimately impacting competitiveness in the market.

To navigate these challenges, firms may be forced to diversify their supply chains, identify alternative suppliers, and adapt procurement strategies. However, finding replacements for advanced semiconductors may be costly and difficult, further raising operational expenses.

China’s legacy chip potential

China is ramping up efforts to achieve semiconductor self-sufficiency as the US and its allies impose tighter restrictions on advanced chips and manufacturing equipment.

While Beijing remains behind industry leaders like Nvidia in AI chip design and ASML in chipmaking tools, analysts suggest it could dominate the legacy node market, which is not heavily targeted by these restrictions.

“China will likely become a powerhouse for the legacy nodes, as they have a lot of capacity, and they might reduce the prices,” said Pareekh Jain, CEO of Pareekh Consulting. “Simultaneously, the impact will be that more of the lower power, advanced nodes might remain with the countries like the US and Taiwan.” This shift underscores China’s potential to solidify its role in older semiconductor technologies while advanced chipmaking remains concentrated in regions such as the US and Taiwan.