China faces technological self-sufficiency challenges as U.S. tightens export controls on AI-capable chips

New U.S. rules expand and strengthen existing export restrictions on advanced chips, and particularly those with AI capabilities, as China grapples with developing technological self-sufficiency.

On 6 November 2023, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) hosted a public address to clarify new measures aimed at restricting the People’s Republic of China (PRC)’s access to U.S. semiconductor technology and, in turn, hampering Beijing’s ability to create supercomputers that could develop artificial intelligence (AI) platforms, which could be used for military applications, such as advanced weapon design and AI-led war operations decision-making.

New U.S. restrictions hamper China’s access to AI platforms

The new measures aim to close perceived loopholes in existing export controls on semiconductors, set tighter parameters on existing restrictions on semiconductor integrated circuits, strengthen restrictions on semiconductor manufacturing equipment, and add 13 new entities, associated with AI development, have been added to the Entity List.

Furthermore, on 16 November 2023, the Advanced Computing Chips Rule came into effect. The rule adjusts the parameters that determine whether an advanced computing chip is restricted. Before this update, chips were restricted if they exceeded specifications for both total processing performance/speed and interconnect bandwidth (the rate at which chips communicate).

Under the new rules, the BIS removed “interconnect bandwidth” – which does not necessarily gauge a chip’s AI capacity – and added “performance density” as a control parameter. Density measures a chip’s processing speed compared to its size, so this change prevents Chinese purchasers from bypassing the performance cap by combining multiple, smaller chips that are below the cap.

Other changes include expanded licensing requirements to prevent Beijing from accessing restricted items through third countries and the addition of four new ‘red flags’ to assess whether foreign parties are attempting to circumvent the controls by illicitly manufacturing restricted chips. The BIS indicated that it is “continually assessing the effectiveness of its advanced computing controls” and signaled that potential future updates are likely.

China seeks technological self-sufficiency

Conversely, the Chinese government has been taking steps to minimize technology-related security vulnerabilities and is promoting technology independence, particularly in critical sectors like semiconductors. Some of China’s recent restrictions imposed on US technology include:

• Teslas are being prohibited from entering or traveling near sensitive compounds like military installations, important government agencies, and TV and radio stations.
• In May, China banned the use of Micron chips in China’s key information infrastructure.
• In early September, international media reported China had banned the use of iPhones by civil servants and employees of state-owned enterprises. China’s Foreign Ministry denied that report but said iPhones had security problems. Chinese social media, however, supported the media report, saying that iPhones were being restricted in certain government facilities.
• On 27 October, China replaced foreign hardware and software in 2022 at the cost of RMB 1.4 trillion ($191 billion), an increase of 16.2% YoY. According to a Chinese finance ministry database seen by Reuters, the number of offers from SOEs, government, and military entities to nationalize equipment nearly doubled from 119 to 235 between September 2022-2023.

Furthermore, on 10 November 2023, Wei Shaojun, chairman of the Integrated Circuit Design Branch of the China Semiconductor Industry Association (CSIA), made a widely anticipated speech at the 29th China Integrated Circuit Computer-Aided Design (ICCAD) and the Guangzhou Integrated Circuit Industry Innovation Development Summit held in Guangzhou.

Wei noted that the total number of 3,451 integrated circuit design companies in China had increased by 208 companies in 12 months. He estimated that total sales for China’s design industry in 2023 was RMB577.4 billion (approximately $80 billion), an 8% increase on 2022.

Notably, he cautioned against the blind pursuit of “domestic substitution” in attempts to increase self-sufficiency in the chips sector. China’s chip design industry is facing significant losses this year due to intense competition and a rapid influx of players into the sector. The focus on greater self-sufficiency meant that the IC industry could face financial difficulties due to an “extremely difficult” environment.

According to International Data Corporation, the combined China market share held by five major foreign makers of database management systems — the majority of which are American — dropped from 57.3% in 2018 to 27.3% by the end of 2022. In 2022, Huawei's enterprise business, which includes software and cloud computing operations, reported RMB 133 billion in sales, up 30% from 2021.

However, foreign firms are still dominant suppliers for banking and telecom database management. Non-Chinese companies held 90% market share for banking database systems at the end of 2022.

China’s automotive industry aims for domestic chip procurement and development

Meanwhile, China’s autonomous vehicle industry is also pressing ahead with plans to procure and develop domestic chips for the Chinese automotive sector as China seeks to strengthen supply chain immunity to U.S. trade restrictions.

On the same day (7 November) that Great Wall Motor announced it had started manufacturing advanced semiconductors in a "breakthrough of a technological barrier" marking "a new step forward", the China Association of Automobile Manufacturers (CAAM), announced a new committee dedicated to automotive semiconductors aimed at raising China's self-sufficiency for components.

As the U.S. strengthens its restrictions on Chinese access to Western chip technology, particularly AI-related advanced chips, and to chip fabrication capabilities, Beijing is promoting self-sufficiency and Chinese immunity from U.S. and Western supply chains. At least in the short-term, it seems that these restrictions are impacting China’s chip and automotive industry, while it builds out local supply chain, chip development, and procurement capabilities.

Pamir observes that Beijing’s acceleration of technology self-sufficiency and heightened counterespionage scrutiny will necessitate bolstering insider risk detection capabilities and securing access to sensitive R&D. This applies to a broad range of verticals, and remains an on-going and evolving landscape that needs to be carefully monitored.