China’s chip imports by volume fell 26.5% in the first months of 2023, compared with the same period a year earlier, according to the South China Morning Post, citing Chinese customs data. Chip exports for January and February dropped 20.9% year on year as well.

That’s a sharper contraction than what was recorded for all of last year. China’s chip imports fell by 15.3% last year, while its exports dropped 12%, according to the SCMP. Last year was the first time the country reported a fall in chip imports since 2004.

China’s largest chip companies are reportedly already feeling the strain from the continued pressure. Semiconductor Manufacturing International Corp., which has been on a U.S. trade blacklist since 2020, admitted in February that it was delaying the launch of its new factory given the difficulty of sourcing equipment. 

Non-Chinese chipmakers with China operations are also concerned. ASML Holding, the Netherlands-based company that is the only manufacturer of lithography tools needed for the most advanced chips, has had to increase spending on security and intellectual property protection by a “significant double-digit” percentage each year, CEO Peter Wennink told the Financial Times on Tuesday. 

“Do we have to be highly sensitized on know-how leakage, on IP leakage? More than ever before,” he said, warning that new controls will push China to create its own chip ecosystem.

Chip controls

The Biden administration has escalated its pressure on China’s semiconductor business since last October, when it imposed sweeping restrictions on sales of chips and chipmaking equipment to Chinese companies. 

Last Thursday, the Biden administration added Chinese cloud computing firm Inspur (among several other Chinese firms) to its Entity List. U.S. firms cannot sell to companies on the trade blacklist without special permission. 

Inspur, which is the world’s third-largest supplier of servers used in data centers, is also a customer of chips from U.S. companies. Both Nvidia and Advanced Micro Devices (AMD) were asked about sales to Inspur at an investor conference on Monday, reports Reuters.

Japan and the Netherlands, which are also key countries in the chip supply chain, have reportedly agreed to impose similar restrictions on exports to China, though neither country has released details. In a February interview with the Financial Times, the president of Kyocera, a major Japanese contributor to chipmaking equipment, noted that even “non-cutting-edge tools” were starting to come under regulatory scrutiny.

Washington is also encouraging semiconductor manufacturing to move to the U.S. by offering generous subsidies through the CHIPS and Science Act, which started to accept subsidy applications last week. 

Yet some non-U.S. chip companies are concerned about the conditions attached to U.S. funds, such as the need to provide childcare. These conditions “deepen business uncertainties, violate companies’ management and technology rights, as well as make the United States less attractive as an investment option,” South Korea’s trade ministry said on Tuesday. 

Controls are pushing China’s major tech companies to look for alternatives to foreign semiconductors. On Friday, the vice-president of Alibaba Group’s chip division said at a conference that the company would devote more resources towards RISC-V, an open-source chip design architecture that’s an alternative to designs from U.S.-based Intel or U.K.-based Arm.

Correction, March 16, 2023: An earlier version of this article misattributed the source of Alibaba’s comments on RISC-V. This article has also been updated to clarify the Alibaba Group’s approach to the open-source chip design architecture.