China’s strategy in the chip war against the US – 07/08/2023 – Market

As its microchip war against the United States intensifies, China is restricting exports of two key players in the semiconductor industry.

Under the new controls, special licenses will be needed to export gallium and germanium from the Asian country, which is the world’s second-largest economy.

These elements are used in the production of chips and also have military uses.

The restrictions were imposed after Washington limited Beijing’s access to advanced microchip technology.

China by far dominates the global gallium and germanium supply chain. The country produces 80% of the world’s gallium and 60% of its germanium, according to the Critical Raw Materials Alliance (CRMA), the body that represents this industry.

The elements are known as “minor metals”, meaning they are not usually found pure in nature and are by-products of other processes.

In addition to the United States, Japan and the Netherlands — home to the leading chip maker ASML — have imposed restrictions on exports of chip technology to China.

“The timing of this announcement by China is no coincidence, given the export restrictions announced by the Netherlands, among others,” Colin Hamilton of investment firm BMO Capital Markets told the BBC.

“They basically said if they don’t give us their chips, we won’t give them the materials to make those chips,” he said.

The constant give and take between the world’s two largest economies has raised concerns about so-called “resource nationalism”, when governments hoard critical materials to put pressure on other countries.

“We are seeing governments moving further and further away from the globalization narrative,” says Gavin Harper, a research professor at the University of Birmingham in England.

“The idea of ​​international markets simply supplying materials is over, and if we look at the big picture, industry in the West could face some sort of existential threat.”

key elements

Gallium arsenide, a compound of gallium and arsenic, is used in the manufacture of high-frequency computer chips, as well as in the production of light-emitting diodes (LEDs) and solar panels.

A limited number of companies in the world produce gallium arsenide with the purity needed to be used in electronic components, according to the CRMA.

Germanium is also used in making microprocessors and solar panels. Plus, it’s part of making vision lenses that are “key to the military,” says Hamilton.

However, he added: “There should be sufficient supplies of base metal smelters to have alternatives. The importance for (production) of high-tech semiconductors is more difficult to resolve as China is dominant. There will likely be a trend towards recycling.”

Last month, a Pentagon spokesman reported that the US had reserves of germanium but not gallium.

The spokesperson also said that “the Department of Defense is taking steps to increase domestic mining and processing of materials critical to the space and microelectronics supply chain, including gallium and germanium.”

Even so, China’s export restrictions are expected to have limited impact in the longer term.

Alternatives

Although China is the main exporter of gallium and germanium, there are substitutes for these materials in the production of components such as computer chips, according to Grupo Eurasia, a consultancy.

There are also active mining and processing facilities located outside of China, the group adds.

The consultancy highlighted the similarities of this episode with the restrictions that China imposed on exports of rare earth minerals more than a decade ago.

At that time, more exporters emerged and in less than 10 years China’s dominance in the supply of rare minerals fell from 98% to 63%, according to the consultancy’s estimate.

“We look forward to seeing the development and exploration of alternative sources of gallium and germanium, as well as increased efforts to recycle these products and identify more available alternatives,” Anna Ashton of the Eurasia Group told the BBC.

“This will not just be a result of China’s decision to restrict exports,” she says. “It is the result of expectations of increased demand, heightened competition and geostrategic distrust, as well as China’s documented willingness to restrict imports and exports for political and strategic purposes.”

In October, Washington announced it would require licenses from companies that export chips to China and use American tools or software, no matter where in the world they are manufactured.

The impact beyond the tech industry

China frequently accuses the US of “technological hegemony” in response to export controls imposed by Washington.

In recent months, Beijing has also imposed restrictions on US companies with ties to the US military, such as aerospace company Lockheed Martin.

Meanwhile, Western governments have been talking about the need to “wean” from China, in the sense of not being so dependent on the Asian country in terms of raw materials and ready-made products.

However, diversifying supply chains, developing the capacity to mine and, most importantly, process metals such as gallium and germanium will take years.

Mineral-rich countries such as Australia and Canada see the materials crisis as a long-term opportunity.

Experts warn that the use of technological resources and capabilities as weapons — as the US and China have done — will also have global environmental consequences.

That’s because important new green technologies depend on these types of materials.

“This is not a national problem. It is a problem we face as a human race. We hope that policymakers can bring their best proposals to the table, ensure access to the critical materials that are essential for the energy transition, and that we can begin to address some of the of issues related to decarbonisation”, says Gavin Harper.

While the impact of the latest export controls will not be catastrophic for the industry or consumers, experts caution that it is important to pay attention to where this trend is heading.

“Average men and women may not care about gallium and germanium,” says Harper. “But at the same time they worry about the cost of cars or the cost of transitioning to green technology.”

“Sometimes abstract politics happening in distant lands can really have a big impact on our lives.”

This text was originally published here.