Tech war: Japan's new semiconductor tool export restrictions throw a major spanner in works of China's chip plans

Japan's new export restrictions on 23 types of chip-related equipment and materials, which will come into effect in July, are set to disrupt China's semiconductor self-sufficiency plan as the specific items are highly selective and targeted, according to industry insiders.

The measures require specific permission for the export of 23 types of items to any country not on a list of 42 "friendly" markets, according to the insiders and a list seen by the Post. For China, it would be a de facto ban, similar to US export curbs announced in October 2022, dealing a heavy blow to Beijing's push for greater self-sufficiency in chips.

Chinese authorities have expressed anger about the Japanese government's decision to implement the curbs and urged a rethink, but there is little sign that the decision will be suspended or revoked.

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Japan, similar to the Netherlands, has not explicitly referenced China in its export control announcements. Instead, Tokyo officials have said that the exports fall under the Foreign Exchange and Foreign Trade Act, which regulates the export of Japanese weapons and other goods that can be converted into military applications.

The restricted items on the list are expansive and will target a range of hi-tech equipment and materials needed for advanced chip production. Analysts say the restrictions move beyond limitations that the US has already imposed on the country.

For instance, certain types of deep ultraviolet (DUV) lithography equipment, which print chips on wafers with a 193-nm light source and can push chip-making technology to 14-nm, will be targeted according to the list seen by the Post.

"My feeling is that the list is intended to plug all the alternative procurement sources from Japan where Chinese companies could turn to," said one chip equipment investor, who asked not to be named. The restrictions could be "devastating" for China's chip-making industry, which is already struggling due to US sanctions, he added.

Chinese chipmakers have turned to non-American suppliers, mostly from Japan, the Netherlands and Germany, over the past three years to cut out use of US parts in Chinese fabs, industry experts say.

Japan is a key player in the global chip supply chain, with a monopoly in certain niche areas, which Tokyo has used in the past in its rivalry with South Korea. In July 2019, Japan tightened controls on exports to South Korea of three key materials - fluorinated polyimide, resists and hydrogen fluoride - for chips and display production, disrupting South Korea's downstream industries.

The export controls only ended this year when Tokyo and Seoul mended their ties.

According to UN Comtrade data, Japan was the top exporter to China of semiconductor manufacturing equipment in 2022, hence Beijing's diplomatic pressure on Tokyo to reverse course. Last week commerce minister Wang Wentao told his Japanese counterpart Yasutoshi Nishimura that Japan must halt the curbs as the policy represents "wrongdoing" that violates international trade rules.

Arisa Liu, a research director at the Taiwan Institute of Economic Research who studies chip supply chains, said Japanese chip tool restrictions appear "harsher than previously expected", meaning stronger headwinds down the road for China. "Apart from advanced nodes that have already been restricted, capacity expansions on 14-nm node and mature 28-nm node are also likely to be affected," Liu said.

Most of the tools covered in the list are machinery needed in so-called front-end semiconductor chip-making, which involves lithography, etching, film deposition, coating, developing and cleaning. The restrictions may also cover second-hand equipment as well, according to the chip equipment investor who asked not to be named.

The largest companies that sell equipment used to produce cutting-edge chips are in the US, the Netherlands and Japan, such as US-based Applied Materials, the Netherlands' ASML and Japan's Tokyo Electron.

"If Japan follows suit [with the US] to fully restrict the export of [chip-making] machines, China's research and development in [chip-making] will be screwed," said an engineer at a Beijing-based semiconductor equipment manufacturer.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

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