The U.S. government has imposed restrictions on exports to SMIC, China’s biggest chip manufacturer, a move that threatens Beijing’s push to become more self-contained in one of the most critical areas of technology.

Suppliers for certain equipment to SMIC will need to apply for an export license according to the U.S. Department of Commerce. The commerce department claims there is an unacceptable risk that equipment sold to SMIC, maybe diverted to “military end-use.”

The move threatens to hit at the heart of China’s plans to boost its semiconductor industry, a need that has been started by the trade war with the U.S.
Experts warned that SMIC is seen as a critical part of China’s ambitions and the commerce department’s sanctions could hold back the company’s development for several years.

President of Independent Strategy, David Roche, told CNBC that “It hits right at the core of China’s ability to be autonomous in technology.”

The U.S. Department of Commerce was not available for comment when approached by CNBC. SMIC told CNBC that it has no relationship with the Chinese military and does not manufacture for any military end-users.

SMIC’s shares in Shanghai were down over 6%, while its Hong Kong shares fell over 5%.

The U.S. dominates supply chain

Semiconductors are critical components in a whole host of consumer electronics that we use. As an increasing number of devices become “smart” and connected to the internet, they will become more and more crucial in new areas, such as automobiles.

Semiconductors have an extremely complex supply chain. It’s not just about companies that manufacture the chips but there are also design companies that make tools that enable manufacturing in the first place.

But American, European, and other Asian firms dominate in this field. For example, direct rivals to SMIC such as TSMC and Samsung Electronics are far advanced in their manufacturing processes.
Dutch firm ASML is a critical player when it comes to key tools in the manufacturing process. The company makes a machine that uses the so-called EUV. This required to make the most advanced chips such as those manufactured by TSMC and Samsung.

Reuters reported earlier this year that The U.S. pressurize the Netherlands government to stop the sale of an ASML machine to SMIC. Highlighting China’s dependence on foreign gear that shipment has not made it to China,.
There are hardly any Chinese companies that are able to fill the gaps that could be left by SMIC being cut off from these pieces of equipment.

“As a result, we believe expansion and advancements of SMIC and other Chinese foundries will certainly suffer in the next three years following a potential ban,” Morningstar Equity Research said.

“Complete localization of semiconductor equipment is difficult;t in 10 years.”

I think every U.S. company operating in this area in China is a target, but I also think that the Chinese don’t want to damage their own economy.

Not only would the U.S. sanctions hurt the chips industry in China, but it would also possibly affect other Chinese companies especially Huawei.

The US amended a rule which requires foreign manufacturers to get a license before selling semiconductors to Huawei. It has cut Huawei off from chips manufactured by TSMC which goes into its smartphones and other gear.

Huawei has very few options to make up the deficiency and SMIC would have been a natural option.

The problem is that SMIC cannot manufacture, the advanced chips Huawei needs for its handsets which are only made right now by TSMC and Samsung.

China’s ‘long tech march’

The Global Times said China is “facing a prolonged battle against high-tech suppression being led by the US” and that the country should go on a “long tech march.”
The editorial said, “China must smash the US attempts to throttle China’s technological development.”

Independent Strategy’s Roche said there is likely to be some vengeance from China.

China reveals a blacklist carrying punishments for those firms or individuals deemed to be a danger to the national security of the world’s second-largest economy.

Read More: US restricts exports to China’s top chipmaker