China’s latest export restrictions announced in early July directly impact minerals crucial to semiconductor production and may consequently hinder manufacturer supply chains. This announcement has the Biden administration considering its countermove to continue limiting China’s access to advanced chips and equipment. With the rivalry between these two world powers intensifying, electronic component manufacturers find themselves stuck in the middle.
Minerals of Mass Disruption: the Latest Trade Target
In early July, China announced new trade restrictions that target the supply chain at large. The chipmaking powerhouse imposed export controls on gallium and germanium, essential metals for numerous technology-reliant industries. The possibility of limited access to raw materials and rare minerals has been a concern for the U.S. and its allies for a long time, as China produces 60% of the world’s germanium and 80% of the world’s gallium.
China’s reach extends beyond these two metals. It also processes about two-thirds of the world’s lithium and cobalt, around 60% of aluminum and 80% of polysilicon, plus the country owns a significant amount of global nickel supply. The electric vehicle industry depends on aluminum, lithium and cobalt for battery production, while polysilicon is essential for making solar panels. Additionally, China’s control of rare-Earth minerals also threatens the defense industry since these materials are used in missile defense systems.
If China expands restrictions or bans trading altogether, it could significantly threaten green energy initiatives, electronic component production and defense industries worldwide.
The Shifting Landscape of the Electronic Component Industry
The strategy to achieve a connected and collaborative electronic component supply chain has shifted as governments around the world aim to bolster domestic markets. Initially, the industry was attracted to a supply chain model based on offshoring, as it provided numerous cost-saving opportunities. However, the global pandemic revealed the vulnerability of the supply chain relying on one region for 73% of semiconductor production.
In response to this dependency, companies like Taiwan Semiconductor Manufacturing Company (TSMC), Intel and Samsung Electronics are expanding to localize manufacturing and ensure long-term supply stability. While the U.S. isn’t the only country attempting to shift to a nearshoring model to domesticate chip manufacturing, it is the main contender in the ring against China to regain global share in the industry. In the first round of the tech war in 2018, the U.S. implemented tariffs that hit Chinese imports and targeted raw materials necessary for chipmaking. Since then, the back-and-forth hits have been a constant between the two.
The scope of the U.S. trade restrictions was initially narrow, but as the tech war has progressed, they have begun to specifically target equipment and chips that would limit China’s ability to advance its technology. Companies like NVIDIA were originally able to adhere to the rules while still providing advanced chips to China. NVIDIA’s new advanced chip, the A800, was permitted, and changes to the company’s flagship H100 also allowed it to maintain its foothold in China’s markets.
China’s government continues to find ways to counteract the restrictions, but thus far, diplomacy struggles to prevail. China’s market is already feeling the impact of the U.S. chip controls, with recent reports showing that it was hit particularly hard by the semiconductor equipment restraints. The country previously relied on importing the machines necessary for producing semiconductors. With a year-over-year quarterly decline of 28.1% in semiconductor equipment imports, China’s chip production could see a similar dip, and silicon wafer demand may decrease.
Additionally, the next round of U.S. curbs directed towards China may zero in on advanced technology even further, closing the loopholes that companies have taken advantage of. Reportedly, the next set of restrictions could ban the A800 chip, which became increasingly popular for artificial intelligence applications. While the prospects of this new ban are daunting, China is still a major power with significant influence on the global supply chain.
To maintain its influence, China has tried and failed to stop sanctions but continues to push back to hold its stake in the semiconductor market. Following a security probe into U.S. memory giant Micron Technology, China prohibited the company’s memory products from use in specific projects. The impact of China’s ban has been slow to materialize, primarily due to previously low demand. Nonetheless, Micron does stand to lose its market share to local companies offering an alternative for buyers. And consumers may further feel the brunt of the change, as prices could rise for Samsung and SK Hynix if demand increases.
Manufacturers Caught in the Crosshairs
While the U.S. and its allies’ initiatives should encourage advancement, manufacturers are signaling that innovation may be a casualty. A clause in the CHIPs Act, the bill aimed at improving domestic U.S. production and bolstering innovation, highlights how manufacturers’ hands can be tied by the tech war. The stipulation states explicitly that beneficiaries of the Act cannot expand advanced or leading-edge capabilities in China, Russia, Iran and North Korea for 10 years, effectively limiting manufacturers’ ability to increase the supply chain.
Globally, China’s most recent counterstrike on minerals has yet to play out in the supply chain. Manufacturers quickly claimed that the impact would be minimal, but the export restrictions have only recently been announced, and companies have yet to measure the long-term repercussions. In the interim, China continues to solidify its authority by developing closer ties with countries like Indonesia, Africa and Latin America. These relationships will lead to more supply and control for materials like nickel, cobalt and lithium.
The President and CEO of Imec, a Belgium-based semiconductor research facility, said it best when he stated that international cooperation and partnership were part of the foundation that propelled the semiconductor industry’s success. As the U.S. and China continue to trade limitations as retaliation in the tech war, electronic component manufacturers and industries that rely on chips may be the ones to suffer casualties.
About Fusion Worldwide
For over 20 years, Fusion Worldwide has been connecting buyers to trusted suppliers of electronic components in the open market. As an independent distributor, Fusion offers comprehensive supply chain solutions for small, medium and large global enterprises, including Fortune 500s, across numerous verticals such as computing, IT infrastructure, automotive, industrial automation, consumer electronics, medical and more. Fusion’s vast supplier network, commitment to quality, and market intelligence offers customers the speed, transparency, and reliability they need to navigate today’s fast-changing supply chain, including shortages. With ongoing investments in supplier relations, sales and service hubs, technology infrastructure, and quality testing, including the recent acquisition of Prosemi, Singapore’s largest electronics test center, Fusion enables fast, turnkey sourcing for its customers.
Headquartered in Portsmouth, NH, Fusion Worldwide has grown into a $3B global organization, with over 600 employees in 19 offices throughout the Americas, Europe, and Asia. To learn more, visit fusionww.com and follow Fusion on LinkedIn.
