China's export controls and the shakeup in semiconductor supply chains.

China’s export controls and the shakeup in semiconductor supply chains. (Source – Shutterstock)

Chips at stake: China’s export controls and a semiconductor supply chain shakeup

  • China’s export controls stir ‘chip wars’ and global supply chain shifts.
  • ‘Chip wars’ intensify with China’s new export restrictions prompting supply chain diversification.

As China’s export restrictions loom, the prices of vital chipmaking materials are on an upward trend. In July, the Chinese Ministry of Commerce announced forthcoming controls on the export of gallium, germanium, and some of their compounds. This move requires sellers intending to export these key materials from China to apply and obtain official approval beforehand.

Beijing justifies these impending measures as a ‘safeguard to national security and interests,’ set to take effect on August 1. However, many perceive these actions as a countermeasure to the technology export restrictions that the US and other countries have imposed on China.

According to Nikkei Asia, gallium prices have seen an 18% increase since the end of June, reaching US$332.50 per kilogram in the US and European markets. Meanwhile, the cost of germanium has risen modestly by 4% this month, hitting about US$1,390 per kilogram.

Remember, germanium is crucial in high-speed computer chips, specific plastics, and military technologies such as night-vision devices and satellite imagery sensors. Gallium’s applications include the construction of radars, radio communication devices, satellites, and LEDs. This makes these elements critical to the development and performance of many high-tech devices and systems, from consumer electronics to military hardware.

Concerns have arisen that a diminished supply of either material could inflate the manufacturing costs of certain electronic products, or potentially impede the advancement of newer, sophisticated chips. This could have a ripple effect across the technology sector, slowing innovation, increasing consumer costs, and potentially changing the competitive landscape among tech companies.

China: A dominant force in the global supply of key materials

While estimates differ, China is believed to be the world’s principal source of both metals. It’s estimated to account for approximately 60% of the global germanium supply, with the rest primarily sourced from Canada, Finland, Russia, and the United States. Gallium’s global supply, meanwhile, is believed to be at least 80% Chinese, with some estimates as high as 98%.

Germanium is crucial in high-speed computer chips - part of China's export.

Germanium is crucial in high-speed computer chips. (Source – Shutterstock)

Reports from July indicated that companies had begun stockpiling these materials or intermediate products that rely on them.

Freiberger Compound Materials, a German company that uses gallium sourced from China to produce its gallium-arsenide semiconductor wafers, informed Reuters of orders for inventory increases as customers rush to stockpile. CEO Michael Harz noted that the industry was quite tense over the situation.

However, as The Register reported following the announcement of the export restrictions, some experts argue there’s no immediate cause for alarm. Neither gallium nor germanium is currently in short supply, and any attempts to restrict their supply could trigger production increases elsewhere.

This viewpoint is reinforced by The Stimson Center, a US-based think tank, asserting that these new controls will push countries to implement policies reducing their reliance on China for vital materials, a process that could take years.

Echoes of the past: Recalling China’s rare earth export restrictions

They reminded that China attempted similar strategies with the so-called rare earth elements in 2010, leading importing countries to diversify their supply sources away from China and sparking an increase in smuggling, causing minimal impact on rare earth shipments from Chinese sources.

Concerns have surfaced over potential restrictions on rare earth exports from China, recalling its shipment curbs from 12 years ago during a dispute with Japan. China is the largest global producer of these metals, integral to EVs and military equipment.

However, China has already issued a foreboding warning that the upcoming export controls could mark the start of their countermeasures in the chip wars, and they could broaden these measures to other crucial materials if external restrictions on China keep escalating.

Following a series of previous curbs, Washington is weighing up additional restrictions on high-tech microchip shipments to China.

The United States and the Netherlands are further anticipated to limit chipmaking equipment sales to China, to prevent China’s military from exploiting their technology.

The day after the announcement of these curbs, Chinese President Xi Jinping reemphasized his call for “stable and smooth functioning of regional industrial and supply chains” during a virtual address to the leaders at the Shanghai Cooperation Organization summit, as reported by state media.

As China flexes its export muscle on critical chipmaking materials, a ripple effect is set to shake the world’s semiconductor industry. China’s strategy is a stern reminder of the importance of diverse sourcing for maintaining resilient supply chains. The immediate surge in gallium and germanium prices is just a prelude to the potential long-term ramifications of such a geopolitical chess move.

However, this is not just an issue for the present, but a harbinger of what the future of global tech dominance could entail. It signals a new front in the technology war, where resource control might become a common weapon. Such scenarios could fundamentally reshape the global tech industry, determining which countries and companies can lead in developing next-generation technologies.

Nations reconsidering supply chain strategies

Nations that previously relied heavily on China’s resources must rethink their supply chain strategies and develop contingencies for such situations. This could lead to a global tech landscape reshaped by the urgency to find alternative resources, potentially opening doors for other countries to enter these roles.

Moreover, while immediate panic may be overstated, the prospect of escalating ‘chip wars’ and broader export controls from China should not be taken lightly. This could set a precedent for similar tactics involving other critical resources, potentially leading to a cascading effect on several technology sectors.

Ultimately, this situation underscores the intricacies and vulnerabilities of global tech supply chains. It’s a wakeup call for industries and governments alike to foster cooperative solutions and diversification strategies to ensure stability in the face of geopolitical turbulence.