In the latest escalation of geopolitical tensions over chips, China has threatened export restrictions on two key semiconductor materials.

China’s Ministry of Commerce (MOFCOM) and the General Administration of Customs (GAC) posted notices yesterday suggesting that starting on August 1st, 2023, eight items related to gallium, and six items related to germanium, could not be exported without state approval in order to “safeguard national security interests”.

The move comes swiftly after the Netherlands announced new rules restricting exports of certain semiconductor manufacturing equipment on “national security grounds”, although it has been reported that the country was under pressure from the US to curb the sale of chips to China. ASML, headquartered in the Netherlands, produces hardware, software, and services to mass produce patterns on silicon through lithography – and is at the centre of the export restriction. Three of ASML’s four systems for immersion lithography will be covered by the new rules, leaving Chinese producers unable to manufacture commercial-scale semiconductors smaller than 28nm.

These moves are the latest battles in what is often characterised as chip wars. Last year, the US imposed considerable export restrictions on shipments of US chipmaking technologies. The centrepiece of US policy related to semiconductors is the CHIPS and Science Act, a federal statute signed into law by President Joe Biden in August 2022. The act provides roughly US$280Bn in funding to boost domestic research and manufacturing of semiconductors in the US, including US$39Bn in subsidies for chip manufacturing on US soil along with 25% investment tax credits for costs of manufacturing equipment, and US$13Bn for semiconductor research and workforce training, with the aim of boosting the US while negatively impacting China.

Japan is in on the act too. In March, it placed restrictions on 23 types of semiconductor manufacturing equipment in alignment with Washington’s efforts to hinder China’s progress on advanced chips. Meanwhile, in Europe, the European Chips Act is designed to bolster Europe’s competitiveness and resilience in semiconductor technologies and applications by strengthening Europe’s technological leadership in the field. The Act will mobilise more than US$46Bn of public and private investments up to 2030.

For its part, China has poured US$50Bn into chipmaking, hoping to meet 70% of domestic demand for chips by 2025. That demand is considerable. Data from the Semiconductor Industry Association suggests that APAC accounts for nearly two-thirds of global consumption with China alone accounting for over one-third of total demand.

Microchips, sometimes dubbed the “new oil”, are increasingly seen as of vital importance for geopolitical, economic, and military security. While some of the ramp-up in tensions over the technology can be attributed to a general US-Sino decoupling narrative, much of it is to do with the fact that Taiwan produces over 60% of the world’s semiconductors, with most manufactured by Taiwan Semiconductor Manufacturing Corporation. 

Gallium and germanium: China holding all the chips?

To date, the chip wars have been largely about restricting access to technologies. Restricting access to raw materials is a new development. China dominates the supply of germanium and is well-placed to disrupt global markets. Chinese exports were principally to Germany, Hong Kong, Japan, Belgium, the USA and Russia.

With regard to gallium, Project Blue data suggests that China is now by far the largest producer of gallium feedstock with a >96% market share in 2022. Outside of China, there is small-scale production in Hungary, Japan, Russia, South Korea, and Ukraine. China also dominates the supply of high-purity refined gallium. Canada, Japan, Slovakia, and the USA are the other principal producers of high-purity material. Importantly, Project Blue’s base case assumes all upside in terms of primary supply is from China. Restrictions on Chinese exports could leave Western consumers scrambling for materials. Capacity utilisation is low in the ROW, so there is some potential for an increase – although this would only translate into an additional 35t Ga according to Project Blue estimates. Meanwhile, total demand for gallium in ICs last year was nearly 170t Ga, with most material originating in China.