Chips and chipmaking products are still flowing in huge quantities from the US to China. Despite an ongoing trade war between the two countries and sanctions against Huawei, China's biggest maker of network equipment, US companies in the semiconductor industry made billions more from product shipments to China last year than they did in 2019, according to publicly available data gathered by Light Reading.

It will pile additional pressure onto the Biden administration to restrict the sale of cutting-edge technologies to China, increasingly seen as a threat to US security. US hawks fear China's government may use American chips technology to gain advantage in the design of next-generation networks or artificial intelligence. There have also been warnings that China could develop advanced weaponry based on US technology.

The companies Light Reading examined include well-known brands such as Intel and Qualcomm, which produce chips used in PCs, servers, mobile phones and other gadgets. The full list of 16 organizations (shown below) also features two developers of electronic design automation (EDA) software, critical in the production of semiconductors, and three companies that make equipment used in semiconductor factories (or fabs).

Across the 16 companies, annual revenues soared by $32 billion last year compared with 2019, an astonishing 46% increase. It came as markets partially recovered last year from the tough COVID-19 lockdowns of 2020. After growing by just $6.7 billion in 2020, sales rose by about $25 billion last year, roughly a third more.

The increases at different chip companies were not always because the end customer was Chinese. Both Qualcomm and Nvidia – which together grew China sales by nearly $12 billion last year, to about $29.6 billion – have pointed out that geographical sales figures are based on the destination of their shipments. Deliveries to a Guangzhou factory operated by South Korea's LG would count as China business.

But the sharp rise in revenues allocated to China highlights the continued importance of China as a manufacturing and assembly hub. Sales are up despite China's ongoing use of lockdowns to fight COVID-19 and the relocation of factories by major players such as Samsung, which has become increasingly reliant on Vietnam instead. Chipmaker revenues alone grew $20.6 billion last year.

Heavily reliant on sales to China, many of those companies expressed concern in their filings with the US Securities and Exchange Commission about the possibility of new sanctions. Qualcomm, which assembles and packs radiofrequency modules at facilities in China and Singapore, warned in last year's annual update that: "A significant portion of our business is concentrated in China, and the risks of such concentration are exacerbated by US/China trade and national security tensions."

Those tensions have risen since Russia invaded Ukraine last month. Chinese technology companies including Huawei have continued to serve Russian clients as their Western rivals have suspended operations and even cut off existing customers. Last week, Germany's SAP said it would switch off its cloud business in Russia, meaning Russian customers will not be able to use SAP's software unless they run it on their own premises. China's role as an increasingly important technology supplier to Russia could persuade US authorities that stricter controls on China business are needed.

It's not just about Huawei

Until now, Huawei has consumed most of the US attention. Still the world's largest vendor of network products, it continues to serve many of Europe's telecom incumbents but has been denied access to components and software with US origins. Its revenues plummeted 30% last year, Huawei revealed earlier this week, after sanctions decimated a smartphone business that had been heavily reliant on US chip technology.

Rules introduced under Donald Trump, the former US president, meant Huawei could no longer obtain chips made by Taiwan's TSMC, the world's most advanced foundry. Because TSMC uses equipment from American suppliers such as Applied Materials, continuing to serve Huawei would have put the Taiwanese company in breach of trade rules. HiSilicon, Huawei's internal chips business, was also cut off from the EDA software designed by California-based Cadence and Synopsys.

Figure 1: Workers handle chip components inside a fab owned by Taiwan's TSMC.
(Source: TSMC)

SMIC, a foundry business, is the other prominent Chinese technology firm to have been hit by sanctions. It is the main alternative to TSMC and Samsung for Huawei but is thought to lack their sophistication, and it cannot buy US chipmaking tools and software while it remains on the US blacklist (the so-called Entity List).

Yet the China revenues generated by Applied Materials, Lam Research and KLA – the three big US producers of fab equipment – rose by $4.4 billion last year, an increase of 44%. In its last annual SEC filing, KLA said the "new rules have not significantly impacted our operations but we are continually monitoring their impact." Meanwhile, annual revenues at Cadence and Synopsys hit $945 million last year, up from $828 million in 2020 and just $564 million in 2019.

Those results came after prominent US politicians complained to Gina Raimondo, the US Secretary of Commerce, that US policy on China was too soft. In a letter written last April, Michael McCaul, the House Foreign Affairs Committee Lead Republican, and Senator Tom Cotton said that hundreds of Chinese companies were still able to buy EDA software from US suppliers.

"The Huawei Entity Listing and ban on EDA software has done nothing to restrict other PRC [People's Republic of China] companies from buying EDA software licenses from the two dominant suppliers, Cadence and Synopsys," they said. "According to reports hundreds of companies run by PRC regional governments poured investments into fabless semiconductor producers and mass purchased EDA software licenses from these two US companies."

Among other things, McCaul and Cotton have argued that US tools should be denied to any Chinese company designing chips at or below 14 nanometers, the range used for the most advanced technologies.

Who's still supplying the Y-M-T-C?

They are not the only ones concerned about China's ability to access US technology. In a report published in late 2020, James Mulvenon, a China expert with SOS International, identified Applied Materials as the largest single supplier to YMTC, a government-owned maker of memory chips. In separate research published this month, analysts at Credit Suisse reckoned Apple is evaluating YMTC chips for inclusion in the forthcoming iPhone 14.

Mulvenon thinks YMTC has also bought products from ASML, a Dutch maker of the lithography equipment that imprints electronic circuits on silicon wafers. ASML is understood to enjoy a monopoly in the market for extreme ultraviolet lithography (EUV), needed to produce the smallest and most advanced chips.

Owing to security concerns, the Dutch government has denied it a license to sell EUV technology to SMIC, but it does not appear to face the same restrictions in the market for deep ultraviolet lithography, an older system. ASML's China revenues rose from about €1.4 billion ($1.6 billion) in 2019 to around €2.7 billion ($3 billion) last year, according to its latest annual SEC filing.

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— Iain Morris, International Editor, Light Reading