U.S. Orders TSMC to Cease Advanced Chip Shipments to China, Heightening Tensions in Semiconductor Industry

TSMC- Huawei

With the U.S. government’s restrictions on Chinese technology capabilities, the United States has instructed Taiwan Semiconductor Manufacturing Co. (TSMC) to halt shipments of advanced semiconductor chips to Chinese customers. These chips, which are integral to high-level artificial intelligence (AI) applications, have been restricted from being shipped to China effective Monday. According to a source familiar with the matter, the U.S. Department of Commerce issued the directive amid concerns that chips from TSMC, the world’s largest contract chipmaker, have been appearing in Chinese AI processors, notably in products by Huawei Technologies Co.

The U.S. order, conveyed via a formal letter from the Department of Commerce to TSMC, prohibits the shipment of chips of 7 nanometers (nm) or more advanced technology to any Chinese customers. These chips, which power AI acceleration and graphics processing units (GPUs), are essential in the development of sophisticated AI and machine learning technologies. U.S. authorities believe these chips, if allowed into China, could enhance the country’s strategic technological capabilities.

The order is the latest in a series of increasingly stringent export restrictions imposed by the U.S. on China over the past few years, targeting semiconductor technologies critical to China’s ambitions in AI and supercomputing. This move specifically expands previous restrictions to limit China’s access to AI and advanced data-processing capabilities. Following the letter, TSMC promptly notified its affected clients of the suspension, effective immediately, in compliance with the U.S. directive.

Neither the U.S. Department of Commerce nor TSMC have publicly commented on the matter, although Taiwan’s Ministry of Economic Affairs noted that TSMC would continue to fully adhere to “domestic and international regulations,” including U.S.-imposed export controls.

The latest directive follows revelations that a TSMC chip was discovered in Huawei’s Ascend 910B, an advanced AI processor launched in 2022. Tech research firm Tech Insights conducted a teardown of the chip, reportedly identifying the TSMC-manufactured component, which would constitute a potential violation of U.S. export controls. Huawei is among the companies blacklisted under U.S. trade restrictions, and any shipment of technology or components with AI capabilities to the firm would typically require a special export license. Such licenses are likely to be denied for items that could further Huawei’s technological advancements in AI or networking.

The discovery that Huawei had acquired a high-powered TSMC chip led the U.S. to suspect that companies may be circumventing restrictions, intentionally or not, to provide Huawei with restricted technologies. TSMC, in response, had already halted shipments to China-based chip designer Sophgo following reports that its chip was similar to the one found in Huawei’s AI processor.

The latest order from the Commerce Department, known as an “is-informed” letter, enables the U.S. to act swiftly, bypassing the bureaucratic rule-making process to enforce new licensing requirements. This approach allows the U.S. to target specific companies, such as TSMC, without requiring a blanket policy adjustment. Such “is-informed” letters have previously been issued to prominent U.S. chipmakers Nvidia and AMD, as well as to manufacturers of chipmaking tools like Lam Research and Applied Materials, curbing their ability to supply China with high-powered AI chips and essential production equipment.

This recent action underscores bipartisan concern within the U.S. government regarding the potential inadequacy of existing export controls, especially as China intensifies its push toward self-sufficiency in semiconductor technology. Both Republican and Democratic lawmakers have urged the Department of Commerce to act decisively to prevent U.S.-origin technology from bolstering Chinese tech and defense sectors.

As part of a broader strategic plan, the Biden administration has been drafting updated rules that could expand restrictions on chipmaking equipment exports to China and add around 120 Chinese companies, including chipmakers and related entities, to its restricted entity list. Despite intentions to release these updated regulations in August, delays have stalled their publication, leaving many stakeholders in uncertainty about the full scope and impact of future U.S. export control policies.

These strategic delays have caused friction within the U.S. business and technology sectors, where some argue that prolonged rule-making introduces ambiguity and makes compliance challenging for companies like TSMC, which has operations and customers globally. Nonetheless, the Biden administration’s strategy to restrict China’s access to high-powered semiconductors and tools for chipmaking highlights a concerted effort to contain China’s rapid advancements in AI, autonomous systems, and other AI-driven technologies with defense and security implications.

TSMC’s reaction has been consistent with its longstanding policy to follow all applicable laws and regulations, both domestically and internationally. The company reiterated its commitment to abiding by export control measures, reflecting the delicate position it finds itself in as a primary supplier for global tech companies, including firms from both the U.S. and China. TSMC operates in a complex geopolitical landscape and relies on a diverse client base, which includes American tech giants and Chinese technology firms eager for advanced AI processing power.

Suspending these shipments to Chinese companies could also have economic implications for TSMC and other chip manufacturers reliant on the lucrative Chinese market. However, TSMC’s cooperation with U.S. authorities on export restrictions reflects the chipmaker’s strategy to maintain its access to the critical U.S. market for both business and advanced chip technology. With escalating regulatory pressures, TSMC’s ability to balance its business between China and the U.S. may become increasingly challenging as the restrictions tighten.

Moreover, this restriction will likely ripple through the tech industry in China, affecting Chinese tech giants that depend on high-end chips for cloud computing, autonomous driving, and other AI-driven applications. For many Chinese companies, the new order represents yet another setback as they strive to reduce their dependence on U.S.-based technology and capabilities. In the long term, analysts suggest that the directive could accelerate China’s efforts to achieve technological self-reliance.

The recent U.S. actions are part of a larger trend in which the U.S. is intensifying its efforts to curtail China’s technological advancements by limiting access to advanced semiconductors, a crucial component of modern digital and military applications. Since 2019, the U.S. government has continuously expanded its Entity List—a list of foreign organizations that require U.S. suppliers to secure licenses before exporting goods or technology. Huawei and dozens of other Chinese companies have been added to this list, restricting their access to critical technologies in the 5G, AI, and semiconductor industries.

The U.S. government’s strategy revolves around restricting China’s access to high-end chip manufacturing technology, which is difficult to acquire elsewhere, even as China increases investment in developing its own semiconductor industry. Chinese companies have been attempting to develop domestic manufacturing capabilities; however, the production of advanced chips requires not only significant capital investment but also specialized materials and machinery, much of which is sourced from U.S. and allied countries.

As this latest order takes effect, industry observers are closely watching the response from Chinese tech firms and the Chinese government, which has previously criticized U.S. policies as an attempt to unfairly suppress China’s technological progress. The U.S. Commerce Department, through its is-informed letters and regulatory amendments, is establishing an agile framework for placing restrictions on companies and technologies deemed strategically sensitive. However, the delays in finalizing broader rules could create regulatory gaps that may be challenging to address without international collaboration, particularly with major allies in semiconductor production such as Japan, South Korea, and Taiwan.

For companies like TSMC, compliance with U.S. export controls remains paramount to sustaining operations in a market increasingly influenced by geopolitical tensions. TSMC’s predicament is emblematic of the semiconductor industry’s precarious position, caught between rising U.S. restrictions and the economic demands of the Chinese market. As TSMC and similar companies adjust to the new directive, the longer-term impacts of U.S. policy on semiconductor innovation and market dynamics are likely to be profound.

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