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BofA Sees Far-Ranging Impact of New Chip Controls, Says ‘More to Come’

The new U.S. chip controls against China (see 2210070049 and 2211010042) mark a “major escalation” in the U.S.-China technology war and will likely have a significant effect on China’s technology capabilities, Bank of America said this week. The bank also warned that the controls, which are “more comprehensive and stricter than what we have seen in the past,” could ultimately open the “door to more sweeping restrictions in other domains like leading edge manufacturing.”

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The controls “jeopardize China's ambitions of technological advancement and self-reliance to the point of derailing China's progress even in realms where it is currently strong, such as datacenter and autonomous driving,” BofA said. The rule’s new U.S-persons restrictions may be “even more important” than the technology restrictions, the bank said, noting the semiconductor industry has “broad, precisely-calibrated, deep production processes.”

Reverse engineering this “complexity” can be difficult, BofA said, particularly because the "recipient needs to have the absorptive capacity which needs tacit knowledge, often requiring hundreds of personnel with decades of experience with testing, trial and error, and embedded knowledge." It said the new restrictions on U.S. persons "have made any transfer of technical knowhow almost impossible. China is possibly staring at a massive shortage of senior talent for years to come.” The Bureau of Industry and Security last month offered guidance on the new U.S.-persons restrictions, including more information on who the licensing requirements capture (see 2210310044).

BofA said it’s preparing for more U.S. controls along with a potential outbound investment screening regime, which the Biden administration is considering (see 2209140041 and 2210040025). “The change in intent and attitude of US policymakers makes us believe that there is more to come,” the bank said, adding “it does not seem far-fetched that the restrictions spill over to emerging technologies,” such as “brain computer interface, artificial intelligence (AI), quantum computing, intrusion software etc.”

BIS Undersecretary Alan Estevez last month said the agency isn’t done tightening its chip restrictions and will likely look to impose export controls on quantum information science items, biotechnologies, and AI software and algorithms (see 2210270047). The agency in October sought feedback on the possibility of controlling exports of brain computer interface technologies (see 2110250011), although it received pushback from tech companies and academics (see 2201100010 and 2205050019).

BofA said a number of Chinese chipmakers will suffer as a result of BIS’s new chip controls, including Semiconductor Manufacturing International Corporation (SMIC) and Yangtze Memory Technologies Corp., which was added last month to the Unverified List and could soon be placed on the Entity List if it doesn’t allow BIS to conduct an end-use check (see 2210070006). But while SMIC and YMTC are the “key and immediate losers of the new restrictions” -- as are “high-end semiconductor equipment and supercomputer CPU/GPU/AI chips” -- restrictions on chips used in smartphones, computers, consumer electronics and automotives are “more limited,” the bank said.

The controls also appear to have a more limited impact on European chip firms, the bank said. Those companies “see medium and long-term demand fundamentally unaffected, with production capacity in China substitutable by fabs located outside,” BofA said.

It added that companies in Asia, such as TSMC, Samsung and SK Hynix, will eventually “shift their future” capital expenditure plans to former China regions after their one-year BIS authorization expires, the bank said, and Japanese “front-end semiconductor capital equipment makers are likely to be impacted to the same degree as US peers.” Back-end Japanese companies “will be negatively impacted by the decline in semis output, given one of its earnings drivers is testing demand for cutting-edge logic semiconductors.”

While the U.S. industry is expecting retaliation from Beijing (see 2211040051), BofA views China’s options as limited, although the country could shift away from foreign brands to local ones, “clamping down the long-term demand for some US companies.” The bank said it “seems unlikely that China would retaliate by disrupting supply chains, particularly Apple's, given the synergistic relationship between the two.”

While some of the controls' impacts are clear, BofA said “things remain fluid” and BIS is still accepting public comments on the restrictions, which are due Dec. 12. The bank said it’s watching for additional U.S. guidance and whether BIS issues any additional exemptions, including for its U.S.-persons restrictions or any China-based facilities.