Tensions in the US-China technology war are escalating.

On July 3rd, China's Ministry of Commerce announced export controls on critical semiconductor raw materials, including the metals gallium and germanium, as well as gallium nitride (GaN) and gallium arsenide (GaAs). 

This move is seen as a technological blockade against the United States' plan to impose new export restrictions on China's high-tech industry. The export controls are expected to take effect on August 1st, 2023.

The Wall Street Journal pointed out that China's restrictions on these minerals and dozens of related compounds seem to target countries such as the United States, South Korea, and Japan. These countries had previously imposed export restrictions on advanced semiconductor-related technologies to China.

Currently, China exports gallium to compound semiconductor substrate manufacturers overseas, who then process them into compound semiconductor epitaxial wafers, RF chips, LEDs, and other products. These materials are commonly used in communication devices widely used, such as fast charging and 5G millimeter-wave small cell base stations.

Concerns arise regarding the wide-ranging impact of these export controls, which could potentially affect the global compound semiconductor supply chain.

The key is: Taiwanese manufacturers do not import from China directly

Leading Taiwanese LED epitaxial wafer manufacturer, Ennostar, stated that the control measures means application in advance is needed, not outright prohibition. Therefore, the impact remains limited, and the company will continue to monitor the situation.

WIN Semiconductors, a key Taiwanese manufacturer of gallium arsenide (GaAs) wafers, similarly stated that the export restrictions on gallium and germanium semiconductor raw materials have limited impact on the company's short-term wafer procurement, production, and delivery.

The raw material used by WIN Semiconductors is epitaxial wafers, coming mainly from Germany and Japan. Its statement suggests that they only purchase a small number of substrates from China, so the short-term impact is limited. 

A government official familiar with the compound semiconductor industry chain noted that Taiwan does not directly import raw materials from China, therefore industry players currently do not feel significant impact.

A high-level executive from an unnamed compound wafer foundry revealed that as soon as China announced the export controls, they and many other industry peers immediately checked their inventory with suppliers, while exploring alternative sources.

He gave an example of their own process of manufacturing gallium nitride wafers, which requires chemically treated trimethyl gallium, a liquid compound stored in steel cylinders. They purchase this compound from a foreign international semiconductor material manufacturer, which initially undergoes preliminary processing in a factory in South Korea before being sent to a purification plant in Kaohsiung, Taiwan, from which their company makes the purchase.

If we look at the numbers for production and reserves, China indeed has overwhelming advantages. China is the largest exporter of gallium and germanium in the world. China's gallium production accounts for over 90% of global production, and its reserves account for around 70% of the global total. Approximately 70% of the production is for domestic use, while about a quarter is exported. As for germanium, China accounts for 70% of global production and 40% of reserves, with the remaining half of reserves located in the United States.

However, after these metal raw materials are extracted in China, they still need to undergo purification and chemical synthesis. Currently, these advanced refining technologies are still controlled by international giants in the United States, Japan, and Europe.

"After about a week since the export controls were announced, we are still confirming the inventory levels with our foreign suppliers," the executive admitted. "Both our company and suppliers have inventory in the short term."

Insufficient purification technology may backfire for China

In the short term, which may last several months, if inventory is depleted and China's export controls remain in place, could there be negative consequences?

This is ultimately a gamble for China.

"If China cannot achieve semiconductor-level purification, synthesis, and chemical processing technology, implementing export controls on raw materials will ultimately harm themselves," he believes. 

Chinese raw material suppliers would need to export the materials for purification overseas before reimporting them for domestic use. Export controls would only slow down the process, and naturally, the Chinese government would not want to be too strict.

"But if China develops advanced purification and synthesis technologies and continues to implement controls, that could significantly affect non-Chinese companies in the long run," he said.

Is China's implementation of "technological barriers" that may not necessarily benefit itself a strategic strike against the West or an impulsive decision?

A director at an industry think tank suggests that in the geopolitical context of the US-China semiconductor battle, raw materials have become "weapons" for national security and competitiveness.

"From the array of US sanctions, we can see that the future is heading towards a G2 world, in terms of supply chain and market: Mainland China versus the rest," the director stated.

Recently, Morris Chang, the founder of TSMC, mentioned in a keynote speech that the foundation of globalization is "collaboration based on each country's comparative advantage in the economy." However, now national security and technology and economic leadership related to national security have surpassed the importance of globalization.

Now that the US and China escalate tensions through prohibitions on high-tech equipment, the "Chips Act," and increased tariffs, they aim to strengthen themselves or weaken the competitiveness of the other, achieving military or economic leadership. "All of these are anti-globalization," he said. 

Reducing dependence is key

China's wave of export controls may accelerate the reduction of dependence on critical Chinese raw materials by importing countries.

Germany, the largest metal importing country in Europe, has warned of the dangers of overdependence on China. Wolfgang Niedermark, a board member of the Federation of German Industries (BDI), stated in an interview that China's implementation of these restrictive measures highlights the dangers of European and German dependence on China. "Europe and Germany must quickly reduce their reliance on critical Chinese raw materials."

In fact, the metals gallium and germanium subject to China's export controls are not considered rare metals. China is dominating because their extraction and refinement costs are low. There was no incentive for countries in Europe and America to develop these resources.

Both the United States and Australia have large-scale zinc and alumina refining plants, where gallium and germanium are usually recovered as byproducts and have not been given much attention in the past. Nyrstar, the world's second-largest zinc producer, is currently considering establishing a facility at a zinc smelting plant in Tennessee, to recover and process gallium and germanium.

It is still unclear how China's move to restrict critical raw materials can help them regain an advantage, but it is no doubt escalating the battle for key technology between the US and China.

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Have you read?

• TSMC founder Morris Chang: Taiwan is indispensable in global chip industry 
• Why is TSMC experiencing ‘negative growth’ for the first time in 14 years? 
• TSMC founder: “In the chip sector, globalization is dead.”

Uploaded by Ian Huang