Thriving underground market for high-end chips in China after US export ban

With the US and China at loggerheads, the decades-old semiconductor industry is facing an upheaval.

Lim Min Zhang

Lim Min Zhang

The Straits Times


The US, its partners and allies have recently moved to tighten the transfer of critical technology to China. PHOTO: REUTERS

July 21, 2023

BEIJING – A thriving underground market for top-end US graphics chips in China has laid bare the technological gap between the two superpowers.

Small quantities of A100 and H100 chips manufactured by Nvidia are still reportedly available on many Chinese e-commerce platforms despite being banned for export by the United States in 2022 over “national security” concerns.

Such hardware components are used in artificial intelligence (AI), cost more than US$10,000 (S$13,200), and have been increasingly sought after in China after the roll-out of ChatGPT in the US. Chinese firms want to create their own version of the highly intelligent chatbot.

The below-the-counter trade has apparently flourished as the US reportedly mulls over further curbs on such powerful chips, with the two countries’ tech rivalry showing few signs of easing.

The US, its partners and allies such as Japan and the Netherlands dominate key areas of the semiconductor supply chain, and have recently moved to tighten the transfer of critical technology to China.

But checks by The Straits Times found many listings for high-end graphics processing units (GPUs) on Chinese e-commerce platforms ranging from Xiaohongshu to Pinduoduo and JD, although often with inflated prices and dubious warranty status.

One seller, whose IP address is shown to be from Shanghai, quoted 125,000 yuan (S$23,000) for the A100. The A800, a version of the A100 with reduced capabilities for the Chinese market, was priced at 108,000 yuan.

Another Guangdong-based seller, who declined to be named, said: “There are no longer any authorised agents for this model (A100). Any guarantee would be by the seller.”

Nvidia’s GPUs are widely considered to be industry-leading and are used in laptops, data centres and cars.

The firm’s market value briefly crossed the US$1 trillion mark in May amid the generative AI boom in the past year. Other than Nvidia, key players in this sector include AMD and Intel, which are also American.

Nvidia declined comment when asked about media reports that said further US government curbs on its chips, including the cleared-for-China A800, could be on the cards. It said via e-mail that it complies with all US government export restrictions.

“We continue to work with our customers in China to satisfy their planned or future purchases with alternative products and may seek licences where replacements aren’t sufficient.”

Vendors at electronics malls in the Huaqiangbei shopping street in tech hub Shenzhen were quick to tout locally made alternatives when asked about the A100.

Sellers told ST that users with the A100 run a high risk of being left without a warranty if there are any problems with the chips, adding that it is a safer bet to buy locally made alternatives.

But they conceded that the raw processing power of the local alternatives fall short of the A100’s, even though “many of our customers find them good enough”.

Impact of the chip war
With the US and China at loggerheads, the decades-old semiconductor industry is facing an upheaval.

Supply chains are being reconfigured: More of Apple’s latest iPhones are being made in India rather than China, while leading chipmaker Taiwan Semiconductor Manufacturing Company is building two fabrication plants in the US.

For decades, firms in the semiconductor sector have thrived because it is one of the most globalised industries, said the managing director of Chinese-owned Singapore firm Stats ChipPAC, Mr Chiou Lid Jian.

The industry has supply chains spread across the world, leveraging various countries’ strengths and purely governed by the laws of economics, said Mr Chiou. His firm provides advanced semiconductor packaging and test services.

“The chip war is changing this long-established paradigm. It will definitely cause major disruptions in the industry,” said Mr Chiou, who has worked in the industry for more than 30 years.

The US ratcheted up the rivalry last October by banning American firms from exporting tech used in producing advanced chips to China. In January, an agreement was reached for the Netherlands and Japan to join the effort.

In May, the Chinese authorities banned Micron Technology from key infrastructure projects, saying that products made by the US memory chip giant posed a national security risk.

This was followed by a decision in July to restrict the export of gallium and germanium, two metals used in semiconductor manufacturing.

There are few signs of easing competition between the two superpowers. Chinese Ambassador to the US Xie Feng told a US forum on Wednesday that Beijing will definitely respond if the US imposes more curbs on the chip sector.

Mr Walter Kuijpers, an advisory partner at KPMG in Singapore, said semiconductor capabilities are seen as more closely linked to national security and economic prosperity today, driving a trend towards nationalism.

The US Chips and Science Act was never meant to build a completely independent supply chain, said Mr Kuijpers, referring to a US$52 billion investment announced in August 2022 to boost US chip research and manufacturing.

He expects changes to supply chains to focus on protecting high-end technologies, while low-tech capabilities and low-cost components will continue to be sourced and manufactured through global supply chains.

China’s prospects
In the short term, China is unlikely to catch up in making the most advanced chips, said Mr Bert Hofman, director of the East Asian Institute in Singapore, pointing to the complexity of the mechanical and software tools involved.

For instance, ASML, which produces high-end lithography machines, has more than 5,000 companies in its supply chain, he noted. The Dutch company holds a monopoly on extreme ultraviolet lithography tools needed to make the most advanced chips.

He believes China will not be satisfied with making and using only lower-end chips, even though these are most important for its current industrial production.

“Access to high-end chips is important for numerous areas of research and development critical for the industries of the future that China wants to engage in, including AI, biochemicals and new materials.”

Nevertheless, few are betting against China, which has been making massive investments in this strategic industry.

Professor Joseph Liow of Nanyang Technological University said that US actions to restrict the export of chip technology – including by joining forces with allied countries – had catalysed Beijing’s efforts at self-sufficiency.

“The Chinese government is throwing everything and the kitchen sink at semiconductor development,” said Prof Liow, who is dean of the College of Humanities, Arts and Social Sciences.

“No amount of money is too large… and at some point, breakthroughs are going to come.”

Additional reporting by Aw Cheng Wei

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