U.S. Tightens Grip on Chipmaking in China as Alibaba Develops New AI Processor

Restrictions on semiconductor manufacturing equipment in China are intensifying as the U.S. Commerce Department moves to constrain chipmakers' ability to expand their operations there, according to reporting from Reuters. The policy change directly targets Samsung Electronics Co. Ltd. and SK hynix Inc., which rank as the planet's leading suppliers of memory chips. SK hynix manufactures a significant portion of the HBM memory found in Nvidia Corp.'s graphics processing units, while Samsung produces both memory and processors used in smartphones and other consumer electronics.

Intel Corp. rounds out the trio of semiconductor firms subject to the Commerce Department's new restrictions. The practical consequences for Intel remain uncertain, given that the company divested its Chinese memory fabrication facility to SK hynix approximately four years ago.

Under the new framework, Samsung, SK hynix, and Intel must secure licenses from the Commerce Department before deploying American-manufactured chipmaking equipment at their Chinese facilities. Implementation of the requirement begins in 120 days. While the regulation will ostensibly allow these manufacturers to sustain their current production operations in China, it prevents them from modernizing their equipment or expanding their manufacturing footprint.

The announcement triggered a market downturn for U.S. equipment manufacturers. Lam Research Corp. experienced a 3.8% decline in share price during trading, while Applied Materials Inc. fell 2.7%.

The Commerce Department had previously restricted shipments of cutting-edge chipmaking equipment to China in 2023, mandating that exporters obtain authorization for such transactions. According to Reuters, American equipment suppliers are currently seeking licenses to ship billions of dollars in manufacturing hardware to China.

Parallel reporting from the Wall Street Journal indicates that Alibaba Group Holding Ltd. has created a new artificial intelligence processor utilizing Chinese manufacturing facilities. The company's fabs leverage both legacy equipment sourced from foreign suppliers and domestically developed hardware, according to the Journal.

Alibaba's processor is engineered specifically for inference operations and is designed to handle a wider spectrum of applications compared to the company's previous custom silicon offerings.

A notable feature of Alibaba's chip involves its software compatibility layer. The processor can execute code originally developed for Nvidia hardware without requiring the extensive modifications typically necessary when porting applications between different chip architectures. This capability could substantially reduce the engineering effort involved in adapting software to the new platform.

Nvidia and Advanced Micro Devices Inc. have recently obtained clearance to resume exporting artificial intelligence chips to China. Both companies must remit 15% of revenues generated from these sales to the U.S. government. Analysts project that Nvidia could secure orders worth billions of dollars from Chinese customers by the conclusion of the year.