China has clarified its regulations on determining the place of origin for integrated circuits (ICs), according to the China Semiconductor Industry Association (CSIA).

The origin will be based on the location of the wafer fabrication facility, regardless of whether the chips are packaged or unpackaged.

This change could encourage chip developers to use local foundries like Semiconductor Manufacturing International Corporation (SMIC).

Following the announcement, SMIC’s shares rose by 5.9%, and shares of Hua Hong Semiconductor increased by 14%.

Analysts suggest that this move could affect the US semiconductor industry.

A research note from ICWise warns that the new rule may raise production costs for US-made chips, possibly pushing manufacturers to relocate facilities abroad.

This comes amid rising trade tensions between the US and China, as China’s Ministry of Finance plans to increase tariffs on US goods from 84% to 125%.

🔗 Source: South China Morning Post

🧠 Food for thought

1️⃣ Semiconductor origin rules reflect industry’s global interconnectedness

China’s rule that chip origin is determined by where wafer fabrication occurs highlights the inherently global nature of semiconductor production, which makes traditional trade barriers particularly disruptive.

The semiconductor industry, valued at approximately $500 billion globally, relies on a complex international supply chain where raw materials are sourced from countries like Japan and Mexico, while manufacturing occurs across multiple regions 1.

This interconnectedness explains why China’s clarification carries such significant market implications. SMIC shares rose 5.9%, and Hua Hong surged 14% following the announcement.

Semiconductor manufacturing involves thousands of precise steps in sterile environments, making it nearly impossible for any single country to control the entire production chain, despite political desires for self-sufficiency 1.

Even the purest silicon, essential for chip production, comes primarily from specific locations like Spruce Pine, North Carolina, demonstrating how geographically distributed the supply chain truly is 1.

2️⃣ China accelerates semiconductor self-sufficiency amid trade tensions

The origin rule change represents another step in China’s long-term strategy to reduce its semiconductor dependency, which has become more urgent during the trade conflict.

As the world’s largest consumer of semiconductors, importing $260 billion worth in 2017, China has been actively working to increase domestic production capacity through policy support and investment 1.

Chinese companies like Suzhou Everbright Photonics and Chipsea Technologies have stated they expect to benefit from the trade war as domestic products become more competitive against higher-priced imports 2.

The timing is significant, as this policy change comes amid escalating tariffs. China recently raised duties on US products from 84% to 125%, directly matching Trump’s tariff increases 2.

Industry experts note this trade conflict may accelerate the transition from foreign to domestic chip production in China, potentially undermining US goals of reshoring semiconductor manufacturing 2.

3️⃣ Trade policies reshape global semiconductor manufacturing landscapes

The US-China competition in semiconductors is triggering fundamental changes in where chips are made, with both countries using industrial policy to influence manufacturing decisions.

The US semiconductor industry has maintained a trade surplus for approximately 30 years, reflecting its historical global competitiveness 3, but now faces challenges from China’s growing capabilities and targeted policies.

The US response through the CHIPS and Science Act provides substantial subsidies and tax breaks to revitalize domestic semiconductor production, with major investments being directed toward new US-based factories by companies like TSMC and Intel 4.

Meanwhile, data shows China’s semiconductor output fell by 17% in early 2023 due to US export controls on advanced chip technology 5, demonstrating the immediate impact of these trade policies.

The origin rule change by China could further complicate manufacturing decisions, as chips made in US facilities may face higher costs when entering the Chinese market, potentially incentivizing companies to establish production elsewhere 2.