Export Controls Could Cause China to Lead in ‘Lower-Capability’ Chip Tech, DNI Warns

U.S. export controls against China could cause the country to dominate the global industry for “lower-capability” chip technologies, the Office of the Director of National Intelligence said in its annual threat assessment released last week. The DNI also warned that China, which is quickly building new chip factories, remains the “top threat to U.S. technological competitiveness.”

The Chinese government is “doubling down on efforts to boost indigenous innovation and to become self-sufficient,” the DNI said, especially in the chip industry. The U.S. in October introduced new export controls targeting semiconductors-related items destined to China (see 2210070049), but the DNI said restrictions on advanced chips is causing China to focus on meeting the world’s demand for lower-level chip technologies.

“Because of the difficulties China is facing from export controls by Western nations, it is focusing on lower-capability, commodity chip technology,” the report said, “and China could become a powerhouse in that segment, which could eventually make some buyers more reliant on China.”

China also leads the world in building new chip factories and is expected to account for 18% of global fabrication facilities by 2025, a 7% increase from 2019. The country plans to build “dozens” of semiconductor factories by 2024, and most “will be dedicated to producing older, more mature technologies.”

Although it’s focusing on older chip technologies, Beijing also continues to try to acquire “proprietary commercial and military technology from U.S. and allied companies and institutions,” the DNI said. “Beijing’s willingness to use espionage, subsidies, and trade policy to try to give its firms a competitive advantage represents not just an ongoing challenge for the U.S. economy and its workers, but also advances Beijing's attempts to assume leadership of the world’s technological advancement and standards.”

The DNI expects China to “persist with efforts to acquire foreign science and technology information and expertise,” including through “extensive" collaboration with foreign scientists and researchers. The DNI also warned about malign Chinese “investments and acquisitions, talent recruitment, economic espionage, and cyber theft to acquire and transfer technologies and technical knowledge.”

The report also touched on Russia, saying the country will remain a “key space competitor” but has been slowed due to “additional international sanctions and export controls following its invasion of Ukraine.” The DNI expects Moscow to prioritize “integrating space services -- such as communications; positioning, navigation, and timing; geolocation; and intelligence, surveillance, and reconnaissance -- deemed critical to its national security.”

Russia will also continue to use energy “as a foreign policy tool to try to coerce cooperation and weaken Western unity on Ukraine,” the report said, “although sanctions resulting from the war are reshaping Russian energy relationships in both predictable and unpredictable ways.” Even if the U.S. and its allies were to lift their Russia sanctions, the DNI said “Russia probably would need to reduce corruption and state control of the economy, and improve the rule of law, to attract investment and expand economic growth.”

The DNI also warned that Iran isn’t taking steps to reduce its nuclear weapons capabilities but is instead accelerating those efforts, partly because it’s no longer “constrained” by the Joint Competitive Plan of Action. Iran has urged the U.S. to lift certain sanctions against the country in exchange for a return to the JCPOA.

“If Tehran does not receive sanctions relief,” the DNI said, Iranian officials probably will consider further enriching uranium up to 90 percent.” The Biden administration has negotiated with the country over the last year but has stopped short of promising to remove sanctions from Iran's Islamic Revolutionary Guard Corps (see 2208150006).

North Korea is also continuing to build a missile program, the DNI said, and continues to rely on imported goods subject to sanctions. “To support development of these new missile systems, North Korea continues to import a variety of dual-use goods in violation of UN sanctions,” the DNI said, “primarily from China and Russia.”