New Restrictions on China’s Gallium and Germanium Exports hit Semiconductor Industry

Updates (7/19/23)

Exactly what items do China’s new export restrictions affect?

China’s new restrictions have left many exporters wondering how far-reaching the new rules extend. According to Covington, an American multinational law firm, “the announcement of the export restrictions details the specific customs classifications codes” of commodities affected by the new rules. “Notably, the new rules apply only to these specific commodities and not to finished products that incorporate them.”  

Another move in the long-standing battle for national security interests

While China’s new gallium and germanium restrictions may come as a surprise to some, they mark a continuation of national security tensions between China and the United States.  

In an article for Foreign Investment Watch by Nathanial Reid, an attorney and China analyst, found that “evidence from CFIUS cases…supports the idea that wide bandgap semiconductors are a key point of emphasis” for the U.S. government with regards to national security.

“Wide bandgap” semiconductors are those that allow “power electronic components to be ‘smaller, faster, more reliable, and more efficient than their Silicon (Si)-based counterparts.’”

CFIUS, or the Committee on Foreign Investment in the United States, is an interagency committee “authorized to review certain transactions involving foreign investment in the United States…in order to determine the effect of such transactions on the national security of the United States.”  

While transactions reviewed by CFIUS that involve gallium are few and far between, those presented are rarely approved. Here is a brief overview of the known cases around gallium:

• 2015: CFIUS expressed concerns over a sale of Philips’ stake in “its auto and light-emitting diode components subsidiary” to Chinese investors. The deal was later withdrawn.
• 2016: China-based San’an Optoelectronics offered to purchase GCS Holdings, a Taiwanese semiconductor manufacturer. CFIUS said it would not approve the deal, which led to it falling through.  
• 2016: Investment firm Fujian Grand Chip Investment Fund LP offered to buy German semiconductor Aixtron SE. The sale was ultimately blocked by President Obama on recommendation by CFIUS.
• 2016: German semiconductor firm Infineon agreed to buy a division of Cree, a North Carolina-based semiconductor manufacturer.” The deal was blocked by CFIUS over national security concerns.  
  

Updates (7/11/23)

In the week since China announced its new restrictions, the market for gallium and germanium has seen a price shift, with gallium rising $43 to $326 per kilogram. Germanium’s pricing has seen a milder shift of less than 2%.  

While political and news sources speculate on how this move impacts the growing trade tensions between China and the West, manufacturing companies are looking towards industry giants for measurable impact.  

Over the week, more companies announced internal reviews to assess the impact of China’s trade restrictions, including Intel, Microchip, and Infineon.  

Microchip said its initial assessment found no material impact, while Intel said it was still assessing the impact. A spokesperson for the company noted that “our strategy of having a diverse, global supply chain minimizes our risk to local changes and interruptions.”

Infineon said it relies mainly on sources outside of China for its supplies and did not foresee any real impact.  

Additionally, mining companies in Congo and Russia are looking to boost production on gallium and germanium in an attempt to tempt new buyers away from China.  

Summary points:

• On July 3, China announced new restrictions on gallium and germanium exports
• Exporters will need a license to export these elements starting August 1, 2023
• 95% of the United States’ gallium imports come from China
• Gallium and germanium are vital to semiconductor and electronics manufacturing
• Semiconductor companies offer mixed results on potential impact

Overview:

On July 3, China’s Ministry of Commerce announced a new series of restrictions on gallium and germanium exports, two vital elements used in semiconductor and consumer electronics manufacturing.

Beijing officials announced starting August 1, 2023, exporters will need a license to ship gallium and germanium out of the country. The application process will require exporters to identify importers, end users, as well as how the metals will be used.

While China’s official announcement cites national security and state interests as the driving motivator, the act comes amidst a growing technology trade war between China and the United States and Europe.

What are gallium and germanium? 

• Gallium (Ga) and germanium (Ge) are two chemical elements that play vital roles in the semiconductor and consumer electronics manufacturing industries. Gallium is used to manufacture compound semiconductor wafers, which are used in a variety of goods including solar cells, LEDs, fiber optics communication, and even dentistry. 
• Germanium is used in semiconductor manufacturing as well as fiber optic systems, solar cell applications, and LEDs. Germanium is also regularly used in airport security scanners. 

Neither element is found naturally; both are byproducts from the harvesting of other metals such as zinc and bauxite. 

Both metals are listed as technology-critical elements (TCE) that play a vital role in the development and manufacture of emerging technologies. The European Commission features both elements on its Critical Raw Materials (CRM) list, and the U.S. Department of Energy cites them in a 2021 report as “essential to the economic prosperity and national defense of the United States.” 

How big a role does China play in their production?

According to the U.S. Department of Energy, the United States relies on China for 95% of its gallium supply. The report found that the United States “does not have sufficient domestic resources to meet expected demands for certain critical materials, such as cobalt and gallium.” 

China is also the main producer of germanium, “making up 80% of the element’s total worldwide production during 2012-2016.”

And the demand for both is only growing. 

Studies show that gallium production has increased “at a rate of 7% per year on average over the past decades, much faster than most industrial metals.” This demand is exacerbated by the demand for clean energy technology both from consumers and countries aiming to meet their energy goals as stated in the Paris Agreement.

Germanium is also seeing increasing demand in light of historically upward growth and the growing need for solar cells and 5G networks. 

Demand, combined with a tightening grip on access due to these new restrictions, may bring a new test for electronic supply chain management teams. 

How affected countries are responding

Japan and South Korea are the largest importers of gallium and germanium from China. 

In response to the news, South Korea’s ministry conducted a meeting to assess the situation reported an article from the Financial Times. “The latest sanctions are expected to have limited impact on sourcing in the short term,” remarked the deputy minister for South Korea’s Office of Industrial Policy. “But we cannot rule out the possibility of the sanctions lasting longer and expanding to other items.” The official said they would be closely assessing the situation for any new changes. 

Japanese trade minister Yasutoshi Nishimura said Japan’s government was looking at the impact the new regulations might have. 

Reuters reported a spokesperson from the U.S. Department of Commerce said the United States “firmly” opposed the act and would be working with allies to tackle the issue. No official actions have been taken to directly challenge or address the new restrictions. 

The real impact may be on Chinese companies

According to the South China Morning Post, a Hong-Kong based newspaper owned by Alibaba, Chinese companies may be the most heavily impacted by the new licensing system. China may be the largest producer of gallium and germanium in the world, but it’s not the only source for low-purity gallium production. Other producers include Japan, the Republic of Korea, and Russia.  

Companies seeking to get around China’s new restrictions may be able to find business elsewhere if need be, leaving Chinese companies in the lurch.

Reasons why we might not see any immediate impact

While governments and businesses scramble to assess the fallout, some industry experts are chalking the new restrictions up to a lot of noise. An article released by DigiTimes, a newspaper for the semiconductor, electronics, and communications industries in Taiwan, pointed to three key reasons why manufacturers might not see any initial fallout from these new restrictions:

1. Gallium production is diversified across several countries. As of 2020, gallium is produced by at least four other countries.
2. According to industry players, most key gallium arsenide (GaA) substrate manufacturers are not based in China. Additionally, industry contracts with substrate makers tend to be 1-2 years in length, meaning gallium remains accessible at the contract price for an extended period of time. While licensing may cause some price changes with time, the low cost of production and non-exclusivity over the element does not give China the advantage it needs to raise pricing in any meaningful way.
3. Restricting gallium exporters also affects Chinese substrate manufacturers. Since a significant portion of China’s gallium is exported worldwide, domestic production heavily relies on exporters for business. Too much restriction might motivate foreign companies to seek more reliable sources of gallium, leaving Chinese companies with fewer business prospects. 
   

Who else produces gallium and germanium?

Top worldwide producers of gallium include Japan, the Republic of Korea, Russia, and Ukraine. Germany and Kazakhstan were previously producers but ceased primary production in the 2010s. Germany’s production stopped in response to the high operating costs and cheapness of the gallium produced by China. 

After China, the United Kingdon, Russia, and the United States are the primary suppliers of germanium, with some additional production in Finland. 

Semiconductor companies & others respond to restrictions

Key semiconductor manufacturers and designers are also addressing the news, including industry giants such as Taiwan Semiconductor Manufacturing Company Ltd. (TSMC) and NXP Semiconductors N.V.

Wolfgang Niedermark, an Executive Board Member of BDI, a leading organization of German industry, saw the news as further evidence for reducing their raw materials dependency abroad. He called the restrictions an illustration of “the urgency for Europe and Germany to quickly reduce their dependence on raw materials now,” a stance that mirrors his long-held policy on reducing Germany’s economic dependency on China. 

Potential impact on industry players – a Z2Data Analysis

A further analysis leveraging Z2Data’s data intelligence platform found additional commodities and suppliers that may be affected by these new restrictions:

LED Suppliers: 

• Broadcom Inc.
• OSRAM Opto Semiconductors GmbH
• ROHM Co., Ltd
• LED Indication
• Colored LED Lighting.
• Wolfspeed, Inc.

Oscillators (Notably Crystal Oscillators):

• Ecliptek Corp.
• Transko Electronics, Inc.

Opto-couplers:

• Broadcom Inc.
• On Semiconductor
• Lite-On

RF Amplifiers, Switches, Mixers:

• Hittite Microwave
• NXP
• Analog Devices
  

Sensors/Encoders:

• Bourns, Inc.
• Broadcom, Inc.
• Analog Devices

Microcontrollers (MCUs)/Microprocessors (MPUs):

• Not very prevalent but certain NXP MCUs/MPUs utilize Germanium in solder ball in NXP MCUS and MPUs

Chip Resistors: 

• The data analysis also found that germanium is used in specific chip resistors from KOA Speer

To learn more about how Z2Data delivers in-depth analysis on the impact of new trade compliance requirements, schedule a product demo.[MA1] 

What’s the foreseeable future impact for the semiconductor industry?

While new restrictions add complexity to the supply chain process, their actual effect remains to be seen. China’s new restrictions don’t prevent exporters from obtaining either element—they put a license on the process. And until applications are submitted it’s too soon to say if there will be restrictions or rejections around that process. 

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