China’s production of boring chips is getting exciting

A lot of focus has recently been put on China’s ability to make cutting-edge chips, and for good reason—with the dawn of the AI age, these semiconductors will play a massive role in the geopolitical race to get ahead economically and even militarily. But boring chips matter too.

As Fortune’s Lionel Lim writes today, China will in the coming years continue to make most of the “legacy chips"—using older, cheaper production processes—that power our electric vehicles, household appliances, and so on.

Chinese production of these mature chips grew 40% in the first quarter, partly thanks to state support and partly because, despite soaring demand, making these chips still isn’t profitable enough for manufacturers in the U.S. and Europe. As Lionel notes, China's boosted production is also a result of U.S.-led export restrictions on the top-shelf equipment that’s needed to make cutting-edge stuff:

China’s goal is to eventually produce the advanced chips that can power AI or 5G mobile technology. Yet Washington’s export restrictions are stopping Chinese chip manufacturers from getting the tools they need. That means Chinese chip manufacturers are turning to the less advanced chips they can still produce. “They have to start somewhere,” says Chim Lee, a senior Asia analyst at the Economist Intelligence Unit.

China’s ongoing dominance in legacy chip production could create problems down the line. On Friday, Reuters reported that the European Commission has started asking the local semiconductor sector what it thinks of the situation, particularly the possibility of Chinese subsidies creating an oversupply of legacy chips.

The result could be the EU and U.S. developing “joint or cooperative measures to address dependencies or distortionary effects,” the Commission told the news agency.

The EU and U.S. have in recent months already promised heightened tariffs to crack down on the import of Chinese electric vehicles, which again enjoy subsidized production in China, making life harder for Western competitors. (The U.S. tariffs are, at 100%, more than twice as high as Europe’s, but have far less impact as Chinese EV makers have a roaring trade in the EU but no meaningful presence in the U.S.) It now looks like this blossoming trade war could extend to legacy chips.

ASML, the industry-leading Dutch maker of chip-making machines—and Europe’s biggest tech firm—doesn’t seem very keen on this scenario. New CEO Christophe Fouquet just told the German newspaper Handelsblatt that “the automotive industry in particular, including the German one, needs a lot more” of these legacy chips.

“If someone wants to slow [Chinese legacy-chip production] down, for whatever reason, then alternatives are needed,” Fouquet warned (as translated by Reuters). “There is no point in stopping someone from producing something you need.”

More news below.

David Meyer

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This story was originally featured on Fortune.com