China Strikes Back, Intel Takes a Bullet

For decades, Intel stood as a beacon of U.S. semiconductor dominance. Now with the company staring into the abyss, it’s time to recognize how badly U.S. sanctions against China have backfired against U.S. chipmakers. Designed to cripple China’s semiconductor industry, these sanctions instead have propelled Chinese chipmaking to new heights and evoked Chinese counterstrikes including China’s retaliatory ban on Intel’s processors. That only deepened the company’s woes, contributing to last week’s ousting of Intel’s CEO Pat Gelsinger.

In early 2024, China banned Intel from selling its processors for use in government systems, citing national security concerns. This was a clear retaliation against U.S. export controls aimed at restricting China’s access to advanced semiconductors, semiconductor manufacturing tools, and other cutting-edge technologies. For Intel, this ban was more than just a political statement—it was a financial blow. China accounted for 27% of Intel’s $54 billion in annual revenue, making it one of the company’s largest markets.

Though directly applying to only Chinese government purchases, the ban’s impact was immediate and significant, forcing Chinese companies to shift to domestic suppliers such as Loongson and Phytium. These Chinese firms, long overshadowed by Intel, seized the opportunity to grab market share. For Intel, the loss of the Chinese government sector further cut into its declining sales, straining its precarious financial situation.

China’s Propaganda Campaign

In addition to the outright ban on Chinese government agencies buying Intel chips, China launched a propaganda campaign framing U.S. chips as “no longer safe.” This was clear retaliation against flimsy U.S. claims that it had banned Chinese devices from firms such as Huawei for national security reasons, rather than as part of a trade war. This narrative, pushed by Chinese industry bodies, encouraged domestic companies to diversify away from American suppliers.

U.S. Sanctions Strengthen China

Instead of stifling China’s semiconductor ambitions, U.S. sanctions galvanized the country’s chipmaking industry. Between January and October 2024, China exported 245.99 billion chips, an 11.3% year-over-year increase. The value of these exports rose by 19.6% to $130.9 billion.

But it wasn’t just exports. Domestic production surged as well, reaching 353 billion chips during the same period—a 24.8% year-over-year increase—the result of China’s concerted effort to reduce reliance on foreign technology and build a self-sufficient semiconductor ecosystem.

Meanwhile U.S. sanctions had the ironic effect of boosting Chinese imports of semiconductors and semiconductor making equipment in the short term. Imports surged as Chinese firms stockpiled devices that were or might be banned. China imported $315 billion worth of integrated circuits during the first 10 months of 2024, a year-over-year increase of 11.3%. Some of these imports supported production of just those advanced technologies the United States was trying to keep China from developing. Today, there appears to be a growing black market in China for U.S. devices.

China’s direct hit on Intel strategy

The ban on Intel chips and the propaganda campaign were not the first blows China struck. Intel’s biggest challenge was on the manufacturing side of the business. It struggled with delays in its advanced node development and a loss of technological leadership to competitors such as TSMC. Meanwhile AMD, Intel’s biggest competitor in the central processing unit (CPU) market, uses TSMC as a manufacturer and cuts deeply into Intel’s sales.

Pat Gelsinger was brought in as CEO to restore Intel’s manufacturing prowess. An early strategic decision was to acquire Tower Semiconductor, a respected Israeli “foundry” (contract manufacturer like Taiwan Semiconductor Mfg. Co. Ltd. (NYSE: TSM). The Tower acquisition would have given Intel Foundry Services (IFS), newly created by Gelsinger to build the manufacturing side, instant credibility with external customers and its first significant external revenue stream. Chinese regulators torpedoed the merger on anti-trust grounds, clearly a retaliation against U.S. trade practices.

This cascade of challenges ultimately led to Gelsinger’s ouster. Though Chinese retaliation wasn’t the sole reason for Gelsinger’s departure, it was a catalyst.

Wait! You mean the bad guys can shoot back?!!

Both of us have written extensively on the failures of the U.S. sanctions. (Robert’s latest was on his Substack “How U.S. Sanctions Are Reshaping the AI Chip Market: Nvidia’s Challenges and China’s Rise.”) Yet the Biden administration kept upping the ante, adding more sanctions, including the December 2, 2024, announcement of new controls on 24 types of semiconductor manufacturing equipment and three types of software tools. The Trump administration looks likely to do worse.

The great strategic historian Edward Luttwak has pointed out that the difference between business strategy and the strategy of nations is that businesses have rivals, but nations have enemies. Enemies do not merely strive to excel; they shoot back. Every threat or aggression evokes a counter. China shot back, and Intel was one of the victims, but not the last.