Despite US Sanctions, China Pushes Forward In Advanced Chip Development, But Challenges Persist: Report

China’s largest chipmaker, Semiconductor Manufacturing International Corp (SMIC), has managed to produce more sophisticated chips despite U.S. sanctions. However, the company still faces significant hurdles in its quest for semiconductor self-sufficiency.

What Happened: Despite U.S. sanctions aimed at slowing China’s technological progress, SMIC has made strides in producing advanced chips. Last year, the U.S.-sanctioned tech giant Huawei launched the Mate 60, a smartphone equipped with a 7-nanometer chip manufactured by SMIC, a significant achievement for the Chinese chipmaker, CNBC reported on Sunday.

SMIC is now reportedly setting up new production lines to manufacture 5-nanometer chips for Huawei, a further step in China’s chipmaking advancement. This comes despite U.S. sanctions that have restricted SMIC’s access to crucial foreign technology. Apple’s newest high-end iPhones feature chips manufactured using a 3-nanometer process.

However, the company’s reliance on older chipmaking tools to produce more advanced chips poses two major challenges. Firstly, it is more expensive to produce semiconductors using older equipment. Secondly, the yield, or the number of usable chips produced, is lower with older equipment.

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"SMIC is working very closely now with both domestic tool makers, leveraging its existing base of advanced lithography gear, and drawing on other outside expertise, such as from Huawei, to constantly improve yields on advanced node processes," said Paul Triolo, an associate partner at consulting firm Albright Stonebridge.

SMIC has had to charge 40% to 50% more for products from its 5-nanometer and 7-nanometer production processes than Taiwan Semiconductor Manufacturing Co Ltd (NYSE:TSM), the world’s largest and most advanced contract chip manufacturer. This could lead to a significant increase in costs with each subsequent generation of chips unless SMIC can acquire ASML Holding NV‘s (NASDAQ:ASML) extreme ultraviolet (EUV) machine, a tool critical in making the most advanced chips at scale and cost-effectively, according to Pranay Kotasthane, chairperson of the high tech geopolitics program at the Takshashila Institution.

Why It Matters: The U.S. has been actively working to slow down China’s progress in the semiconductor sector. In October, the U.S. imposed stringent restrictions on the procurement of vital spare parts for chip equipment, as part of a broader effort to deter China’s technological strides in the semiconductor realm.

Despite these restrictions, Chinese chipmakers have continued to make advancements. In November, Nvidia confirmed its intention to dominate the Chinese chip market, despite increasingly severe export restrictions from the U.S. government.

However, the potential for a major alternative for EUV machines is still uncertain. The U.S. government is considering stringent export restrictions on AI chips to China, a move that could prove devastating for chipmakers.

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