China may be making more advanced chips despite U.S. sanctions — but it still faces big problems

China’s
biggest
chipmaker
SMIC
seems
to
have
been
manufacturing
advanced
chips
in
the
last
few
months
—
defying
U.S.
sanctions
designed
to
slow
down
Beijing’s
progress.

But
there
are
still
some
major
challenges
to
China’s
bid
to
become
more
self-sufficient
in
the
semiconductor
industry,
with
questions
swirling
around
the
long-term
viability
of
its
latest
advancements.

SMIC
is
China’s
biggest
contract
semiconductor
manufacturer.
The
nanometer
figure
refers
to
the
size
of
each
individual
transistor
on
a
chip.
The
smaller
the
transistor,
the
more
of
them
can
be
packed
onto
a
single
semiconductor.
Typically,
a
reduction
in
nanometer
size
can
yield
more
powerful
and
efficient
chips.

The
7
nanometer
process
is
seen
as
highly
advanced
in
the
world
of
semiconductors,
even
though
it
isn’t
the
latest
technology.

It
was
a
big
deal
at
the
time.
But
last
week,
the

Financial
Times
reported
that
SMIC
is
setting
up
new
production
lines
to
make
5
nanometer
chips
for
Huawei.
That
would
signal
even
further
advancement
for
China’s
biggest
chipmaker.

The
chips
in


Apple’s
latest
high-end
iPhones
are
made
on
a
3
nanometer
process.

Without
EUV
tools,
experts
thought,
SMIC
would
find
it
difficult
to
make
7
nanometer
and
smaller
chips,
or
would
at
least
find
it
expensive
to
do
so.

So
when
the
Huawei
Mate
60
came
out
last
year
with
a
7
nanometer
chip,
that
raised
a
lot
of
eyebrows.

One
expert
told
CNBC
at
the
time
that
SMIC
is
likely
using
older
chipmaking
tools
to
make
more
advanced
chips.

The
FT
reported
something
similar
last
week.
The
newspaper,
citing
two
people
with
knowledge
of
the
plans,
reported
that
SMIC
is
aiming
to
use
its
existing
stock
of
U.S.-
and
Dutch-made
semiconductor
equipment
to
produce
5
nanometer
chips,
an
advancement
on
the
7
nanometer.

“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,”
Paul
Triolo,
an
associate
partner
at
consulting
firm
Albright
Stonebridge,
told
CNBC
via
email.

“So
for
now
it
is
possible
for
SMIC
to
continue
to
improve
capabilities
and
yields
at
7
and
soon
5
nm,
for
a
small
number
of
customers,
mostly
Huawei.”

Using
older
equipment
to
make
more
advanced
chips
poses
two
major
challenges.

The
first
is
that
it’s
more
expensive
to
produce
the
semiconductors
than
if
more
advanced
tools
and
machinery
were
used.
The
second
is
an
issue
around
yield
—
the
number
of
usable
chips
that
are
produced
and
can
be
sold
to
customers.
With
older
equipment,
the
yield
is
also
lower.

The
FT
also
reported,
citing
three
people close
to
Chinese
chip
companies,
that
SMIC
had
to
charge
40%
to
50%
more
for
products
from
its
5
nanometer
and
7
nanometer
production
processes
than
TSMC
does
at
the
same
nodes.

TSMC,
or
Taiwan
Semiconductor
Manufacturing
Company,
is
the
world’s
largest
and
most
advanced
contract
chip
manufacturer.
TSMC
makes
semiconductors
for
companies
from
Apple
to


Nvidia.

Pranay
Kotasthane,
chairperson
of
the
high
tech
geopolitics
program
at
the
Takshashila
Institution,
told
CNBC
that
SMIC
and
China
could
keep
throwing
money
at
the
process,
but
ultimately,
costs
will
continue
to
rise
with
each
more
advanced
generation
of
chips
—
unless
the
company
can
get
its
hands
on
an
ASML
EUV
machine.

“SMIC
might
overcome
current
yield
issues
by
investing
more
money.
This
investment
might
even
come
from
governments
as
this
has
become
an
issue
of
national
prestige,”
Kotasthane
said
via
email.

“But
the
extent
of
underwriting
higher
costs
will
only
increase
with
every
subsequent
generation
of
chips.
The
costs
will
keep
compounding
unless
China
finds
a
major
alternative
for
EUVs.”