A Chinese flag next to a printed circuit board with semiconductor chips.
Florence Lo | Reuters
China’s biggest chipmaker SMIC appears to have been building advanced chips in recent months — defying US sanctions designed to slow Beijing’s progress.
However, some significant challenges remain in China’s bid to become more self-sufficient in the semiconductor industry, with questions swirling around the long-term sustainability of its latest developments.
What is the latest?
SMIC is China’s largest contract semiconductor manufacturer. The number of nanometers refers to the size of each individual transistor on a chip. The smaller the transistor, the more of them can be packed into a single semiconductor. Typically, a reduction in nanometer size can yield more powerful and efficient chips.
The 7-nanometer process is considered extremely advanced in the semiconductor world, even though it is not the latest technology.
It was a big deal at the time. But last week, the Financial Times reported that SMIC is building new production lines to make 5nm chips for Huawei. That would mark even further progress for China’s biggest chip maker.
The chips inside of Apple The latest high-end iPhones are manufactured using a 3-nanometer process.
Why is this a big deal?
How does SMIC do this?
So when the Huawei Mate 60 launched last year with a 7nm chip, it raised a lot of eyebrows.
An expert told CNBC at the time that SMIC was 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, said SMIC plans to use its existing stockpile of U.S.- and Dutch-made semiconductor equipment to produce 5-nanometer chips, an advance on 7-nanometer.
“SMIC is now working very closely with both domestic toolmakers, leveraging their existing base of advanced lithography equipment and drawing on other external expertise, such as Huawei, to continually improve yields on advanced node processes,” Paul Triolo, 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, mainly Huawei.”
China’s challenges
Using older equipment to make more advanced chips poses two major challenges.
The first is that semiconductors are more expensive to produce than if more advanced tools and machinery were used. The second is a yield issue — the number of usable chips produced that can be sold to customers. With older equipment, performance 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 5nm and 7nm manufacturing processes than TSMC for the same nodes.
TSMC, or Taiwan Semiconductor Manufacturing Company, is the world’s largest and most advanced conventional chip manufacturer. TSMC makes semiconductors for companies from Apple to Nvidia.
Pranay Kotasthane, chair of the high-tech geopolitics program at the Takshashila Institute, told CNBC that SMIC and China could continue to pour money into the process, but ultimately, costs will continue to rise with each more advanced generation of chips — except if the company can get its hands on an ASML EUV machine.
“SMIC can overcome the current performance issues by investing more money. This investment can even come from governments as this has become a national issue,” Kotasthane said via email.
“But the extent of taking on higher costs will only increase with each successive generation of chips. Costs will continue to worsen unless China finds a significant alternative to EUV.”