China’s largest chip company wants to eliminate the US.

Tue Jun 04 2024
Julie Young (593 articles)
China’s largest chip company wants to eliminate the US.

In an industrial site adorned with gray factory buildings and young trees, China’s chip champion is running a brand new production line that plays a crucial role in Chinese leader Xi Jinping’s ambitious plan to reduce dependence on U.S. technology. In comparison to industry leaders like TSMC or Samsung Electronics, the operations conducted by Semiconductor Manufacturing International Corp., or SMIC, are considered outdated and several generations behind.

SMIC, located at the company’s state-of-the-art Jingcheng facility on the outskirts of Beijing, is making bold moves by integrating locally developed semiconductor-production equipment into its manufacturing line. Additionally, the company is reducing its dependence on American tools, according to a source familiar with the situation. This particular endeavor showcases China’s latest and most sophisticated attempt to independently produce chips using domestic resources. It serves as a strategic move to safeguard Beijing against potential U.S. sanctions, highlighting their commitment to technological self-sufficiency.

This initiative is part of a larger effort to eliminate American technology in China, known as “Delete A” or “Decouple From A.” This campaign has gained momentum in recent years as the world’s two largest economies fiercely compete to establish dominance in next-generation technology.

The Biden administration, along with certain U.S. allies like Japan and the Netherlands, have implemented strategic export restrictions that have significantly impacted China’s capacity to produce advanced semiconductor chips. However, these measures have also sparked a sense of urgency within China’s domestic industry, prompting increased investment, innovative experimentation, and even notable advancements.

In 2023, China stood out from the rest of the world by significantly increasing its purchases of semiconductor equipment, defying the overall global trend. In fact, China’s spending accounted for a remarkable one-third of all worldwide sales, as reported by industry association SEMI. According to an estimate by analytics firm Gavekal Research, the country is set to surpass the rest of the world in adding new semiconductor-production capacity this year. What’s even more impressive is that this capacity will be dedicated to mature-technology chips. In May, China introduced a third round of its national semiconductor fund, amounting to approximately $48 billion. This new round adds to the previous two iterations, which had a combined total of nearly $50 billion.

The SMIC project, at this point, is mostly a lofty aspiration. The production line still incorporates a selection of U.S. tools alongside other equipment sourced from various international suppliers. According to semiconductor executives and industry experts, China still has a significant journey ahead in reducing its dependence on foreign technologies, particularly in the production of advanced chips. Nevertheless, SMIC is making significant progress towards commercialization. According to a reliable source, the production line has reached an impressive milestone by successfully manufacturing cutting-edge 28-nanometer circuits. The output volume has already surpassed the initial pilot production level, showcasing the line’s remarkable capabilities.

“When you prevent everything, you compel the dormant lion to stir,” remarked Konrad Kwang-Leei Young, a former TSMC executive who held a position as an independent board member at SMIC until 2021. He was referring to the current state of China’s semiconductor industry.

SMIC, a contract-chip manufacturer established in 2000 in Shanghai, is currently positioned as China’s leading contender in the race to produce the most cutting-edge chips in the world. SMIC, although not directly controlled by the government, has significant state-linked investors, such as the national semiconductor fund, as major shareholders. The current chairman, who became a board member in 2023 based on the recommendation of the national semiconductor fund, has a strong background in executive positions at state-owned enterprises.

In 2017, SMIC established an innovation center next to a fabrication plant in southern Beijing. According to insiders, the research conducted there focuses on localizing the company’s supply chain.

In December 2020, SMIC was placed on the U.S.’s export blacklist due to alleged connections with the Chinese military. This required companies with technology originating from the U.S. to obtain approval from Washington before selling any tools, equipment, or parts to SMIC that could assist in more advanced chipmaking. SMIC has categorically refuted any connections to China’s military. Since then, SMIC has made significant strides in enhancing its self-sufficiency. The Jingcheng project, which highlights the preference for Chinese suppliers, demonstrates the progress of SMIC’s endeavors as they transition from research to the brink of commercialization, particularly in light of the U.S. blacklisting.

The line utilizes domestic tools from China’s top semiconductor-equipment manufacturers, including Naura Technology Group, AMEC, and ACM Research, according to a source familiar with the matter.

The purpose of the chips produced at the Jingcheng plant remains unknown. Typically, chips measuring approximately 28 nanometers are commonly utilized in everyday gadgets and automobiles, a few steps behind the latest technologies found in new smartphones and the advanced systems required to develop powerful language models that fuel generative artificial intelligence.

According to data provider Wind, SMIC has received a substantial amount of $1.8 billion in direct government grants since 2017. The company is currently increasing its production capacity for older generation chips. Prior to the implementation of U.S. restrictions, Chinese chip makers had unrestricted access to foreign tools and technology, allowing them to prioritize efficiency rather than solely serving as a testing ground for local companies. Following the implementation of sanctions, they were compelled to rely on domestic alternatives for certain areas. According to industry experts, even when individuals have the option to choose, they tend to prioritize securing backup options.

Navigating the path to self-sufficiency will become more challenging with the rapid advancements in chip technology. In order to achieve true localization, China must not only rely on domestic chip-making equipment, but also ensure that the components used in these homegrown machines are produced within the country. In addition, the company would have to establish local manufacturing capabilities for wafers and other materials utilized in the production of the chips.

There have been some exciting new developments. In the previous year, Huawei Technologies unveiled the latest addition to its smartphone lineup, the Mate 60. This cutting-edge device featured a system-on-chip manufactured using SMIC’s advanced technology, which is on par with the 7-nanometer process. These findings were revealed through a teardown conducted by TechInsights, a renowned industry research firm.

The manufacturer of the advanced chip in the Mate 60 has not been confirmed by either Huawei or SMIC. This achievement was widely recognized, as SMIC and other chip manufacturers in China do not currently have access to the cutting-edge lithography machine developed by ASML Holding, based in the Netherlands. Sales to China are restricted by The Netherlands.

Experienced semiconductor-manufacturing engineers believe that Huawei and its partners may have employed a technique where the silicon is exposed to light multiple times, instead of just once. However, this approach would result in lower yields and increased costs. According to the engineers, at higher levels of chipmaking, the technique becomes increasingly challenging and less effective.

China currently lacks a domestically developed alternative for the more advanced lithography machines. Shanghai Micro Electronics Equipment Group is the leading domestic option in the country. Their website proudly displays their expertise in manufacturing lithography machines for the production of cutting-edge chips with circuit sizes as small as 90 nanometers. Internationally, that technology was introduced over two decades ago.

Export controls imposed by the U.S. and its allies have restricted access to a range of foreign technology. Now, a surge of fresh local businesses have emerged to bridge the voids.

In order to stay ahead in the highly competitive market, certain companies have resorted to offering enticing “buy one, get one free” deals on specific chip-making tools, according to an industry executive. During Semicon, a chip-tool exhibition held in Shanghai in March, certain exhibitors placed a strong emphasis on their domestically produced products. A sign caught my attention with the words: “High level of localization.”

Meanwhile, Chinese companies are accumulating foreign equipment that remains unaffected by the policies of the Biden administration or other governments. Applied Materials and Lam Research, both headquartered in California, generated approximately 40% of their total revenue from China in their most recent quarter. China accounted for approximately 50% of ASML’s lithography-system sales in the first quarter of the year.

Julie Young

Julie Young

Julie Young is a Senior Market Reporter and Analyst. She has been covering stock markets for many years.