The Challenges of China’s Semiconductor Industry

China’s bid to become more self-sufficient in the semiconductor industry has faced significant challenges, with questions surrounding the long-term viability of its latest advancements. Despite U.S. sanctions aimed at slowing down China’s progress, SMIC, China’s biggest chipmaker, has been defying these sanctions by manufacturing advanced chips in recent months. However, the use of older equipment to produce more advanced chips presents both financial and yield challenges. This article explores the obstacles China’s semiconductor industry faces and the potential consequences of relying on outdated technology.

Semiconductor advancements are measured by the nanometer size of individual transistors on a chip. SMIC made a major breakthrough when it manufactured a 7 nanometer chip for Huawei’s Mate 60 smartphone. Although not the latest technology, this advancement was a significant achievement for China’s semiconductor industry. However, recent reports indicate that SMIC is now working on developing 5 nanometer chips for Huawei, surpassing its previous accomplishment. By comparison, Apple’s latest high-end iPhones are made on a 3 nanometer process. China’s progress in nanometer technology highlights its ambition to compete with global leaders in semiconductor manufacturing.

Despite SMIC’s advancements, U.S. sanctions have attempted to impede China’s ability to produce the most advanced chips. SMIC was added to the U.S. Entity List in 2020, cutting off its access to crucial foreign technology necessary for manufacturing advanced chips. Additionally, the U.S. has pressured other countries to impose similar restrictions. The Netherlands, home to ASML, a key provider of lithography machines, introduced export restrictions on semiconductor manufacturing equipment. Without access to these tools, experts expected SMIC to struggle in producing 7 nanometer and smaller chips. The fact that SMIC managed to develop a 7 nanometer chip for Huawei’s smartphone raised eyebrows and speculation about the methods employed.

Reports suggest that SMIC is utilizing its existing stock of U.S.- and Dutch-made semiconductor equipment to produce more advanced chips. This approach poses significant challenges for the company. Firstly, it is more expensive to produce semiconductors using older equipment compared to using more advanced machinery. Secondly, the yield, or the number of usable chips, is lower with older equipment. SMIC had to charge 40% to 50% more for products from its 5 nanometer and 7 nanometer production processes compared to TSMC, the world’s largest and most advanced contract chip manufacturer. TSMC’s ability to produce semiconductors for companies like Apple and Nvidia at a lower cost highlights the financial disadvantage faced by SMIC.

To overcome the challenges of using outdated equipment, SMIC and China may invest more money into the process. However, with each subsequent generation of chips, costs are expected to rise unless SMIC can obtain an ASML extreme ultraviolet (EUV) machine. Pranay Kotasthane, chairperson of the high tech geopolitics program at the Takshashila Institution, suggests that the extent of underwriting higher costs will continue to increase, making the achievement of national prestige in the semiconductor industry more challenging. Governments may play a role in supporting these efforts, recognizing the strategic importance of semiconductor self-sufficiency.

Despite SMIC’s progress, the challenges faced by China’s semiconductor industry cannot be overlooked. Relying on older equipment limits the company’s ability to compete globally. To establish itself as a major player in the industry, China must invest in cutting-edge technology, such as ASML’s EUV machines. Additionally, it needs to address the issue of yield and find cost-effective solutions to produce advanced chips. China’s ambition to become self-sufficient in semiconductors requires significant investment, innovation, and cooperation with global technology leaders.

China’s semiconductor industry faces numerous challenges in its quest for self-sufficiency. Despite SMIC’s defiance of U.S. sanctions and technological advancements, the use of older equipment and higher production costs hinder its progress. To establish itself as a global leader, China must address these challenges by investing in advanced technology and finding cost-effective solutions. The future of China’s semiconductor industry depends on its ability to overcome obstacles and collaborate with international partners to secure its position in the highly competitive semiconductor market.

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