China’s secret struggles in the semiconductor race – What you need to know now! 🕵️‍♂️

In a rare and candid revelation, a high-ranking Huawei executive has acknowledged that China’s aggressive pursuit of semiconductor supremacy may have hit a critical roadblock. Speaking at the Mobile Computility Network Conference held in Suzhou, China, on June 9, Huawei’s Cloud Services CEO, Zhang Ping’an, highlighted a pressing issue: China’s current inability to procure 3.5nm chips due to stringent U.S. sanctions.

Zhang’s remarks shed light on the stark contrast between Taiwan‘s TSMC and Chinese semiconductor manufacturers. TSMC, which remains outside the purview of U.S. sanctions, continues to expand its production of 3.5nm semiconductors. Zhang remarked, “Under U.S. sanctions, China has no way to secure these products,” signaling a significant setback for China’s semiconductor ambitions.

China’s ambition to dominate global chip manufacturing is hindered by its low domestic production capabilities. Despite significant investment, China’s domestic chipmaking tool production remains around 20%, with critically important lithography tools at less than 1%. U.S. sanctions and restrictions on advanced technology have further exacerbated these challenges, making self-sufficiency difficult for China. Beijing is investing billions into its semiconductor industry, with companies like Naura Technology and AMEC focusing on developing lithography tools. However, espionage efforts and “gray market” acquisitions have only partially mitigated the impact of U.S. sanctions.

Despite these obstacles, China has made strides with mature node technologies. For example, Huawei mass-produced 7nm chips without EUV technology. However, the country struggles with more advanced nodes like 3.5nm, which require technology China currently lacks. Some in the industry, including Huawei executives, have expressed doubts about meeting these ambitious goals. China continues to invest heavily in its semiconductor sector, aiming to increase its market share in legacy semiconductors from 29% in 2023 to 33% by 2027.

China’s Confidence and the Reality Check

The admission was unexpected, especially given China’s public stance on its semiconductor growth. In May, the Chinese government announced a substantial investment of 65.6 trillion won ($47.5 billion) to bolster its semiconductor industry through a third fund. This move was intended to reassure stakeholders about China’s commitment and capability to advance its semiconductor technology.

Despite these efforts, the challenges imposed by U.S. restrictions are becoming increasingly apparent. Huawei’s recent achievement of mass-producing 7nm chips without extreme ultraviolet (EUV) technology initially sparked optimism and speculation that 5nm chip production might soon follow. However, Zhang’s comments underscore the limitations that continue to hinder further advancements.

Technological Barriers and Strategic Shifts

The crux of the issue lies in the technology gap. Producing 3.5nm chips necessitates the use of EUV technology, which China currently lacks. This technology is heavily guarded by U.S. and Dutch patents, making it difficult for China to develop independently. The ongoing sanctions have effectively blocked the import of essential manufacturing equipment and technology, stalling progress in achieving smaller and more advanced semiconductor nodes.

Zhang’s remarks suggest a strategic pivot for Huawei and other Chinese manufacturers. “The reality is that we can’t introduce advanced manufacturing equipment due to U.S. sanctions, and we need to find ways to effectively utilize the 7nm semiconductors,” he said. This implies a focus on optimizing existing technology rather than striving for unattainable advancements under current restrictions.

Innovative Workarounds and Market Adjustments

While the technological impasse is daunting, some Chinese manufacturers are exploring innovative solutions to circumvent the sanctions. CXMT, a Chinese DRAM maker, has managed to skirt around U.S. sanctions on sub-18nm DRAM equipment by preparing to mass-produce 18.5nm DRAM. Additionally, there is mention of a “gray market” where Chinese firms acquire U.S. equipment parts through unofficial channels, further demonstrating the resourcefulness in overcoming these hurdles.

However, the broader implication of these sanctions is a potential strategic shift towards the legacy semiconductor market. If China continues to face barriers in producing advanced semiconductors, it is likely to concentrate on expanding its share in this segment. Research firm TrendForce projects that China’s share of the legacy semiconductor market will grow from 29% in 2023 to 33% by 2027.

China’s market share for legacy or mature semiconductor chips (28nm and above process nodes) is forecasted to grow significantly in the coming years:

Key Forecasts for China’s Legacy Chip Market Share

• China’s share of the global legacy chip market was around 27% for the 28-65nm process node and 20% for the 90-180nm node in 2020.[1]
• By 2030, domestic capacity in China is projected to be able to cover around 90% of domestic demand for legacy chips, up from 37% in 2020.[1]
• Over the next three years to 2027, China’s legacy chip capacity is set to grow to 39% of the overall global market, thanks to Beijing’s subsidies and investments.[2]
• Taiwan‘s TrendForce forecasts that China’s global market share for mature chips will increase from 31% at the end of 2022 to 39% by 2027.[3]
• In contrast, Taiwan‘s global market share for legacy chips is expected to decrease from 44% to 40% over the same 2022-2027 period.[3]

The forecasts indicate that driven by massive government subsidies and investments in new fabs, China is rapidly expanding its production capacity for legacy or mature semiconductor chips. This is allowing China to increase its market share substantially at the expense of traditional suppliers like Taiwan.

However, some projections suggest that even with this capacity expansion, domestic demand in China will remain high enough that Chinese foundries may still need to import a portion of their legacy chip needs by 2030.[1]

China’s Ambitious Pursuit of Global Chip Manufacturing Dominance

China’s aspiration to dominate the global chip manufacturing industry faces significant hurdles, primarily due to its low domestic production rates. Despite substantial investments and ambitious targets, China’s self-sufficiency in chipmaking remains a distant goal. This post delves into the current state of China’s semiconductor industry, the challenges it faces, and the strategies it employs to overcome these obstacles.

Hurdles in Domestic Production

According to a report from Nikkei, China’s domestic chipmaking tool manufacturers account for only 20% of the tools used within the country. More critically, the production rate for essential lithography tools stands at a mere 1%. This stark reality underscores the immense gap between China’s ambitions and its current capabilities in the semiconductor sector.

Yuji Miura, a senior researcher at the Japan Research Institute, highlights the frustration within the industry. “Those on the ground (semiconductor manufacturing companies and equipment manufacturers) are at their wits’ end, but it’s difficult for them to say so,” Miura notes. The data compiled by Nikkei from various sources, including Japan’s Ministry of Economy, Trade, and Industry, the China Institute of Commerce and Industry, the Semiconductor Industry Association, and the Boston Consulting Group, paints a grim picture of China’s domestic chipmaking tool production.

Impact of U.S. Sanctions

The U.S. has been actively blocking China’s access to advanced semiconductor technologies, which has severely hampered Beijing’s progress. Measures such as banning ASML from servicing high-end chipmaking tools in China threaten to bring advanced chip production in the country to a standstill. This has significant implications for China’s ambitions, potentially delaying its targets by years, if not decades.

Despite these challenges, Chinese President Xi Jinping remains resolute. He asserts that China does not need ASML to develop its own technologies. To this end, Beijing is investing billions of dollars in its domestic semiconductor industry. Companies like Naura Technology and AMEC are focusing on developing lithography tools to reduce China’s dependence on foreign technology.

Espionage and Innovation

In addition to heavy investments, China has reportedly taken more covert actions to circumvent U.S. sanctions. There are rumors that Beijing has established a secret spy and intelligence-gathering agency aimed at infiltrating Western tech companies and stealing their technology. This alleged corporate espionage underscores the lengths to which China is willing to go to achieve its semiconductor ambitions.

Despite these controversial tactics, China’s semiconductor industry has made some notable strides. For instance, Zhaoxin released its KX-7000 CPU in March 2024. While this processor is only as powerful as Intel and AMD chips from 2018, it represents a significant improvement over its predecessor, the KX-6000, doubling its performance. Similarly, Huawei has managed to introduce its Kirin 9000C processor, circumventing the U.S. ban on its access to 12th-Gen Intel CPUs.

Leveraging Older Technologies and Open Standards

One of China’s strategies to sidestep Western sanctions involves leveraging older but mature semiconductor nodes. A striking example of this approach is Huawei’s successful mass production of 7nm chips without using EUV technology, a feat that surprised many in the global semiconductor industry.

Chinese firms are also increasingly focusing on open standard technologies like RISC-V. These open standards are accessible and usable by anyone, making it difficult for the U.S. to legally prevent Chinese companies from utilizing them. This strategic pivot towards open standards could provide China with a viable pathway to continue advancing its semiconductor capabilities despite external pressures.

Insights

1. China’s domestic production of critical chipmaking tools is significantly low.
2. U.S. sanctions severely limit China’s access to advanced semiconductor technologies.
3. China is making progress with mature nodes but struggles with more advanced technologies.
4. Espionage and gray markets partially mitigate, but do not solve, technology gaps.

The Essence (80/20)The Origins and Evolution of the 80/20 Principle The Discovery by Vilfredo Pareto In 1897, Italian economist Vilfredo Pareto uncovered a striking pattern in his study of wealth and… More

• Core Topics: China’s semiconductor ambitions, U.S. sanctions, domestic production challenges, investment in mature node technologies.
• Detailed Descriptions:
  • China’s Semiconductor Ambitions: Efforts to dominate global chip manufacturing.
  • U.S. Sanctions: Restrictions limiting access to advanced technologies.
  • Domestic Production Challenges: Low production rates of critical tools like lithography.
  • Investment in Technologies: Focus on mature nodes and heavy investment in the semiconductor sector.

Action Plan – What China Will Do

1. Increase Domestic Production:
   • Invest in developing domestic lithography tools.
   • Support firms like Naura Technology and AMEC with funding and research.
2. Mitigate Impact of Sanctions:
   • Develop alternative technologies to replace those restricted by sanctions.
   • Utilize “gray market” channels for critical equipment procurement.
3. Focus on Mature Nodes:
   • Continue innovating with existing technologies like 7nm chips.
   • Aim for mass production of 5nm chips without relying on EUV.
4. Strengthen Espionage and Intelligence:
   • Enhance intelligence operations to circumvent sanctions and acquire advanced technologies.
   • Protect domestic developments from foreign espionage.

Blind Spots

• Over-Reliance on Espionage: Overdependence on corporate espionage and gray markets may lead to international backlash and further restrictions, potentially harming long-term goals.
• Dependency on Mature Nodes: China’s heavy focus on mature nodes and older technologies might hinder its ability to compete in the cutting-edge semiconductor market. While this strategy helps circumvent current sanctions and technology barriers, it could lead to a technological lag compared to global competitors who are advancing rapidly in newer, more powerful chip technologies. This reliance might limit China’s potential for innovation and market leadership in the long term.

Looking Ahead

The candid admission from Huawei’s Zhang Ping’an has brought to light the significant challenges China faces in its semiconductor ambitions due to U.S. sanctions. Despite substantial investments and recent technological achievements, the lack of access to advanced manufacturing equipment and technology remains a formidable obstacle.

China’s semiconductor industry is at a crossroads. While some manufacturers are finding creative ways to bypass restrictions, the broader strategy may need to pivot towards maximizing existing technology and growing its footprint in the legacy semiconductor market. The next few years will be critical in determining whether China can overcome these barriers or if it will need to recalibrate its ambitions in the face of ongoing geopolitical tensions.

As the global semiconductor landscape continues to evolve, the industry’s future will be shaped by the interplay between technological advancements, strategic innovations, and geopolitical developments.

China’s Semiconductor Ambitions – Frequently Asked Questions (FAQ)

What percentage of chipmaking tools used in China are produced domestically?

China’s domestic chipmaking tool manufacturers produce 20% of the tools the country uses for chipmaking.

What is China’s production rate for critical lithography tools?

China currently has a production rate of only 1% for critically important lithography tools.

What challenges are semiconductor manufacturing companies in China facing?

Semiconductor manufacturing companies and equipment manufacturers in China are struggling due to low domestic production rates and restrictions from the U.S. on accessing advanced technologies.

Who is Yuji Miura?

Yuji Miura is a senior researcher at the Japan Research Institute who commented on the struggles faced by semiconductor manufacturing companies in China.

What sources did Nikkei use for their data on China’s semiconductor industry?

Nikkei compiled data from Japan’s Ministry of Economy, Trade, and Industry, the China Institute of Commerce and Industry, the Semiconductor Industry Association, and the Boston Consulting Group.

How has the U.S. impacted China’s semiconductor ambitions?

The U.S. has implemented bans, sanctions, and tariffs that restrict China’s access to advanced technologies, significantly impacting China’s semiconductor industry ambitions.

What is ASML’s role in China’s semiconductor industry?

ASML provides high-end chipmaking tools, but the U.S. has banned ASML from servicing some of its tools in China, hindering China’s advanced chip production.

What investments is China making to develop its semiconductor industry?

China is investing billions of dollars in its domestic semiconductor industry, with firms like Naura Technology and AMEC developing lithography tools to reduce reliance on ASML.

What strategies is China using to bypass U.S. sanctions?

China is reportedly engaging in corporate espionage, infiltrating Western tech companies, and using open standard technologies like RISC-V to circumvent U.S. sanctions.

How has Huawei responded to U.S. sanctions?

Huawei has introduced its own Kirin 9000C processor and mass-produced 7nm chips without EUV technology to sidestep U.S. sanctions.

What is the significance of Huawei’s 7nm chip production?

Huawei’s ability to mass-produce 7nm chips without EUV technology surprised the global semiconductor market and demonstrated China’s capability to innovate with mature nodes.

What challenges does China face in producing 3.5nm chips?

China lacks the EUV technology necessary for 3.5nm chip production due to U.S. sanctions, and developing this technology independently is highly challenging.

What are the future prospects for China’s semiconductor industry?

Despite challenges, China is expected to grow its share of the legacy semiconductor market, with predictions of an increase from 29% in 2023 to 33% by 2027.

How is the Chinese government supporting its semiconductor industry?

The Chinese government has announced a $47.5 billion fund to reinforce investment in the country’s semiconductor industry.

What is the “gray market” mentioned in the context of China’s semiconductor industry?

The “gray market” refers to unofficial procurement channels through which Chinese firms acquire U.S. equipment parts to bypass sanctions.

What was the rare admission made by a high-ranking Huawei executive?

Huawei’s Cloud Services CEO Zhang Ping’an admitted concerns about China’s inability to source 3.5nm chips due to U.S. sanctions.

What is the significance of Zhaoxin’s KX-7000 CPU?

Zhaoxin’s KX-7000 CPU, released in March 2024, doubled the performance of its predecessor and demonstrated progress in China’s domestic semiconductor capabilities.

How are Chinese firms working around the restrictions on advanced manufacturing equipment?

Chinese firms like CXMT are finding ways to work around restrictions by preparing to mass-produce slightly less advanced technologies, such as 18.5nm DRAM.

What is the role of open standards like RISC-V in China’s semiconductor strategy?

Open standards like RISC-V are accessible to anyone and help Chinese firms continue innovating despite U.S. restrictions, as the U.S. cannot easily block their use.

What was the impact of U.S. actions on ASML’s ability to service its tools in China?

The U.S. banning ASML from servicing some of its high-end chipmaking tools in China has made it difficult for China to advance its semiconductor production capabilities.

Citations:
[1] https://www.csis.org/blogs/trustee-china-hand/legacy-chip-overcapacity-china-myth-and-reality
[2] https://www.dw.com/en/tech-war-china-could-face-us-eu-curbs-over-legacy-chips/a-68735425
[3] https://asiatimes.com/2024/03/chinas-legacy-chips-to-survive-with-price-advantage/

No tags for this post.