The U.S. And Its Allies Are Joining Forces On Chips To Stop China From Reaching The Next Level

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Top chip-producing countries, including the United States, are forming alliances to protect their semiconductor supply chain and stop China from acquiring an edge.

As a result, China’s path to overcoming the United States and its allies in semiconductors is becoming more complex. Washington is stepping its efforts to limit Beijing’s capacity to build sophisticated semiconductors and maintain superiority in key technologies.

Washington blocked the sale of select Nvidia and AMD sophisticated graphic processing units (GPUs) used in artificial intelligence applications and supercomputers to China last week.

The move came after the US Commerce Department announced a shipment restriction to China of electronic design automation (EDA) software used in developing next-generation semiconductors last month.

And all the while, Washington has been nudging East Asian partners Taiwan, South Korea, and Japan to form a “Chip 4” industry alliance to isolate China from the international tech ecosystem and the CHIPS Act, which offers $52 billion in subsidies to firms that manufacture chips on US soil, has bolstered efforts to develop its homegrown industry.

Semiconductors have emerged as one of the most heated battlefronts in the US-China competition. Beyond serving as the contemporary economy’s lifeblood, powering everything from iPhones to fighter planes, the chips are considered vital to unlocking future technical advancements, implying that tomorrow’s global balance of power may hinge on the wafer-thin processors being built today.

Like other major countries, China is highly reliant on semiconductor manufacturing in Taiwan, which supplies more than 90 percent of the world’s high-end chips. Still, it has lately made significant progress in building its local sector.

TechInsights analysts revealed in July that China’s national champion Semiconductor Manufacturing International Corporation (SMIC), has likely gained the capacity to build a 7-nanometer (nm) chip, signalling a significant step forward after years of trying to push past a 14nm node. Semiconductors are frequently compared based on the length of their transistor gates, with a shorter gate correlating to more processing power.

SMIC, supported by Beijing, is increasing foundry capacity with plans for the fourth unit in Tianjin, China’s northernmost city.

“It’s a massive breakthrough,” said Dylan Patel, an industry analyst and author of the newsletter SemiAnalysis. “It’s missing some features, but it’s a fully functional node.”

“This is the first real sign they’ve broken through a supposedly insurmountable barrier. Now they need to incrementally improve the design and scale up the production to higher value chips.”

Since top Dutch company ASML was refused an export licence in response to US pressure on Amsterdam, China has been prevented from getting the newest technology for making sophisticated chips – extreme ultraviolet (EUV) lithography machines.

However, Chinese businesses may still create high-end semiconductors using less efficient deep ultraviolet (DUV) lithography tools, which have broader beam wavelengths and are typically used to etch patterns on less-advanced devices.

Despite Washington’s ambitions to widen its restrictions on chip-making equipment, China has been amassing ASML’s DUV lithography machines, purchasing 81 units last year alone.

“SMIC can fabricate a 7nm process with DUV, perhaps producing it en masse, but that does not make it cost-effective,” said Ray Yang, a consulting director at Taiwan’s Industrial Technology Research Institute.

“With DUV resolution, but you are pushing the technology to its limits,” Yang said, likening it to driving a consumer car at Formula 1 speeds.

“The yield rate is meagre; therefore, it is not a cost-optimised solution for advanced processors, and anything beyond 7nm is simply impossible.”

Due to its state backing, Yang said that SMIC could afford to use less profitable processes to produce advanced chips.

“Now that Huawei cannot use foreign foundries, China is heavily relying on SMIC for chips it urgently needs, likely for ‘special non-commercial uses,’” he said.

Among these non-commercial purposes is sophisticated weaponry for China’s growing military.

The links between Huawei, one of China’s largest tech companies, and the Chinese military have remained a source of worry in Washington, culminating with the Trump administration placing Huawei on the “Entity List” of sanctioned firms in 2019.

Under Chinese President Xi Jinping, harnessing private sector technological advances to strengthen China’s defence sector has become a national priority, with the Military-Civil Fusion Strategy becoming a cornerstone of industrial strategy.

“Chips are crucial for smart weapons. This is one of the reasons many policymakers are so concerned about the development of China’s semiconductor industry,” Douglas Fuller, an expert in technological development at the City University of Hong Kong, said.

Although China is still considered to lack the expertise to create chips smaller than 7nm, companies such as SMIC and Shanghai Micro Electronics Equipment Co are racing to build their indigenous equipment to break the impasse.

“SMIC engineers have leaked complaints that those machines are prone to problems. China has not yet made a well-functioning ArF lithography machine,” Patel said, referring to a sub-type of DUV lithography machine.

“China is years behind in making chips with foreign tools, but decades behind with domestically-made tools.”

Chinese companies can also continue to create semiconductors smaller than 7nm, even if they cannot yet manufacture them.

Last year, Alibaba announced the Yitian 710, one of China’s most sophisticated designs — a 5nm server chip designed for various internet-of-things (IoT) applications. Nonetheless, Washington’s recent regulations are expected to make the design phase for next-generation semiconductors — those smaller than 5nm — more difficult.

Next-generation chips are projected to rely on the upcoming gate-all-around (GAA) design, which is widely seen as a solution to the physical constraints of downsizing chips to infinitesimally small sizes.

“The ban impacts China’s pipeline today but won’t hit their products and revenue for years to come since GAA will only be for 2nm nodes and under, which haven’t arrived yet,” said Patel, adding that 2nm nodes could make up half the output of the world’s leading chipmaker, Taiwan Semiconductor Manufacturing Company (TSMC), in the coming decades.

“It will be hard [for China] to sidestep these EDA suppliers,” Patel said.

“However, Cadence [a leading American EDA supplier] has joint ventures in China and offers its design programs at a discount in China compared to US customers. So China could have some leverage over the firm there and exert pressure on them.”

Yang stated that if China could not acquire lithography equipment on the open market, it would do everything possible to obtain it.

“This could entail reverse engineering, IP theft, or strategically acquiring foreign firms … which has happened many times in the past with other critical technologies,” he said.

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