China pushes to design its own chips, but still relies on foreign technology

A technologist inspects a computer chip.

Sefa Ozel | E + | Getty Images

GUANGZHOU, China – Chinese tech giants have been pushing hard to develop their own semiconductors or chips, an initiative seen as progress toward China’s goal of becoming self-reliant in critical technology.

In reality, China is still a long way off even if it is one step closer to self-sufficiency, according to an expert, adding that the country is still heavily dependent on foreign technology and behind in the so-called advanced part of the chip. Marlet.

Semiconductors are key components in everything from smartphones to modern refrigerators to cars. They have also become a key part of the larger technological battle between the United States and China.

The world’s second-largest economy has invested heavily for years in strengthening its domestic chip industry, but has struggled to catch up with rivals in the United States and other parts of Asia. Increasingly, semiconductors are seen as the key to national security for many countries and a sign of technological prowess.

There have been a slew of announcements from major Chinese tech companies this year regarding chips made in China.

In August, Baidu launched Kunlun 2, its second-generation artificial intelligence chip. This week, Alibaba released a chip designed for servers and cloud computing. Smartphone maker Oppo is also developing its own high-end processors for its handsets, the Nikkei reported on Wednesday.

It is a step towards becoming more self-sufficient in semiconductors, but a small step.

Peter Hanbury

partner, Bain & Compagnie

While these companies are designing their own chips, they might still have to rely on foreign tools to do so. But when it comes to manufacturing and the broader supply chain, China’s internet giants still rely heavily on foreign companies.

“It’s a step towards becoming more self-sufficient in semiconductors, but a small step,” Bain & Company partner Peter Hanbury told CNBC by email. “Specifically, these are examples of locally designed chips, but much of the IP [intellectual property], the workmanship, equipment and materials are still of international origin. “

The reason why these companies design their own chips is that they can create semiconductors for specific applications in order to differentiate themselves from their competitors.

Foreign-dominated supply chain

A closer look at the specifics of the silicon being designed shows China’s dependence on foreign companies.

Take Alibaba’s new Yitian 710 chip. This is based on the architecture of the British semiconductor company Arm. It will also be built on the so-called 5 nanometer process, the most advanced chip technology around today.

Baidu’s Kunlun 2 chip is based on the 7 nanometer process. Oppo would work on a 3-nanometer chip.

This is where the challenge for China lies.

The country does not have a company capable of manufacturing these advanced semiconductors at these sizes. They will only have to rely on three companies – Intel in the US, TSMC in Taiwan, and Samsung in South Korea.

China’s largest SMIC chip maker is still years behind its companies in terms of manufacturing technology.

But it’s not just about manufacturing. Even companies like TSMC and Intel rely on equipment and tools for the manufacturing process of other companies.

In this area, the power is concentrated in the hands of a few: ASML, a company from the Netherlands, is the only company in the world capable of making a machine that chipmakers need to make the most advanced chips. .

“The semiconductor ecosystem is large and complex, so it’s very difficult to build self-sufficiency in such a wide range of technologies and capabilities,” Hanbury said.

“In general, the most difficult area to develop self-sufficiency will be the avant-garde. The challenge here is that you need both the investment, but you also need to overcome the massive demands on technical expertise and accumulated experience. “

Geopolitical vulnerabilities

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Huawei’s chips were made by TSMC. But when the US rule was introduced, TSMC could no longer manufacture semiconductors for Huawei. It crippled its smartphone business around the world.

The minimum wage is also on the American blacklist which restricts its access to American technology.

These sanctions could be a concern for Chinese companies who are now developing their own chips.

“For example, if there was an effort to block the shipment of smart phone processors, Oppo, for example, would have a nationally designed chip source,” Hanbury said. “However, most of these chips are still being manufactured using international technology, so they could still lose access to their chips if the manufacturing partner for these chips were stuck in manufacturing.”

Supply chain issues

Governments around the world now view semiconductors as an extremely strategic and important technology.

US President Joe Biden has called for a $ 50 billion investment in semiconductor manufacturing and research and has sought chipmakers to invest in the country. In March, Intel announced plans to spend $ 20 billion to build two new chip factories, called fabs, in the United States.

“It’s about outdoing China,” Commerce Secretary Gina Raimondo told CNBC in March.

Washington has sought to bring semiconductor manufacturing back to the United States, seeing it as essential for national security, given that the supply chain is highly concentrated in Asia.

But like-minded countries are also trying to work together to keep their semiconductor supply chains secure.

Executives from the United States, India, Japan and Australia, a group known as Quad, in September announced plans to set up a semiconductor supply chain initiative. aimed at identifying vulnerabilities and securing access to semiconductors and their critical components.

Much of the recent talk about semiconductor supply chains has been sparked by a global chip shortage that has hit industries ranging from automobiles to consumer electronics, and has worried executives about the their countries’ ability to secure semiconductors when needed.

So where is China now?

China may be ahead of its peers in some areas of chip development, but it will struggle to catch up with advanced technologies, at least in the short term.

For example, SMIC can manufacture large-scale 28-nanometer chips. These could be used in televisions or even automobiles – an area where China could do well, especially with the current semiconductor shortage.

However, to put it in perspective, TSMC is already working on the 3 nanometer technology. SMIC would have to master the manufacturing processes that TSMC has been doing for years before it can catch up.

“So even moving quickly through these existing technologies would not be enough to catch up and reduce reliance on cutting edge technology, as cutting edge technology is constantly advancing,” Hanbury said.

“It’s like running a race to catch up with a really fast runner as that runner is quickly pulling away from you.”

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