U.S. likely to tighten tech curbs as China advances chip production

By Gabriel Dominguez

Beijing’s success in making advanced 7-nanometer (nm) semiconductors will likely result in Washington further tightening its tech export restrictions on China, experts say, as the current curbs have failed to prevent Chinese firms from finding loopholes.

Apparently made using less-advanced Western lithography machines, the silicon chips powering Huawei’s new Mate 60 Pro smartphone series represent a jump forward in China’s domestic chipmaking capability as the country boosts efforts to catch up with the U.S. and other rivals.

“Huawei’s new phone demonstrates that China is figuring out ways to limit the impact of sanctions, and this will necessitate tactical changes in U.S. export controls and other restrictions to achieve the same strategic goal,” said Matthew Bey, an analyst at U.S.-based geopolitics and intelligence firm RANE.

Although expanding sanctions would also reinforce Beijing’s rationale for developing an entire indigenous supply chain — which would harm Western suppliers — experts say it’s currently not politically tenable for Washington to fundamentally rethink its strategy, as that could leave U.S. President Joe Biden looking soft ahead of the November 2024 presidential election.

Washington first blacklisted Huawei in 2019 amid concerns that the company — which was then a leader in 5G wireless networks and smartphones — could use its position in the world’s telecommunications networks to spy for Beijing.

The sanctions not only curbed the firm’s ability to sell equipment in the U.S. but also to buy parts from American suppliers, dealing a huge blow to the telecoms firm.

Last October, Washington broadened its restrictions in an effort to preserve U.S. technological primacy and slow Beijing’s technological and military rise.

The curbs require vendors to obtain export licenses to sell to China cutting-edge semiconductors and components, as well as chip-design software and manufacturing equipment made with U.S. tech.

A key aim of those measures was to restrict the country’s chipmaking capability to 14 nm. A nanometer denotes the size of transistors, which are the backbone of microprocessors. The smaller the size of a transistor, the more of them can be squeezed into a chip, increasing the device’s performance.

The most advanced chips are currently 5 nm and 3 nm, the latter of which are used in the iPhone 15, for instance, and made by industry giant Taiwan Semiconductor Manufacturing Co. (TSMC).

Huawei has yet to comment on the new chip but industry experts who examined the phone say it is the Kirin 9000S produced by the partly state-owned — and U.S.-blacklisted — Semiconductor Manufacturing International Corp. (SMIC)

China is believed to also be behind Western firms in the production of memory chips. Huawei’s new phone, for instance, reportedly uses memory and flash storage from South Korea’s SK Hynix, although the Incheon-based firm has denied doing business with the Chinese company.

For the most part, however, the components in the Mate 60 Pro appear to have been designed and manufactured domestically, a feat that “demonstrates China’s desire to produce an independent supply chain and the extraordinary resources the country is devoting to this task,” said Chris Miller, an associate professor of international history at Tufts University.

A report by SemiAnalysis indicates that SMIC began developing and then mass-producing 7-nm chips last year, apparently using a process that TSMC had abandoned several years earlier.

While this is impressive, experts note that the process has technical limitations, particularly when it comes to scaling.

“It appears that Huawei’s new chip was built using deep ultraviolet lithography machines … and not the more advanced extreme ultraviolet lithography machines that have been the focus of U.S. restrictions,” Bey said.

Because of this, said Antonia Hmaidi, a China tech expert at the Berlin-based Mercator Institute for China Studies, SMIC’s breakthrough should be seen as “more of a political statement than a true achievement in China’s semiconductor race with the West.”

The process used by SMIC is “not efficient and not easily adapted to make smaller and faster chips,” she said, adding that it’s unclear whether the company can use old technology to make its chips as well and as cheaply as its Western rivals.

At the same time, cutting-edge technology may be less strategically important than many people think.

“SMIC’s fabrication processes are good enough to make chips for most applications,” according to Hmaidi.

Analysts say there are two important factors behind China’s success.

One is Beijing’s growing support for the semiconductor industry, with a third state-backed multibillion-dollar investment fund reportedly set to be launched in the near future.

“With this money, they are able to invest in equipment but also access to top talent worldwide,” Patel said, pointing out the Chinese companies have been able to lure top engineers from places like Taiwan by offering significant pay hikes.

The other reason is that Western sanctions appear to have several loopholes or aren’t being strictly enforced.

“China has been importing a record quantity of foreign chipmaking tools this year, which has benefited foreign firms but weakened the efficacy of sanctions,” Miller said.

At the same time, some companies have been able to find workarounds by changing the specs of chip designs meant for China to fall outside export controls.

The modifications come as firms such as Nvidia warn that further U.S. export curbs would risk a “permanent loss” for U.S. semiconductor firms to lead in one of the world’s largest markets.

But imposing “more effective export controls on our adversaries" is precisely what some U.S. lawmakers, including House Foreign Affairs Committee Chairman Michael McCaul, have been urging.

In a letter sent last week to the Department of Commerce, the lawmakers called on the administration "to strategically bar the import of SMIC-produced semiconductors, particularly those that pose risks to national security, into the United States," and to "pursue criminal charges against executives from SMIC and Huawei."

Analysts say this shows just how export controls and other restrictions can become a bit of a “cat-and-mouse game” that is not always effective.

“China, as well as those wanting to sell to China, will work hard to circumvent or reduce the effectiveness of U.S. and Western restrictions, while Washington and its allies will seek to address any loopholes or expand the restrictions, if necessary,” Bey said.

James Lewis, director of the Strategic Technologies Program at the Washington-based Center for Strategic and International Studies, argues that the main issue with these controls is that they fail to distinguish between semiconductors and their production.

“The administration’s actions with Japan and the Netherlands to block exports of semiconductor manufacturing equipment have set China back years,” he said.

However, restrictions on chips “have only accelerated Chinese efforts to build its own chip industry — and this includes industrial espionage — while harming U.S. companies,” Lewis added.

For the time being, China’s struggle to access the most advanced chipmaking technologies means that it will likely continue falling behind its Western rivals.

“The gap between China and others will still grow if U.S. restrictions succeed in limiting China’s access to the more advanced machines and other equipment,” Bey said.

Given the current loopholes, however, experts warn that it might take Beijing only a few years to bridge that gap.