Huawei Technologies Co alarmed politicians from Washington to Tokyo when it took the wraps off a US$900 smartphone that signaled China’s rapid advance in semiconductor technology. The episode also thrust the little-known company that made the chip for Huawei into the middle of the US-Chinese battle for geopolitical supremacy.
Semiconductor Manufacturing International Corp (SMIC) has emerged as Beijing’s secret weapon in breaking through a US-organized blockade aimed at containing China’s technological progress, despite years of US sanctions. Its success in delivering an advanced, 7-nanometer processor to Huawei set off jubilant celebration at home, and triggered partisan finger-pointing in Washington over the apparent failure.
The accomplishments of SMIC, as the Shanghai company is known, are all the more surprising because it has been hit by US restrictions for more than a decade and was formally blacklisted in 2020. The US Department of Commerce is supposed to wield broad control over the company’s purchases of any equipment or software with US inputs, but the agency continued to issue licenses to SMIC suppliers in at least certain cases. US lawmakers and industry experts are now calling for US President Joe Biden’s administration to crack down further, even at the risk of fraying US-China tensions.
“Once this comes to light, there’s not much they can do but get much tougher on SMIC,” Copenhagen Business School associate professor Douglas Fuller said. “If they don’t get tougher on SMIC, then this policy doesn’t make any sense.”
MILITARY EDGE
The US government has said its chip strategy is not aimed at China’s smartphones, but rather its military capabilities. Semiconductors are at the foundation of the tech industry, enabling everything from artificial intelligence models and cloud computing to drones, tanks and missiles.
SMIC and the commerce department declined to comment for this story.
For now, local investors are celebrating SMIC. Since Huawei’s Mate 60 Pro emerged in late August, the company’s stock has gained 22 percent, or about US$5 billion, of market value to become the third-best performer on the benchmark gauge for Chinese companies listed in Hong Kong.
The question for SMIC longer term is whether it can produce sophisticated chips in volume — or whether the US would kneecap its capabilities. US Secretary of Commerce Gina Raimondo, who oversees the Biden administration’s tech restrictions, has said China lacks the capacity to make such components “at scale.” Industry veterans, including Burn J. Lin (林本堅), a former Taiwan Semiconductor Manufacturing Co (TSMC) vice president, say the US is underestimating its capabilities.
SMIC has been stockpiling chipmaking machines for years, including the same models of deep ultraviolet lithography (DUV) equipment from the Netherlands’ ASML Holding NV that were used to make the industry’s first 7-nanometer semiconductors. SMIC made Huawei’s chip on DUV machines from ASML, Bloomberg News has reported.
SMIC should be able to advance to more powerful 5-nanometer chips with the ASML machines it already operates, said Lin, who championed lithography technology at TSMC. Fuller and other experts agree.
“The genie is out of the bottle,” said Jan-Peter Kleinhaus, director of technology and geopolitics at the German think tank Stiftung Neue Verantwortung e.V.
SMIC has already etched its name into industry lore. The company was founded more than two decades ago by Richard Chang (張汝京), who was born in China, raised in Taiwan and then spent two decades at Texas Instruments Inc.
He built the chipmaker on the barren land of eastern Shanghai, and from the get-go, it was clear the company enjoyed a somewhat exalted position in China, winning land and tax exemptions to support its ambitions. SMIC muscled out rivals such as Hua Hong Semiconductor Ltd to become the nation’s leading chipmaker.
As one of Beijing’s best shots at making advanced chips, SMIC became a US target soon after its founding. In 2005, Washington halted its plan to buy US$1 billion of chipmaking equipment from Applied Materials Inc for fear it would compete with Micron Technology Inc. That same year, Taipei fined its founder for contravening investment laws when establishing SMIC. In 2009, a California court ruled that SMIC improperly used TSMC trade secrets.
Those early setbacks helped it develop a reputation as a controversial underdog. Shanghai’s government, then the centerpiece of China’s modernization, was clearly in its corner. SMIC also assiduously cultivated other city governments, working with Beijing as well as up-and-coming cities like Shenzhen to develop local production bases.
TAIWAN LINK
SMIC quickly set up foundries across the country and vied with TSMC for contracts. The company began hiring Taiwanese executives and engineers to oversee its expansion. Chang, a devout Christian, at one point even persuaded local authorities to let him build a church close to the factory for his overseas staff.
Its local connections helped cultivate a slate of big-name clients — including US giants from Qualcomm Inc. to Broadcom Inc. Along the way, it won backing from powerful concerns, from the Big Fund — China’s main semiconductor investment vehicle — to the sovereign wealth fund of Singapore.
Then in December 2020, the administration of then-US president Donald Trump blacklisted SMIC for allegedly supporting China’s military, an assertion the company denied. That addition to what is known as the Entity List meant US companies would need a license from the commerce department to supply SMIC.
Restrictions on SMIC soon grew tighter. In October last year, the US unveiled landmark export controls that included limits on the sale of cutting-edge chipmaking gear to Chinese fabs that produce chips at 14 nanometers or below.
However, there were loopholes. While the regulations hit US chipmaking firms immediately, the Biden administration took months to win over the Dutch and Japanese governments. That meant companies in those two countries, such as ASML and Tokyo Electron Ltd, could keep selling advanced machines to Chinese customers, who rapidly stockpiled gear. ASML can ship advanced DUV machines through the end of this year under its government’s rules.
In addition, it has been complicated for the commerce department to implement its own regulations. Most supplies for fabs, including ASML’s DUV machines, can be used to produce both chips forbidden under the US controls — and less sophisticated chips that are allowed.
The US Department of Justice is looking into whether Applied Materials sold hundreds of millions of US dollars of equipment without proper licenses to SMIC by shipping gear from the US to South Korea, then to China, Reuters reported.
The fallout for SMIC remains uncertain. The Biden administration is still calibrating how to react to its cooperation with Huawei, which is also blacklisted. The US did unveil a new set of chip controls last month that further tightened restrictions on doing business in China.
Hawks such as US representatives Mike McCaul and Mike Gallagher have lambasted the administration for botching its enforcement. The commerce department is investigating the matter, but otherwise staying quiet about potential moves. SMIC may be headed for punishment from Washington, but its accomplishments have already given hope to Beijing’s strategy of building a more self-reliant tech industry.
“This marks a milestone in China’s semiconductor progression,” Bloomberg Intelligence’s analysts Charles Shum (沈明) and Sean Chen wrote in a memo. “The chip shows that China’s tech juggernaut is forging ahead, making progress circumventing US sanctions while quietly pursuing tech self-sufficiency.”
Additional reporting by Jane Lanhee Lee
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