Chips War

My previous post would not be to the point without analyzing in more details the situation around microprocessors in China and how it could evolve. For what was initially the competition between developed nations fighting for market dominance, is about to become the most important global geopolitical battle, which I think can be called ‘Chips War’ between the US and China.

According to these MERICS reports one and two, China has invested significantly in the microprocessors value chain, from design, to wafer fabrication and packaging. China promotes RISC-V open standards of chip architecture to increase interoperability of different systems and to standardize the design and manufacturing. And as of 2023, China is largely capable of covering its own needs for low-end to mid-range microchips in industry and Internet-of-Things through foundries like SMIC and Hua Hong. But the problem is with microprocessors of 7nm or smaller, typically used for smartphones and computers and other advanced use cases. Due to American sanctions, Huawei got critically handicapped and not able to produce 5G-compatible mobile phones. Imported Snapdragon processors from Qualcomm were restricted to 4G, so Huawei designed internally their own Kirin, and produced recently by Chinese SMIC foundry using 7nm process. It can support 5G, but at the cost of higher energy consumption. Interestingly, 3rd largest maker of the mobile phones in the world, Chinese Xiaomi can still import latest 4nm Qualcomm’s 5G-compatible microprocessors made by TSMC in Taiwan.

In general, American microprocessor companies don’t want to lose Chinese market, which provides 20% of their revenues (and less revenue here would also mean less budget for R&D), so Intel CPUs are sold to Chinese brands like Inspur and Lenovo for their laptops and servers, and Nvidia GPUs like V100 and A100 are also used quite a lot for different LLM projects in China. But Huawei for their servers had to design and develop its own microprocessor named Kunpeng. Kunpeng boasts the size of transistors at 7nm and better performance than Intel CPUs, and is again produced by SMIC foundry. And here comes the problem for China.

SMIC and Hua Hong foundries depend on ASML company from Netherlands. ASML produces lithographic machines to make microprocessors by printing tiny transistors on silicon wafers. The most advanced Extreme Ultraviolet lithography (EUV) machines are produced only by ASML in the whole world. Companies (foundries) like TSMC from Taiwan (also IBM, Samsung and many others for their own purposes) buy these machines to make microprocessors for their own customers like Apple, NVIDIA, Qualcomm and others, at sizes of 7nm, 4nm, and latest 3nm. IBM has produced even 2nm transistors using this technology. EUV lithographic machine is very expensive, at around $150M and consists of almost half a million of components. ASML doesn’t manufacture all these parts themselves, but imports them from different suppliers in Germany, Japan, US and other countries. Older generation, Deep Ultraviolet lithography (DUV) machines were sold during the period from 2020 to 2022 to SMIC and Hua Hong in China, who managed to develop and implement a manufacturing process to produce 7nm microprocessors, among others for Huawei as mentioned earlier – one of the reasons why US doesn’t agree anymore even these DUV machines (because they include components from US suppliers) to be sold to Chinese foundries. And starting from July, Netherlands decided to impose restrictions even on servicing already installed DUV machines in China. As the response to this decision, Chinese government decided to impose special licenses for exports of gallium and germanium, key material for semiconductor industry and solar panels. Still, this is just an indirect response and threat. The main question about this ultimate battle for technological and AI dominance in the world is if China will be able to produce its own technology for the manufacturing of microprocessors or not. It is not an overstatement to say that everything is at stake.

Shanghai Microelectronics Equipment company (SMEE) was created already in 2002 as lithography equipment manufacturer, but was never able to produce modern machines that could be used for the production even of mid-range microprocessors. This was not a priority all until 2020, when new Chinese strategies for the scientific and technological self-sufficiency determined that this is a critical piece of technology that needs urgently to be developed within China. Lithographic machines are among the most complicated in the world, comparable with nuclear plants, wide-body airplanes or space stations. Having in mind that there are hundreds of thousands of individual parts in them, producing one such machine independently requires creating the whole ecosystem of high-end technologies within China like optics, lasers and similar. As an example, Carl Zeiss provides very complicated optic systems to ASML and this also needs now to be produced in China. These cases depend also on the fundamental research, where China still has important weaknesses.

Latest announcement appeared just few days ago that SMEE will deliver the first DUV machine at the end of 2023, independently and built with domestic components. Great and relieving news for Chinese semiconductor industry, but the situation is still uncertain. Is this news credible? Is SMEE really able to achieve this target at required quality, how long will it take to ensure the full operating capability of this machine, are they capable of serial production? If the answer to any of these is ‘no’, having in mind these increasing restrictions and pressures from abroad, China risks of entering a “dark forest age” as mentioned by one researcher.