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U.S. regulators made Huawei’s chip ‘breakthrough’ possible

Last month, Chinese state media proclaimed that the microchips at the core of Huawei Technologies‘ flashy new flagship Mate 60 Pro smartphone showed how Chinese companies were ingeniously breaking through America’s blockade on advanced chipmaking technologies.

Douglas Fuller is an associate professor of international economics, government and business at Copenhagen Business School and the author of “Paper Tigers, Hidden Dragons: Firms and the Political Economy of China’s Technological Development.”

The chips, made by Semiconductor Manufacturing International Corp. (SMIC), are based on what is known as 7-nanometer technology — despite Washington’s attempts to restrict access by Chinese companies to technologies to produce chips below the threshold of 14 nm, or in some cases 16 nm.

Two weeks ago, U.S. Commerce Secretary Gina Raimondo attempted to assuage congressional concerns that the administration’s export controls are not working by saying at a hearing that SMIC, China’s largest chipmaker, cannot produce 7-nm semiconductors “at scale.”

The truth, though, is more convoluted than either side would have us believe.

SMIC’s “breakthrough” is at scale but is not based on indigenous innovation. Despite Washington’s tech controls, SMIC managed to acquire the American equipment needed for advanced chip fabrication. The fact is, Raimondo’s department has issued many licenses for equipment sales to SMIC.

In theory, given that the Commerce Department now has a presumption to deny licenses for advanced chip technologies, licenses should just be for equipment and parts for SMIC production lines based on mature technologies. But some equipment can be useful for production of chips both below and above the 14-nm threshold.

Third-party vendors have received U.S. licenses to acquire parts needed to maintain SMIC’s equipment in good operating order. Reportedly, one such vendor is located adjacent to SMIC’s fabrication plant in Beijing, so it may not even be a true third-party vendor.

Of note also, sales of some advanced equipment to SMIC by Dutch company ASML and Japanese vendors have continued to be allowed under a grace period before new export controls in their countries take effect.

Beyond relatively loose licensing, implementation of U.S. export controls has been wanting in other ways.

Many of the technical standards on the controls for specific types of equipment are too vague to stop licenses from being granted for tools that really could only be used in advanced fabrication. Allegedly, industry insiders wrote the technical specifications for Commerce’s Bureau of Industry and Security for certain types of equipment and thus may have deliberately rendered the controls effectively meaningless.

As long as SMIC has access to advanced deep ultraviolet (DUV) lithography technology from ASML and wide access to other critical advanced tools from American vendors, it can produce 7-nm chips at scale. It probably can even use DUV equipment to produce 5-nm chips, as Taiwan Semiconductor Manufacturing Co. (TSMC) has done. Whether SMIC can achieve similar yields in 5-nm chip production as TSMC, renowned for its operational efficiency, is another matter.

U.S. Secretary of Commerce Gina Raimondo in Shanghai in August: Despite Washington’s tech controls, China has acquired American equipment for advanced chip fabrication.   © Reuters

Chinese imports of fabrication equipment declined early this year. Sales then came roaring back amid lenient American licensing and Chinese buyers grabbing their last chance to freely buy certain Dutch and Japanese equipment. Through this buying binge, SMIC’s potential capacity to produce advanced chips may have ballooned to 30,000 wafers a month from earlier estimates of 10,000 a month.

This tsunami of equipment imports does not mean American export controls are an irredeemable failure, however.

If the U.S. Commerce Department tightens up its licensing, especially for SMIC and various parts vendors, and revises its technical rules to more effectively prohibit the sale of equipment needed to produce advanced logic chips, this could prevent further buildup of advanced logic capacity in China. Stricter controls would also likely degrade SMIC’s current capacity over time, as the maintenance of its equipment in good operating condition would become more difficult.

Without the tightening of export controls, SMIC will at least be able to maintain the level of advanced fabrication capacity it now has at a high operational efficiency level and advance its process technology to 5 nm. But without extreme ultraviolet (EUV) lithography equipment, it will be nearly impossible for SMIC to go beyond 5 nm, so no further moves toward the technology frontier will be possible.

From a national security perspective, the U.S. Commerce Department’s licensing behavior, and its lenience toward SMIC, seems especially odd.

SMIC is China’s leading logic provider and logic processes are critical for artificial intelligence-related chips, a key national security concern. On the memory chip side, where the national security case is much weaker, Commerce was strict on licensing for ChangXin Memory Technologies until recently. Yangtze Memory Technologies, which makes flash memory chips, has also received very few licenses.

It seems possible that SMIC may have had better luck with licensing due to the fact that it operates more fabrication plants than other Chinese chipmakers, giving U.S. vendors more incentive to lobby hard to maintain sales where they could plausibly make the case that the exports were not for advanced fabrication.

In her congressional testimony on Sept. 19, Raimondo said her department closes rule loopholes when it finds them. At this point, it looks like there is no way for China to progress beyond 5 nm anytime soon even with the current loose licensing. But if the U.S. government is serious about constraining China’s technical capabilities at the level announced a year ago, it must close the loopholes of its own making.

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