[Salon] New phone sparks worry China has found a way around U.S. tech limits

[Chas Freeman <cwfresidence@gmail.com>]

New phone sparks worry China has found a way around U.S. tech limits

Huawei, which has been under U.S. sanctions for years, released the
phone pointedly during Gina Raimondo’s visit to Beijing

By Eva Dou
September 2, 2023

Chinese chip stocks surged in value after Huawei Technologies
introduced its latest Mate 60 Pro phone. According to AnTuTu, a
Chinese benchmarking website, the phone features a Kirin 9000s CPU
designed by HiSilicon that supports 5G. (Alex
Plavevski/EPA-EFE/Shutterstock)

As Commerce Secretary Gina Raimondo was visiting China earlier this
week, a sea-green Chinese smartphone was quietly launched online.

It was no normal gadget. And its launch has sparked hushed concern in
Washington that U.S. sanctions have failed to prevent China from
making a key technological advance. Such a development would seem to
fulfill warnings from U.S. chipmakers that sanctions wouldn’t stop
China, but would spur it to redouble efforts to build alternatives to
U.S. technology.

Huawei Technologies Co.’s new smartphone, the Mate 60 Pro, represents
a new high-water mark in China’s technological capabilities, with an
advanced chip inside that was both designed and manufactured in China
despite onerous U.S. export controls intended to prevent China from
making this technical jump. Those sanctions were first imposed by the
Trump administration and continued under President Biden.

The timing of the phone announcement on Monday, while Raimondo was in
Beijing, appeared to be a show of defiance. Chinese state media
declared it showed the U.S. that trade war was a “failure.”

Paul Triolo, the technology policy lead at the Washington-based
business consulting firm Albright Stonebridge Group, called the new
phone “a major blow to all of Huawei’s former technology suppliers,
mostly U.S. companies.”

“The major geopolitical significance,” he said, “has been to show that
it is possible to completely design [without] U.S. technology and
still produce a product that may not be quite as good as cutting edge
Western models, but is still quite capable.”

Biden administration officials declined to comment.

U.S. Commerce Secretary Gina Raimondo, center, leaves after a news
conference at the Boeing Shanghai Aviation Service Co., in Shanghai on
Aug. 30. (Andy Wong/AFP/Getty Images)

How powerful the new chip design is remains an open question.
Unusually, Huawei revealed little about key aspects of the phone in
its announcement, such as whether it was 5G-enabled or what process
was used to produce it. In a statement, Huawei simply touted the phone
as making breakthroughs in “satellite communications.”

China’s official broadcaster, CGTN, in a post on X, formerly known as
Twitter, called the phone Huawei’s “first higher-end processor” since
U.S. sanctions were imposed and said the chip it contains was made by
Semiconductor Manufacturing International Corp., a company partially
owned by the Chinese government.

One person told The Washington Post that the Mate 60 Pro has a 5G
chip. Speed tests posted by early buyers of the phone online suggest
its performance is similar to top-of-the-line 5G phones. In July,
Reuters reported Huawei’s imminent return to the 5G phone market,
citing three technology research firms speaking on the condition of
anonymity.

Nikkei Asia has reported, citing sources, that SMIC would be using
what’s known as the “7-nanometer process” to make the chips for
Huawei, the most advanced level in China. This would be on par with
the process used for the chips inside Apple’s iPhones launched in
2018. Apple’s latest iPhone chips were made by the Taiwan
Semiconductor Manufacturing Company, using what is known as the
four-nanometer process. A nanometer is a measure of chip size, with
the fewer nanometers in the process, the better. A piece of paper is
about 100,000 nanometers thick.

U.S. sanctions were intended to slow China’s progress in emerging
fields like artificial intelligence and big data by cutting off its
ability to buy or build advanced semiconductors, which are the brains
of these systems. The unveiling of a domestically produced
seven-nanometer chip suggests that has not happened.

Industry experts cautioned that it’s still too early to tell how
competitive China’s chipmaking operations will become. But what is
clear is that China is still in the game.

“This shows that Chinese companies like Huawei still have plenty of
capability to innovate,” said Chris Miller, a professor at Tufts
University and author of the book “Chip War.” “I think it will also
probably intensify debate in Washington on whether restrictions are to
be tightened.”

A Huawei Technologies Co. Mate 60 Pro smartphone. Chinese state media
jumped aboard a groundswell of national pride surrounding Huawei’s
latest smartphone, portraying the gadget as a technological marvel
that delivered a much-needed victory over U.S. sanctions. (Justin
Chin/Bloomberg News)

Few stakeholders have yet to voice opinions publicly, as industry
groups seek to confirm more details and evaluate their stances. But
there is no doubt the new Huawei phone has sparked discussions of what
comes next. “There is a lot of activity,” said Craig Allen, president
of the U.S.-China Business Council, a nonprofit group that promotes
trade between the United States and China.

Opinions differ as to how the U.S. government should react.

“This development will almost certainly prompt much stronger calls for
further tightening of export control licensing for U.S. suppliers of
Huawei, who continue to be able to ship commodity semiconductors that
are not used for 5G applications,” Triolo said.

On the other hand, he added, “U.S. semiconductor companies would
prefer to be able to continue to ship commodity semiconductors to
Huawei and other Chinese end users, to maintain market share and stave
off the designing [without] U.S. technology from Chinese supply chains
more broadly.”

Washington faced a similar quandary of how to hobble the Soviet
Union’s technological development during the Cold War. Willy Shih, an
economist at Harvard Business School, said Huawei’s breakthrough was
evocative of what happened with Global Positioning System technology,
now commonly known as GPS. The U.S. Defense Department developed the
technology and restricted its export, wary of it in the hands of
rivals. But the export restrictions pushed Moscow and other
governments to develop their own versions, Shih said.

“So it went from a situation where the U.S. really dominated that
technology and everyone would come to the U.S. to buy it, to now there
are all these different alternatives,” he said. “And you have to
wonder if the same thing is happening now with Huawei.”

China’s race to build an advanced homegrown chip began in May 2019,
when, amid the Trump administration’s trade war with China, the
Commerce Department put Huawei on its “Entity List,” prohibiting U.S.
companies from doing business with it. Some wondered if it was a
“death penalty” for Huawei, with the company choked from obtaining key
components.

Huawei had long been in the crosshairs of Washington as the sharpest
tip of China’s tech industry. Since 2012, Huawei has been the world’s
largest supplier of the equipment needed to operate the global
internet, a position it has maintained despite U.S. sanctions. Huawei
files more patent applications than any other company in China, and a
constellation of Chinese start-ups rely on Huawei’s AI algorithms to
build their own applications for face and voice recognition, pattern
identification and other purposes.

Huawei’s business lines include geopolitically sensitive products
including mobile base stations that provide nations with cell
coverage, video-surveillance gear for police and submarine cable
systems, which all require chips as their brains.

In the wake of the sanctions, Ren Zhengfei, Huawei’s charismatic
founder who got his start in China’s army engineering corps, rallied
Huawei’s staff for an all-out fight for the survival of their company.
They stockpiled chips from overseas suppliers, predicting that
Washington might close loopholes in the sanctions. This indeed came to
pass. Washington plugged the loopholes one by one, including
sanctioning SMIC, the only factory in China potentially capable of
manufacturing advanced chips for Huawei — and pushing for suppliers of
specialized chipmaking gear to halt sales to China more broadly.

A Huawei store in Shanghai (Alex Plavevski/EPA-EFE/Shutterstock)

Since then, Huawei has hunkered down into survival mode, drawing on
its stockpiled chips as it raced to secure a domestic chipmaking
solution.

SMIC has striven to make cutting-edge chips since its founding in
2000, but the dream had long seemed pie-in-the-sky. Each generation of
chips reflects a new frontier in just how microscopically small humans
can draw precise designs into a sheet of silicon. By the time SMIC
caught up to one generation, industry leaders had raced further ahead
based on new breakthroughs by the world’s brightest physicists and
technicians.

“It’s hard to catch up because chips are the most complex manufactured
good humans have ever produced,” Miller said. “There’s nothing more
complicated that humans make … this is really hard stuff.”

Miller says a considerable gap remains between SMIC’s capabilities and
those of TSMC, the industry leader that produces the newest chips for
companies like Apple. It also remains unclear if SMIC can produce
advanced chips at a scale and cost that will make its products
globally competitive.

Shih said that regardless of if SMIC can reach the cutting edge, the
foundry will certainly be able to produce older-generation chips at
scale, possibly pushing down prices of chips worldwide. “We will see
price pressure and commoditization pressure,” he said.

U.S. companies like Intel and Qualcomm have already lost significant
sales in China, the world’s second-largest economy, due to the U.S.
sanctions, crimping their research and development budgets. U.S.
executives fear this could weigh on their long-term strength, in an
industry where only a few of the strongest, fastest companies tend to
survive.

“It starts a downward spiral in ability, to not be competitive with
the rest of the world,” said an industry executive, who spoke on the
condition of anonymity because of the sensitivity of the subject.

Since the U.S. chip sanctions began, Beijing has flexed what muscles
it can to prevent more of the global chip industry from falling under
Washington’s sway. For instance, Intel recently announced it will have
to pay $353 million in termination fees to Israel’s Tower
Semiconductor after failing to acquire Chinese regulatory approval for
the acquisition.

Ellen Nakashima contributed to this report.

By Eva Dou
Eva Dou is The Washington Post's China business and economy
correspondent. A Detroit native, she previously spent seven years
reporting