The Goal for China’s Chip Giant: Cut Out the U.S.
Hit by Washington’s export controls, China’s domestic chip industry strives for self-sufficiency
In a series of articles this week, Wall Street Journal reporters from around the world go inside the escalating global chip battle. At stake: leadership of an industry expected to double in size by the end of the decade to $1 trillion. The first installment is here, and a visualization of the global chips battle can be found here.
BEIJING—At an industrial site with gray factory buildings surrounded by young trees, China’s chip champion is operating a new production line key to Chinese leader Xi Jinping’s goal to eliminate reliance on U.S. technology.
By today’s standards, the operations done here by Semiconductor Manufacturing International Corp. 981 0.36%increase; green up pointing triangle
But SMIC, at the company’s new Jingcheng facility on the industrial outskirts of Beijing, is aggressively incorporating homegrown semiconductor-production equipment into its manufacturing line. Meanwhile, it is cutting back on its longtime reliance on industry-leading American tools, a person familiar with the matter said.
The line represents one of China’s most advanced efforts to date to commercially create chips with domestic tools—a technological self-survival tactic that would help inoculate Beijing from U.S. sanctions.
It is a part of a broader campaign to eradicate American technology in China, dubbed “Delete A” or “Decouple From A,” which has accelerated in recent years as the world’s two biggest economies intensify their battle to dominate in next-generation technology.
The Biden administration, and some U.S. allies such as Japan and the Netherlands, have introduced targeted export curbs that have undercut China’s ability to make high-end chips. But those measures have also served as a rallying call for China’s homegrown industry to develop more quickly, leading to big spending, experimentation and even some breakthroughs.
China, defying the global drop in semiconductor-equipment purchases, went on a spending spree in 2023 and represented a third of worldwide sales, according to industry association SEMI. This year, the country will add more new semiconductor-production capacity than the rest of the world combined, all for mature-technology chips, according to an estimate by analytics firm Gavekal Research. In May, China established a third round of its national semiconductor fund worth roughly $48 billion—coming on top of the previous two iterations that totaled nearly $50 billion.
The SMIC project, for now, remains largely aspirational. The production line still features some U.S. tools as well as other equipment from outside of China. China has a long way to go to shed its reliance on foreign technologies, especially those needed to produce higher-end chips, semiconductor executives and industry experts say.
Still, SMIC is on a path to commercialization. It is now capable of producing chips as advanced as 28-nanometer circuits at this line, and recent output volume there is already beyond the pilot production level, a person familiar with the matter said.
“By blocking everything, you force the sleeping lion to wake up,” said Konrad Kwang-Leei Young, a former executive at TSMC who served as an independent SMIC board member until 2021, referring to the state of China’s semiconductor industry.
Awakened lion
SMIC, a contract-chip manufacturer founded in 2000 in Shanghai, currently represents China’s best shot at one day churning out the world’s most-advanced chips.
SMIC, which isn’t a directly government-run enterprise, counts state-linked investors including the national semiconductor fund among its major shareholders. Its current chairman, who joined the board in 2023 with the recommendation of the national semiconductor fund, has previously served executive roles at state-owned enterprises.
In 2017, SMIC set up an innovation center adjacent to a fabrication plant in southern Beijing. There, it conducts research related to localizing the company’s supply chain, people familiar with the project said.
SMIC was added to the U.S.’s export blacklist in December 2020 over alleged links to the Chinese military. That meant companies with any U.S.-originating technology needed Washington’s signoff to sell tools, equipment or parts to SMIC that could aid more advanced chipmaking. SMIC has denied any links to China’s military.
Since then, SMIC has accelerated its self-sufficiency efforts. The Jingcheng project that favors Chinese suppliers underscores how SMIC’s efforts have gone from research to nearing commercialization following the U.S. blacklisting.
Domestic tools used at the line include those made by China’s leading semiconductor-equipment makers, such as Naura Technology Group; Advanced Micro-Fabrication Equipment, or AMEC; and the Shanghai-based ACM Research, a person familiar with the matter said.
The end-use of the chips made at the Jingcheng plant couldn’t be determined. Generally, chips of around 28 nanometers are widely used in household devices and cars, several generations removed from the cutting-edge technologies in new smartphones as well as those needed to train large language models driving generative artificial intelligence.
SMIC
has received $1.8 billion in direct government grants since 2017,
according to data provider Wind. It is currently expanding production
capacity for legacy chips. \
Before the U.S. restrictions, Chinese chip makers could access most foreign tools and other technology, and they made efficiency a priority instead of serving as a test bed for local companies. After the sanctions, they had no choice but to use domestic alternatives for some areas. Even when they have a choice, they are aiming to secure backup options, industry experts say.
The self-sufficiency path forward will be increasingly difficult as chip technology advances.
To be truly localized, China not only needs domestic equipment for making chips, but also must make sure the components inside the homegrown equipment are domestically produced. It would also need to locally manufacture wafers and other materials it uses for the chips.
China’s new advances and bottlenecks
There have been some apparent breakthroughs. Last year, Huawei Technologies released its new Mate 60 smartphone, which contained a system-on-chip made with SMIC’s technology comparable with the 7-nanometer process, according to a teardown by TechInsights, an industry research firm.
Neither Huawei nor SMIC have confirmed who manufactured the advanced chip in the Mate 60.
It was seen as a feat because SMIC and other Chinese chip makers don’t have access to the latest lithography machine made by Netherlands-based ASML Holding. The Netherlands restricts such sales to China.
Veteran semiconductor-manufacturing engineers think Huawei and its partners could have made the chips using a process that exposes the silicon to light multiple times instead of once—but doing so would lead to worse yields and higher costs.
At more advanced levels of chipmaking, the technique would become even more difficult and less efficient, the engineers say.
China has no homegrown alternative for the higher-end lithography machines. The country’s top domestic option is Shanghai Micro Electronics Equipment Group, whose website shows it makes lithography machines for production of chips as advanced as 90-nanometer circuit size.
Globally, that technology was introduced more than 20 years ago.
The U.S. and its allies’ export controls clamped down access to a variety of foreign technology. Now, a flood of new local companies have been established to fill in the gaps.
Competition is so tight that some companies offer “buy one, get one free” enticements for certain chip-making tools, an industry executive said.
At Semicon, a chip-tool exhibition that took place in Shanghai in March, some exhibitors emphasized their homegrown offerings. One featured a sign that read: “High level of localization.”
Meanwhile, Chinese companies are stockpiling foreign equipment untouched by the Biden administration or other governments’ restrictions.
Applied Materials and Lam Research, both based in California, each derived roughly two-fifths of their total revenue from China in their most recent quarter. About half of ASML’s lithography-system sales came from China in the first three months of the year.
Clarence Leong contributed to this article.
Write to Yoko Kubota at yoko.kubota@wsj.com