© ReutersSemiconductor Manufacturing International Corp has emerged as Beijing's secret weapon in breaking through a US-organised blockade aimed at containing China's technological progress, despite years of American sanctions.
Semiconductor Manufacturing International Corp has emerged as Beijing's secret weapon in breaking through a US-organised blockade aimed at containing China's technological progress, despite years of American 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's been hit by US restrictions for more than a decade and was formally blacklisted in 2020.
The Commerce Department is supposed to wield broad control over the company's purchases of any equipment or software with American 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 the Biden 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," said Douglas Fuller, associate professor at the Copenhagen Business School. "If they don't get tougher on SMIC, then this policy doesn't make any sense."
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 per cent, 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 will kneecap its capabilities.
Comment: Wishful thinking. Surely by now there's enough evidence, even for the most pathological in the Western establishment, showing that sanctions not only don't work, but for some, like Russia, and China, they are actually beneficial in a number of ways: they compel nations to innovate, and they harm their Western competitors: EU lost $1.5 trillion in revenue due to anti-Russia sanctions
Commerce Secretary 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, a former Taiwan Semiconductor Manufacturing vice -president, argue that the US is underestimating its capabilities.
SMIC has been stockpiling chipmaking machines for years, including the same models of deep ultraviolet lithography equipment from the Netherlands' ASML Holding NV that were used to make the industry's first 7-nm 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-nm 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 — pronounced "smick" — has already etched its name into industry lore. The company was founded more than two decades ago by Richard Chang, 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 to become the country's leading maker of semiconductors.
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 worth of chipmaking equipment from Applied Materials Inc. for fear it would compete with Micron Technology Inc. That same year, Taipei fined its founder for violating 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 modernisation, 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.
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 to Broadcom. 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 of 2020, the Trump administration blacklisted SMIC for allegedly supporting China's military, an assertion the company denied. That addition to what's 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 2022, the US unveiled landmark export controls that included limits on the sale of cutting-edge chipmaking gear to Chinese fabs, or manufacturing plants, that produce chips at 14nm or below.
But there were loopholes. While the US regulations hit American chipmaking firms immediately, the Biden administration took months to win over the Dutch and Japanese governments.
Comment: 'Win over'...
That meant companies in those two countries, such as ASML and Tokyo Electron, 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 Raimondo's 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 Justice Department is looking into whether Applied Materials sold hundreds of millions of 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 this October that further tightened restrictions on doing business in China.
Hawks such as Congressmen 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 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."
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