Huawei’s Recent Chip Breakthrough Expected to Trigger Heightened US Scrutiny, Say Analysts

SHENZHEN, China/SAN FRANCISCO, California, Sept 5 (Reuters) – Huawei Technologies’ breakthrough in advanced chip manufacturing underscores China’s resolve and capability to counteract U.S. sanctions, though these efforts are likely to come at a substantial cost and could lead to tighter restrictions from Washington, according to analysts.

Huawei unexpectedly unveiled its latest smartphone, the Mate 60 Pro, last week during the visit of U.S. Commerce Secretary Gina Raimondo to China. This unveiling coincides with the Chinese government’s launch of a new $40 billion investment fund aimed at bolstering the nation’s burgeoning chip sector.

The Mate 60 Pro is powered by Huawei’s proprietary Kirin 9000s chip and is manufactured by China’s premier contract chipmaker, SMIC (0981.HK), using cutting-edge 7-nanometer (nm) technology, as confirmed by Ottawa-based TechInsights’ teardown analysis.

TechInsights’ findings and feedback from early users, highlighting the phone’s exceptional performance, suggest that China is making substantial progress in the development of high-end chips. This comes as Washington has intensified sanctions in recent years, aiming to limit China’s access to advanced chip manufacturing tools.

“This achievement demonstrates the technical advancements made by China’s semiconductor industry without EUV tools. The complexity of this accomplishment also underscores the resilience of the country’s chip technology,” noted TechInsights analyst Dan Hutcheson.

EUV, or extreme ultraviolet lithography, is employed in the production of 7 nm or more advanced chips.

“Simultaneously, this poses a significant geopolitical challenge to nations that have sought to restrict China’s access to crucial manufacturing technologies. The result could be even more stringent restrictions than those currently in place,” he added.

Jefferies analysts believe that TechInsights’ findings could prompt an investigation by the U.S. Commerce Department’s Bureau of Industry and Security, stimulate further debates in the U.S. about the effectiveness of sanctions, and encourage Congress to introduce even harsher tech sanctions within an upcoming competition bill targeting China.

“Overall, the U.S.-China tech rivalry is poised to intensify,” they stated in a note.

A representative from the U.S. Department of Commerce had not responded to a request for comment as of Tuesday morning.

Huawei declined to comment, while SMIC and China’s State Council, responsible for handling press queries on behalf of the Chinese government, had not provided immediate responses to requests for comments.

LIMITED PROGRESS SMIC’s most advanced chip production had been limited to 14 nm due to Washington’s restrictions in late 2020, preventing the acquisition of an EUV machine from the Dutch firm ASML (ASML.AS).

However, TechInsights reported last year that it believed SMIC had managed to produce 7 nm chips by adapting simpler DUV machines that it could still obtain freely from ASML.

Some analysts, including those at Jefferies, suggested the possibility that Huawei had acquired the technology and equipment from SMIC to manufacture the chip independently.

Regardless of the chip’s origins, Tilly Zhang, an analyst at Gavekal Dragonomics, downplayed the achievement, citing a low yield rate that reduces the number of usable chips from each wafer, thereby increasing costs. Additionally, new export controls imposed by the Netherlands will restrict SMIC’s access to more immersion DUV machines.

“They have demonstrated their willingness to accept much higher costs than are typically deemed feasible… Only the combination of Huawei’s substantial financial resources and generous government subsidies could enable them to sell phones featuring these chips at standard market prices,” Zhang stated.

Reuters reported on Tuesday that China is preparing to launch a state-backed investment fund aimed at raising approximately $40 billion for its chip sector, as the country intensifies its efforts to catch up with the U.S. and other global competitors.

Some research firms estimate that SMIC’s 7 nm process has a yield rate below 50%, compared to the industry norm of 90% or more, limiting shipments to approximately 2-4 million chips, insufficient for Huawei to regain its previous dominance in the smartphone market.

Jefferies analysts believe that Huawei plans to ship ten million units of the Mate 60 Pro, though it may struggle to source enough China-made 7 nm chips to support that quantity.

In such a scenario, the company may turn to 10 nm chips, but with an estimated 20% yield rate (the number of functional chips per silicon wafer), significantly lower than the standard 90% for most consumer devices.

“The U.S. controls are imposing high costs for producing controlled technologies in China,” noted Doug Fuller, a chip researcher at the Copenhagen Business School, adding that the Chinese government is likely covering the expenses.