• Thursday, March 28, 2024
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China’s ability to make computer chips still ‘years behind’ industry leaders

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When Huawei released its latest chip set in Shenzhen this month, the state-run Global Times newspaper hailed the “groundbreaking” development as a “boost” for China’s domestic chipmaking industry, “often portrayed as overly reliant on foreign suppliers”.

But the new server chip set, just like the telecoms company’s similarly feted advanced processor for smartphones, was only designed in China. It is manufactured in Taiwan, in the latest example of a persistent technology gap that hampers China’s efforts to become self-sufficient at manufacturing chips.

Semiconductor sector analysts believe that China’s best chipmakers are as much as a decade behind their international rivals. That is despite long running financial support from Beijing, rising market dominance of Chinese electronics hardware groups and the vastly improved capabilities of China’s chip design companies.

“It is going to be a long time before you have a domestic Chinese foundry that is going to be able to compete with either Samsung or TSMC,” said E Jan Vardaman, president of US-based consultancy TechSearch International, referring to the factories that make chips for other companies.

Beijing’s poor use of state funds slowed the sector’s development historically and a hardening attitude in the west toward Chinese acquisitions of semiconductor companies, technology and talent, had in recent years dragged on China’s ability to catch up, experts said.

The gap is likely to widen further because of the increasingly higher costs of chip making equipment and of the research and development needed to produce the most advanced processors — used in applications such as high-performance computing, high-end mobile and gaming devices and artificial intelligence.

Taiwan Semiconductor Manufacturing, the world’s largest contract chipmaker with more than half of the contract chipmaking market, said on Thursday that it would continue with a research and development spend of 8 per cent to 9 per cent of annual revenues — a spend of roughly $2.9bn in 2018 — as it shrugged off a worsening near-term outlook amid a sudden decline in demand for high-end smartphones.

By comparison, Semiconductor Manufacturing International, China’s biggest chip manufacturer, is expected to have spent about $550m on R&D last year, roughly 16 per cent of sales.

“Manufacturing chips at the leading-edge is now incredibly difficult — there are no short-cuts — even Intel is struggling,” said Jim Fontanelli, a senior analyst at Arete Research in London. “The starting point is very deep R&D pockets followed by the best engineers in the industry. SMIC has neither. TSMC has both.”

Despite US fears over China’s rapid technological rise, analysts, underscoring the distance between the top players, point to SMIC’s most advanced chip — a 14 nanometre chip in testing for commercial production this year. Samsung reached this standard in 2014.

Given the rising costs of chip research, US-based GlobalFoundries and Taiwan’s United Microelectronics — the second- and third-largest foundry companies by sales, respectively — have in the past two years each quit the race to develop leading edge chips, instead focusing on innovation with more established chip sizes.

SMIC said it would continue pursuing the development of advanced technology beyond 14 nanometres.

Velu Sinha, Bain & Company partner in Shanghai, said Chinese semiconductor science and chip design capabilities were already at the cutting edge, but he noted challenges around accessing some of the key enabling technologies.

Chinese chipmakers have been hamstrung as the leading chip factory equipment suppliers, all groups outside of China, work with the industry’s most advanced players in developing the next generation of tools for making chips, according to analysts.

Dutch group ASML, for example, partnered with TSMC, Intel and Samsung in 2012 to accelerate the development of its extreme ultra violet (EUV) lithography technology, used to print and etch designs on to silicon.

TSMC now uses ASML’s EUV machines to make its 7-nanometre processor chips — the industry’s current gold standard used to produce the core processor chips in Huawei and Apple’s latest smartphones.

SMIC has spent $120m on an EUV tool, according to a Nikkei report, but Arete’s Mr Fontanelli forecast it would not be used for commercial production for “many years”. SMIC did not comment on its equipment purchases.

“It’s a bit like buying an F1 engine with no F1 chassis, suspension or aero and expecting to go racing,” Mr Fontanelli said. “EUV will be an important part of leading-edge production over the next decade but there is a huge amount of non-lithography work that goes hand-in-hand with EUV to bring a leading-edge chip through manufacturing.”

Experts said the Taiwanese and South Korean groups were again at the forefront in a wave of new technological developments sweeping through the semiconductor manufacturing industry. General-purpose chips are now being redesigned and optimised for specific tasks, and functions that have been separate, such as processing and memory, are now being combined on a single chip.

Bain’s Mr Sinha said such new technologies marked a “fundamental transformation” as the industry moved beyond Moore’s law— the process whereby the numbers of transistors on a chip doubled every two years which has defined competition in the industry for decade — and would create new opportunities for China’s chip industry.

And analysts would not rule out China’s eventual rise as a competitive chipmaker.

“It is not a question of if, it is a question of when. But we are not talking a year or two, we’re talking five to 10 [years] before those technologies [in China] get caught up,” said Mr Sinha.

In the meantime, however, Chinese electronics companies needing the world’s most advanced chips will still rely on chipmakers outside of China, according to Taipei-based Credit Suisse analyst Randy Abrams.

“If Huawei wants to differentiate against global companies . . . in 2021 they will still have to go to TSMC or Samsung for their advanced gear because those will probably still be the most advanced foundries,” Mr Abrams said.