China is catching up in the microchip race

By Rhod Mackenzie

At the end of 2023, the Chinese company Shanghai Micro Electronics Equipment (SMEE) will launch the first microchip lithography machine with a 28 nm process technology. For the Chinese semiconductor industry, this is a real breakthrough: lithography has been one of its weak points. Although the new lithographic machines will still be seriously lagging behind the most modern options, the rapid progress is very welcome for the Chinese due to increasing restrictions from foreign suppliers. About the rapid development of the war of chips between China and the United States - in the material of Izvestia.

Despite the sanctions
On October 7, 2022, the US administration made a fateful decision to impose unprecedented restrictions on the Chinese semiconductor industry. By design, these were much tougher measures than anything that was introduced against China during the “trade wars” of the Donald Trump administration in 2017-2019. They included a ban on the supply of equipment and software for the production of semiconductors, as well as the recall of employees working directly in Chinese industry firms or trading with them.

The US itself is an important player in the global microchip industry, but far from the only one: the role of Japan, South Korea, Taiwan and the Netherlands is comparable, if not higher. Since last year, the Americans have been working with these countries, trying to get similar measures from them. The results are already there: for example, Japan has introduced quite serious restrictions on the supply of semiconductor industry products . The nuance is that the Japanese themselves do not really like these bans, and they want to export in all cases where possible, while the United States will send something to China only as an exception.

The US sanctions came amid a breakthrough in China's semiconductor industry itself. In the summer of 2022, it became known that the leader of China's microelectronics, Semiconductor Manufacturing International Corp (SMIC), was able to master the production of microchips on the 7 nm process technology, that is, only one generation behind the current advanced one. For understanding, most modern smartphones, except for the most powerful ones, are produced with 7 nm chips, which makes China one of the leaders in the global semiconductor sector.

But the main problem of China at the moment is not the production of the actual chips, but the "production of means of production" for them. This is an even more monopolized environment than semiconductors as such. Of key importance here are ultraviolet photolithography machines, which apply a pattern to the board. For example, only the Dutch company ASML owns the technology for the production of extreme ultraviolet lithography (EUV) machines. EUV provides technical processes of 7 nm and less, that is, without it, the production of the most advanced, modern and powerful chips is impossible.

China has lagged far behind in this sector. The only manufacturer of such machines in the country was the Shanghai SMEE, founded back in 2002. Until recently, the most modern technical process in which the equipment produced by it could work was 90 nm. This process technology was advanced just in 2002-2003. And now, judging by the statements of the Chinese media, she managed to jump through three generations at once. The 28 nm process was considered the most modern in 2010–2011: for example, Russian Elbrus processors are based on 28 nm chips.

The success is quite large, since the production of lithographic machines is high-tech among high-tech. Chinese experts gaining experience abroad in the 2000s said that foreign manufacturers told them: “Even if we give you all the drawings, you still can’t build a car yourself.” The most advanced EUV cars are made up of 450,000 components, 20 times more than a Formula 1 car. Actually, ASML itself produces only 15% of the number of these parts, the rest is bought on the international market.

Almost impossible
The results achieved by SMEE confirm the success of China's semiconductor industrial policy. It originates in the 2000s, but in the 2010s, as the PRC economy became more mature and advanced, it became even more accentuated. In 2014, the National Chip Industry Fund was established with $21 billion in government funding. In 2019, amid U.S. sanctions on electronics manufacturer ZTE, Beijing stepped up and added another $35 billion to the fund.

Half-sanctions: US will not be able to stop the microchip industry in China
China's largest companies expand their production capacity
Colossal amounts of money are helping Chinese manufacturers accomplish the near-impossible by catching up with the overseas microchip industry, which has been in existence for more than half a century and has developed extremely complex competencies . For example, many Chinese chips and related products cost 10 times more than foreign counterparts for a long time, but subsidies allowed manufacturers to stay afloat and learn how to work. The difference in cost was explained by the incomparable "economy of scale", but as the Chinese began to develop their own market, the difference narrowed more and more. This largely offsets the increase in costs as the product becomes more complex.

In addition, starting from 2019, China began to actively purchase microchips and equipment for their production in reserve: companies operating in this sector noted a huge “non-market” demand from Chinese counterparties, hinting that purchases are made for strategic reasons, and not for profit maximization here and now.

The United States, in turn, is now trying to fulfill a dual task: to delay (if not stop) the development of the Chinese semiconductor industry and to raise its own, which once led the world market, and now lags far behind - only 12% of global production . To do this, the Joe Biden administration passed the Chips and Science Act, which provides for the allocation of $ 39 billion for the production of semiconductors within the US borders, as well as $ 13 billion for research and development in this area. Thus, America is now also adopting industrial policy, a phrase that was considered a dirty word in economic and managerial circles for a couple of decades.

Despite comparable amounts, it is worth noting that the difference between the American and Chinese sector development programs is quite significant. The paradox is that the PRC operates in a more decentralized manner: in addition to the Microchip Fund, state support is provided at many levels, including regional and municipal. Thus, Shanghai alone will spend $43 billion on the development of the industry in the next five years.

Have the restrictions
Only the future will tell the outcome of the chip war, but at this stage, the situation looks like the US sanctions have not done much success in causing unacceptable damage to the Chinese industry. Chinese companies have stocked up on enough equipment and materials to keep them going for a while to “import-substitute” key bottlenecks. These latter are slowly but surely beginning to unravel.

In addition, foreign players - the Dutch and Japanese - are not eager to observe the same strictness in relation to Chinese counterparties as the Americans themselves. In many ways, their profitability is based on the very "economy of scale", and the loss of the Chinese market will deal a severe blow to it. There are also fears that restrictions on the supply of semiconductor equipment to China will only force Beijing to redouble its efforts to create its own production chain.

In addition, it should be noted separately that the goal of curbing China's military power, declared during the introduction of restrictions, is completely meaningless, since defense products require relatively simple microchips, only in rare cases are semiconductors on a manufacturing process less than 90 nm needed. And here China, if it does not have a completely closed production chain, is very close to it, and after a new breakthrough in lithography, it significantly exceeds the required bar.
This article originally appeared in Russian at iz.ru