China chip firms struggling under weight of US export bansChina chip firms struggling under weight of US export bans

With the US and China cranking up their tech war, now is a good time to ask how effective US bans have been on holding back China's chip sector.

We have a helpful new benchmark in the form of Huawei's Kirin 9020 chip, the engine inside its new Mate 70 flagship phone. The fully homegrown chip integrates 5G-A SOC and direct-to-device satellite while delivering a 30% improvement in efficiency, early performance testing has found. 

A good deal of this is the result of smart optimization of the chip and the hardware. But from a pure semiconductor perspective, it is still well behind the most advanced international products, as one local blogger has pointed out. 

Most notably the 9020 has been built using 7nm technology, the same that was used to manufacture Huawei’s first 5G Kirin chips a year ago. Hardly a sign of fresh breakthroughs.  

As Bloomberg reported Thursday, some analysts had predicted Huawei and its manufacturing partner, SMIC, would be able to advance to 5nm this year. That clearly hasn’t happened. 

Low yields 

The other critical factor of the chip is its economics. It's widely assumed that Huawei and SMIC have received heavy state assistance in building the new Kirin chips because of its national strategic importance. But multiple reports over the past six months suggest the Huawei chips are being produced at very low yields, which is extremely costly and also means potential bottlenecks as demand ramps up.

That relates not just to the smartphone silicon but also Huawei's Ascend AI server chips – its challenger to Nvidia. Bloomberg reported last month that SMIC's mature 7nm technology is not capable of building the latest generation of AI processors.

SMIC and Huawei have been very good at extracting the most from their older manufacturing kit, but at a high cost. But they will have no access to next-generation tech until at least 2026, sources told Bloomberg. 

While Huawei has its own struggles, US export restrictions have, as many predicted, spurred the growth of the Chinese chip industry as a whole.

To take one example, the equipment sector can now perform virtually every aspect of production except for high-end lithography. TechInsight says China produced 16% of its own semiconductor and related products in 2018, 23% in 2023, and expects this to rise to 27% in 2027.

Despite this progress, domestic firms face headwinds in a market that is shy of adopting local technology. 

"Due to product, ecosystem and other reasons, domestic products in many subsegments were unable to win the favor of Chinese customers when competing with foreign products," China Business News said. 

Huajin Securities estimates that the localization rate of 8-inch silicon wafers is now 55%, but in the sub-sectors such as photoresist, photolithography and measurement equipment, the localization rate is below 10%. So we can see that while the domestic industry has taken up the slack in the mature segments, it's not been able to overcome the absence of the advanced lithographic gear.

US export controls will continue to be highly contentious, and not always well-enforced, but it’s clear they’ve so far had a restraining effect on Chinese advanced chip development.