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Jakarta, CNBC Indonesia – China’s largest chip manufacturer, SMIC, has been intensively producing advanced chips in recent months. The ambitious effort is a move against US sanctions designed to slow technological progress in China.

However, there are still several big challenges facing China to achieve independence in the chip sector, especially in the long term.

As is known, last year Huawei launched the Mate 60, a smartphone with 5G connectivity after being blacklisted by the US in 2019. The mysterious cellphone uses a chip produced by SMIC using a 7 nanometer process.

SMIC is the largest semiconductor manufacturer in China. So far, SMIC has only been able to make chips with 7nm fabrication. For your information, the smaller nanometer size produces a more powerful and efficient chip.

The 7nm process is considered very advanced in the world of semiconductors, even though it is not the latest technology. For comparison, the chip used in the iPhone 15 Pro is built with a 3nm architecture.

Last week, the Financial Times reported that SMIC was setting up a new production line to make 5nm chips for Huawei. This signals further progress for China’s largest chipmaker.

The reason Chinese production chips are important

The US sanctions are designed to slow China’s ability to make the world’s most advanced chips as technological competition between the two countries continues to heat up.

The company was placed on a US trade blacklist called the Entity List in 2019 that ultimately cut SMIC off from key foreign technologies that allowed it to make more advanced chips.

In October last year, the US tightened restrictions to prevent the sale of artificial intelligence chips and semiconductor devices to China.

The US has pressured other countries to implement similar restrictions. One of the biggest moves was the Netherlands last year officially imposing export restrictions on “advanced” semiconductor manufacturing equipment.

The Netherlands is home to ASML, a company that makes extreme ultraviolet (EUV) lithography machines, a tool that is critical in making the most advanced chips on a large scale and cost-effectively.

However, the restrictions imposed by the Netherlands went too far by limiting the export of several less sophisticated lithography machines.

Without EUV tools, according to experts, SMIC would have difficulty making chips 7 nanometers or smaller, or at least would find it expensive to do so.

So that’s why when the Huawei Mate 60 came out last year with a 7nm chip, many were shocked.

An expert told CNBC International at the time that SMIC was likely using older chipmaking tools to make advanced chips.

China’s Challenge

Using old equipment to make more advanced chips poses two major challenges.

The first is that producing semiconductors will be more expensive than using more sophisticated equipment and machines. The second is the issue of yield, that is, with older equipment the yield is also lower.

Financial Time also reported, citing three people close to the Chinese chip company, that SMIC had to charge 40% to 50% more for products from its 5-nanometer and 7-nanometer production processes than TSMC did on the same nodes.

TSMC, or Taiwan Semiconductor Manufacturing Company, is the world’s largest and most advanced contract chip manufacturer. TSMC makes semiconductors for companies ranging from Apple to Nvidia

Pranay Kotasthane, head of the high-tech geopolitics program at the Takshashila Institution, said that SMIC and China could continue to throw money at the process. But ultimately, costs will continue to increase as more generations of chips advance. Unless the company can obtain ASML EUV machines.

“SMIC may overcome the current yield problem by investing more money. This investment may even come from the government as this has become a matter of national prestige,” Kotasthane said via email, quoted by CNBC International.

“But the higher level of underwriting costs will only increase with each subsequent chip generation. The downside will continue to grow unless China finds a mainstream alternative to EUV,” he added.

[Gambas:Video CNBC]

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