Chip breakthrough sends U.S. scrambling for new measures to stifle Huawei

Its groundbreaking Mate 60 model shows the Chinese smartphone maker may have dodged a U.S. tech blockade for now, but tougher sanctions may loom  

Key Takeaways: 

• Huawei’s latest smartphones are powered by its proprietary Kirin 9000s chips, which deliver comparable performance to Qualcomm’s Snapdragon 888 
• U.S. officials have said restrictions on the export of AI chips and semiconductor manufacturing equipment to China could be updated as early as this month 

By Ken Lo

A new smartphone series from Chinese tech giant Huawei Technologies featuring cutting-edge semiconductor technology has sparked a sudden scramble by Washington to find new ways to keep the squeeze one of China’s leading tech firms. It has also raised questions about the effectiveness of U.S. attempts to stifle Huawei’s ability to manufacture leading-edge chips using 7-nm technology.  

The U.S. Commerce Department first placed Huawei on its “Entity List” in May 2019, citing national security concerns for its move that cut off the Chinese company’s access to most of its American suppliers. This move significantly reduced Huawei’s ability to access advanced technology through European and American channels, stymying its growth. 

Many see the efforts against Huawei as part of a broader campaign targeting China’s semiconductor industry, which currently lags the U.S. by about a decade. But that gap may have halved to about just four years with the introduction of Huawei’s Mate 60 Pro, which is anchored by the company’s self-developed Kirin 9000s platform. That, in turn, has raised U.S. concerns about its ability to effectively curb China’s tech ambitions. 

Recent teardown reports by leading industry research firms such as TechInsights explain that the Mate 60 Pro smartphone uses N+1 or N+2 technology developed by Taiwanese contract chipmaker TSMC (TSM.US; 2330.TW), which allows for chip performance close to the 7-nm level and even approaches certain indicators of the 5-nm level, despite employing a 14-nm process used by leading Chinese contract chipmaker SMIC (0981.HK; 688981.SH). 

The Kirin 9000s is a comprehensive chipset that boasts a CPU, multiple GPU rendering processors, a neural network processor, and a 5G modem. The combination uses special processes to enhance the chips’ 14-nm technology to a more advanced 7-nm level, resulting in comparable performance to the Snapdragon 888 chipset sold by U.S. telecoms chip giant Qualcomm (QCOM.US), which uses the 4-nm technology. 

It’s worth noting that the Kirin 9000s chipset is manufactured using a 7-nm DUV (deep ultraviolet) lithography process, which may face challenges maintaining high yields in mass production. On the other hand, the Snapdragon 888 chipset benefits from more advanced EUV (extreme ultraviolet) lithography technology.  

Before the emergence of EUV lithography machines, TSMC started mass-producing 7-nm chips using its N+1 node process in 2017. By 2020, it had produced 1 billion such chips using DUV technology. However, the manufacturing cost for chips using DUV technology were around 30% higher than those using more advanced EUV, leading TSMC to abandon DUV and shift its focus to EUV production starting in 2020. 

SMIC draws on former TSMC engineer

In late 2017, Liang Mong-Song, a former senior engineer at TSMC, joined SMIC. Not long afterwards, SMIC and its Mainland China peers were dealt a setback when U.S. sanctions scuttled their plans to buy 5 EUV lithography machines from Dutch firm ASML (ASML.US), one of the world’s leading manufacturers of chip-making equipment. That development prompted SMIC to move its focus to the N+1 node process under Liang. 

The bottom line is that SMIC hopes to sidestep U.S. sanctions by leveraging older DUV technology. At the same time, the Biden administration has been steadily ratcheting up its restrictions against China in the sector. It announced a ban on U.S. citizens, green card holders and companies from providing maintenance services to DUV lithography machines in China.  

In August, U.S. Commerce Secretary Gina Raimondo travelled to China for a four-day visit, coinciding with the Huawei product launch. Some saw the move as a demonstration that China could make its own breakthroughs in the face of U.S. restrictions. At the same time, the move seemed timed to steal some thunder from Apple’s (AAPL.US) iPhone 15 Pro unveiling not long afterwards on Sept. 12. 

Some Chinese netizens even creatively portrayed Raimondo as a spokesperson for Huawei. In a subsequent interview, she said Washington lacks evidence of Huawei’s ability to mass-produce high-end chips, but is still quite capable of imposing more sanctions.    

New restrictions coming?  

In fact, the Biden administration is reportedly planning to update its restrictions on the export of AI chips and semiconductor production equipment to China as early as this month, according to a recent report by Reuters, citing an unnamed government official. The official said that China had been told in advance about the update in an effort to better manage tense Sino-U.S. relations. 

Starting in late September last year, the U.S. banned the sale of high-end AI chips from domestic suppliers, such as Nvidia and AMD, to Russia and China, including Hong Kong, aiming to prevent the use of such chips in military applications. The U.S., Netherlands and Japan have also restricted the sale of chip-making equipment to China to prevent the transfer of advanced technologies that could be used for sensitive purposes. 

Despite the sanctions facing Huawei, the company continues to be one of Qualcomm’s major customers. Huawei purchased between 23 million and 25 million chips from Qualcomm last year, and is expected to boost that to about 40 million to 42 million this year, according to Ming-Chi Kuo, an analyst at TF International Securities. Qualcomm previously obtained a special U.S. license from Washington to sell its chips to Huawei, though that license only applies to some of its less-advanced 4G telecoms chips.   

Kuo believes that if SMIC can produce the Kirin 9000s chip at just a slightly higher cost using DUV technology than it would incur using EUV, Huawei may reduce its purchase of some of its higher-end chips from Qualcomm next year. The Snapdragon 888 costs more to Huawei than the Kirin 9000s, so greater use of the latter could result in significant cost savings for Huawei. If that happens, Qualcomm’s shipments could fall by as much as 60 million units next year, Kuo estimated, potentially leading to a major loss of revenue for the U.S. chip giant. 

Have a great investment idea but don’t know how to spread the word? We can help! Contact us for more details.

The Bamboo Works offers a wide-ranging mix of coverage on U.S.- and Hong Kong-listed Chinese companies, including some sponsored content. For additional queries, including questions on individual articles, please contact us by clicking here.

To subscribe to Bamboo Works free weekly newsletter, click here