Huawei, “Unable to Secure 3.5 Nanometer Chips”

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Within the Chinese semiconductor industry, there's a growing belief that the government's ambitious semiconductor initiative is reaching its limits. This comes as the U.S. intensifies its pressure on China, compelling local companies to focus on expanding their legacy semiconductor capabilities instead of pursuing cutting-edge technologies.

On June 9, during the Mobile Computility Network Conference in Suzhou, Huawei's Cloud Services CEO, Zhang Ping'an, expressed concerns over China's inability to secure 3.5 nanometer (nm) chips amidst U.S. sanctions. "Taiwan's TSMC is increasing its supply of 3.5 nm semiconductors. However, under U.S. sanctions, China has no way to secure these products," Zhang said. He added, "It's fortunate that we've managed to address the 7 nm issue. The reality is that we can't introduce advanced manufacturing equipment due to U.S. sanctions, and we need to find ways to effectively utilize the 7 nm semiconductors."

Zhang's comments were surprising to many in the industry, as they starkly contrast the previously reported confidence in China's semiconductor growth.

Despite ongoing U.S. sanctions, in May, the Chinese government announced a record-setting third semiconductor fund of $47.5 billion (65.6 trillion won), reinforcing its commitment to investing in the semiconductor sector. Huawei has positioned itself as a spearhead in aligning with government initiatives, shocking the global semiconductor market in August last year by mass-producing 7 nm chips without using extreme ultraviolet (EUV) technology. Some even speculated that Huawei, along with its local foundry SMIC, was ready to mass-produce 5 nm chips, potentially shifting the chipmaking paradigm.

However, the recent statements by a top Huawei executive suggest that the local chip ecosystem is still in a nascent stage, underdeveloped relative to the massive investments and rumors.

The Chinese semiconductor industry faces a stark reality: without equipment from leading international companies, significant progress seems unattainable.

As Zhang noted, producing 3.5 nm semiconductors would require EUV lithography machines, which Huawei is reportedly developing independently. However, circumventing U.S. and Dutch patents to internalize this technology is considered highly challenging.

The local memory sector is also experiencing difficulties. The U.S. has restricted its equipment companies from exporting 128-layer NAND equipment to Chinese companies. It has been reported that companies like YMTC are facing investment delays due to their inability to timely secure equipment from U.S. firms like Lam Research.

While Zhang's remarks provide crucial insights into the state of China's semiconductor industry, some argue that the local "semiconductor boom" should not be underestimated. For instance, CXMT, a leading Chinese DRAM company, has cleverly circumvented U.S. regulations on sub-18 nm DRAM equipment and is preparing to produce 18.5 nm DRAM. Another industry insider mentioned a "gray market" for parts from U.S. equipment, suggesting alternative procurement channels are in place.

Zhang's statement implies a strategic shift towards dominating the legacy market, as companies like SMIC and Hua Hong Semiconductor continue to gain influence in the legacy foundry market. Market research firm Trend Force predicts that China's share in the legacy semiconductor market will increase from 29% in 2023 to 33% by 2027.