USA vs. China – X-Ray vision

The US sees through the propaganda.

• Commentary from the US Department of Commerce indicates that it has not fallen for the propaganda and realised that the ability to make chips economically at scale is more important than being able to achieve a single feat of engineering.
• The launch of the Huawei Mate 60 Pro has caused a lot of fuss and noise because 7nm chips from SMIC have been found in the samples that have been made available to 3^rd parties.
• This has led many commentators to believe that the Chinese semiconductor industry has managed to beat US, Japanese and Dutch sanctions and create advanced semiconductors without any help from overseas.
• However, the US Department of Commerce has stated that there is no evidence that Huawei or SMIC are able to produce 7nm chips at scale demonstrating a good understanding of reality.
• As is so often the case, reality is more nuanced and there is more to this than whether the Chinese have been able to create 7nm chip or not.
• The key to semiconductor manufacturing is not whether one can produce a working chip but whether one can produce millions of chips at scale and do so economically.
• High yields (meaning that most of the chips on the wafer work and can be sold) are the lifeblood of the semiconductor industry because yield is critical to profitability and cash flow.
• Yield at advanced nodes is the main reason why TSMC has been able to capitalise on Intel’s mistakes and become the No.1 semiconductor manufacturer in the world.
• If China is to become self-sufficient in semiconductors, this is what it needs to master and so far, there is no evidence that I have seen that indicates that this hurdle has been cleared.
• Instead, what I see are a few 7nm chips that have been made using the double patterning or multi-patterning technique and no evidence that millions more are on the way.
• This involves using older equipment that until recently China has been able to buy and not the advanced EUV equipment that China has been banned from buying for some considerable amount of time.
• If yields remain very low (which I suspect that they are) then each chip will be so expensive that it will not be economically viable to manufacture.
• This is why I suspect that the Huawei Mate 60 Pro will not ship in large volumes as a result of the damage that these chips will do to the financial performance of one or both of Huawei and SMIC.
• This is where the US Department of Commerce has got it right as its comments indicate that it understands that it is possible to make 7nm chips using older equipment, but that it is not possible to make them commercially.
• This is what Intel tried to do some years ago which signalled the beginning of all of the problems that it is currently working through today.
• The practical reality appears to be that while it is possible to make a 7nm chip using non-EUV equipment, it is virtually impossible to do so economically making the double and multi-patterning technique at 7nm a non-starter.
• This is why I continue to think that the Chinese semiconductor industry has not cracked this problem and it will take millions of units shipping at good margins without state assistance to lead me to change my view.
• Hence, while this incident has caused plenty of consternation among the media and tech press it does not represent a big step forward in the development of the Chinese semiconductor manufacturing industry in my view.
• I think that the current sanctions have teeth and that for the foreseeable future, China will remain dependent on imported technology from overseas to make semiconductors.
• This remains China’s weak spot in the ideological struggle that is being fought in the technology sector and I expect to see further limitations being placed on Chinese access to US and Western technologies.
• RFM Research and Alavan Independent continue to expect global technology standards to bifurcate with the Chinese going one way and everyone else going another.
• It looks likely that the USA will do everything it can to ensure that the Chinese standards are not as good as the global versions so that no 3rd party country will elect to use the Chinese version even if it is much cheaper.
• In the long-term, this is bad news for everyone as the most value is generated by large compatible networks (like 4G) rather than two smaller incompatible ones.
• This means lower long-term growth for everyone as well as lower returns on investment over the next 10 to 20 years.