China’s Semiconductor Offensive: The SMIC-Huawei Axis
That’s why China has stepped up efforts to become technology independent as Semiconductor Manufacturing International Corporation (SMIC) and Huawei, the country’s biggest vendor, drive the process. It reflects both the strength of China’s reaction to US sanctions and the scope of its ambitions for reshaping global semiconductor industry.
Huawei, crippled by U.S. sanctions that began in 2019 and aimed at limiting the company’s access to advanced technology such as semiconductors and software needed to run its smartphone business, has announced that it is launching its operating system in response to the U.S. sanctions. With Huawei dropping to negligible levels of market share globally, from a peak of 18% in 2018, the company had no choice but to pivot. At the heart of its recovery is its relationship with SMIC, a company that has become a critical wheel in China’s semiconductor ecosystem.
SMIC: Navigating Constraints and Scaling Up
It is nothing short of remarkable what SMIC has done. SMIC was denied access to using cutting edge extreme ultraviolet (EUV) lithography machines because they are protected by U.S. export controls but they developed 7nm chips anyway using older deep ultraviolet (DUV) lithography. The chips power Huawei’s Mate 60 Pro smartphone, which has sold more than 1.5 million units in its first six weeks, a symbolic victory for China as it looks to limit the impact of the tech war.
SMIC is investing heavily in its capacity to keep this momentum going. Nevertheless, Globalfoundries announced last week that it will build a fab in China to churn out 300 mm wafers, initially aimed at the 28nm and older nodes that supply nearly 50 percent of global chip demand. Although not as sophisticated as advanced chips, these nodes are necessary for a raft of devices pivotal to Huawei’s IoT strategy, from IoT sensors to smart appliances.
Huawei’s Strategic Pivot: Beyond Smartphones
Huawei’s evolution is based on HarmonyOS, a device ecosystem driven operating system. The strategy of its 1+8+N places the smartphone right at the center of Huawei’s interconnected ecosystem —consisting of its own devices (such as tablets and smartwatches) and third party IoT products. While not the cutting edge chipmaking any more, SMIC's chips are enough to power this vision for Huawei: Huawei is looking to become less dependent on foreign suppliers and to achieve major goals, including having HarmonyOS on 200 million phones and 100 million third party devices by 2024.
The Geopolitical Implications
The SMIC-Huawei partnership represents a part of a much larger strategic battle for control of semiconductor supremacy. With advanced chips viewed as key to U.S. technological and military supremacy, the U.S. has tried to suffocate China’s progress via export controls and sanctions. Yet, this approach has exposed a key vulnerability: Mature nodes are then under estimated. These chips are technologically modest, but quite indispensable for those industries, including automotive manufacturing and consumer electronics.
Instead, by concentrating on mature node production, SMIC is setting itself up to rule the roost in the hottest segment of the semiconductor market. But it also allows Huawei to rebuild part of its competitiveness and China to continue being a contender in the global chip supply chain.
Challenges and Risks Ahead
SMIC and Huawei face a long road ahead. SMIC’s 7nm chips represent a big step for the company, but it is well behind industry leaders such as TSMC and Samsung that are shipping 3nm and 5nm chips to customers. In addition, SMIC is also dependent on DUV lithography, which restricts its capability to scale up production of advanced nodes, exposing it to supply constraints as demand for Huawei’s products rises.
The problem for Huawei now is how to climb out of the reputational deep hole it's been accused of falling into by U.S. claims of espionage and return to its position in international markets. The model promises much, but achieving the scale of Apple and Google will require continued investment, both in hardware and software.
A Broader Realignment
So the partnership between SMIC, China’s biggest chipmaker and Huawei, its largest potential customer, is symbolic of China’s commitment to forge its own technological future. It also highlights how U.S. sanctions are less and less effective when innovation in a technologically advancing world is spread around the world. China’s bet on domestic capabilities is not mere adaptation to new realities, but rather reshaping them.
The contest, these days, is the race to the future of global semiconductors. The U.S. strives to retain its dominance, but the development of firms such as SMIC and Huawei indicates that the power parity in this critical industry beyond is nowhere in sight. In the coming years, we're likely to see more than technology competition, but a larger redefinition of economic and geopolitical alignments shaped by semiconductors.
Additional Read
Chu, M.C.M., 2024. China’s defence semiconductor industrial base in an age of globalisation: Cross-strait dynamics and regional security implications. Journal of Strategic Studies, pp.1-26.
Dobberstein, L. (2024). Teardown confirms Huawei's Pura 70 contains SMIC 7nm process node. The Register. Available at: https://www.theregister.com/2024/04/29/teardown_confirms_huaweis_pura_70/ [Accessed 2 December 2024].
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