[NEWS ANALYSIS] Huawei's 'breakthrough' questioned as China still lags in chip space

Huawei's Mate 60 Pro showcases China's progress in chip technology but also reveals its limitations due to U.S. sanctions.

Pricing details of Huawei's Mate 60 Pro smartphones are seen on smartphones displayed at a Huawei store in Shanghai, China September 8, 2023. [REUTERS]

Huawei's Mate 60 Pro was Beijing's demonstration to Washington of its technological independence, bypassing U.S. sanctions that insistently curbed China's access to advanced chip technology for the past three years.

The U.S. government, apparently alarmed, is seeking more information about the chip inside the phone, raising concerns for Korea's Samsung Electronics and SK hynix that their operations in China might be jeopardized should American sanctions against China become tightened.

The newest 5G smartphone was powered by the Kirin 9000s processor which was designed by HiSilicon and manufactured by SMIC. HiSilicon is Huawei’s affiliated chip designer and SMIC is China's top contract chip manufacturer.

The chip was made on 7-nanometer nodes, according to a teardown conducted by Canada-based tech consulting firm TechInsights, a process technology that SMIC had not succeeded in mass producing. It was a leap for China's chip industry for sure, given that it managed to produce 7-nanometer chips without using extreme ultraviolet (EUV) lithography machines.

Despite the progress, however, the Mate 60 Pro also showed that China's chip technology is still lagging behind, hindered by U.S. sanctions which kicked in at a time when the country was on a trajectory towards becoming a leader in the chip industry.

The 7-nanometer chip is approximately five years behind the leading edge and its yield is expected to remain at 50 percent, according to Nomura Securities analyst Donnie Teng.

"The Mate 60 Pro shows China's technology has stepped up showing that it can make a 7-nanometer chip with old machines," says Kim Yang-paeng, a senior researcher at the Korea Institute for Industrial Economics and Trade.

"But the yield rate and profitability remain questionable. Even if it is a Chinese company backed by massive subsidies, it won't be easy to make a business out of it. China has the example of Tsinghua Unigroup."

People walk past a Huawei store with advertisements for the Mate 60 series smartphones, at a shopping mall in Beijing, China August 30, 2023. [REUTERS]

Not a breakthrough

The 7-nanometer chip created by SMIC did not come out of the blue.

The contract manufacturing firm began developing the 7-nanometer, or what it calls the N+2 technology, in 2020. The commercial production of N+1, which is an inferior version of the N+2, is speculated to have commenced at least before 2022 as they were found in MinerVa's bitcoin mining processors.

"It was actually a disappointment to see SMIC release its 7-nanometer chips two years after it said it was developing it," said Jeon In-seong, a semiconductor specialist who authored "The Future of the Semiconductor Empire."

"There was a drag for China since the sanctions."

SMIC is speculated to have succeeded in making the 7-nanometer chip with DUV (deep ultraviolet) machines, an outdated machine usually used for manufacturing simpler chips above 10-nanometer.

EUVs are exclusively manufactured by the Netherlands' ASML which joined U.S. sanctions from early on and suspended exporting the pricey machine to China.

"It is possible to make 7-nanometer or even more advanced chips with DUV but it is a matter of yield and profitability," says researcher Kim.

TSMC, in fact, utilized DUVs in manufacturing during the early stages of its 7-nanometer chips.

"With DUVs, it will be hard for SMIC to ramp up its production because the more you make it and run the factories, the more money you will lose."

SK hynix chip found on chips deployed on Huawei's Mate 60 Pro [TECHINSIGHTS]

Mysterious SK hynix chip

The mysterious placement of SK hynix's DRAM and NAND memory chips on the Kirin 9000s also showed that China has limits in manufacturing advanced memory chips for mobiles.

As confirmed by TechInsights' teardown, the Mate 60 Pro was deployed with SK hynix's memory chips which the Korean company firmly denies directly sourcing.

SK hynix said it has stopped doing business with Huawei since the U.S. sanctions took effect and has opened a probe into the case.

Industry experts point out that Huawei deploying memory chips from external sources is not a coincidence.

"People think memory chip manufacturing is relatively easy compared to developing processing chips," says Jeong.

"That is not the case. Of course, simply making a memory chip that works can be done by even a university student, but making it competitive in the market is another issue. Memory chips are a business that is drastically affected by cost. Being able to make more memory with the same cost is what's hard. And China is not yet up to that level."

Industry insiders speculate SK hynix chips have been sourced to Huawei through a third party which is a common way of doing business in the semiconductor industry, although how the third party averted SK hynix's monitoring system remains a mystery.

"Usually because of this kind of risk, companies regularly monitor who the end users are when they are doing business with such sales agencies and I am sure SK hynix has that kind of system," said an industry insider who wished to remain anonymous.

"It should not be just SK's memory chip Huawei used, Samsung or Micron's similar memory chip should be somewhere out there on one of the Mate 6 Pros."

Samsung Electronics' NAND flash chip factory in Xi'an in China [SAMSUNG ELECTRONICS]

What it means for Korea

Despite setbacks, China did make progress in securing its own chip technology and it is alarming the United States, which may result in additional sanctions.

That would hurt Korean chipmakers — Samsung Electronics and SK hynix — running factories in China.

The concern was apparent among investors when SK hynix' shares nose-dived by more than 4 percent on Friday when the founding of its chips in the Huawei phone broke out on media outlets.

The U.S. government said it will seek more information about the Huawei chip to see if any of the related parties violated the American restrictions against China.

Samsung Electronics and SK hynix had made hefty investments in China, running factories that make NAND flash and DRAM chips in the country.

The two companies were temporarily exempted from U.S. export controls last year which allowed them to bring U.S.-manufactured equipment to their factories in China.

That grace period is set to expire in October, although a high-ranking U.S. Commerce Department official indicated in June that the two companies’ exemption should get extended.

"Direct sanctions against SK hynix is unlikely because it did not directly do business with Huawei but something additional might be imposed on the Chinese market," said researcher Kim.

"If the U.S. decides to widen the range of U.S. equipment banned in China, Korean chipmakers' factory operation in China should get affected."

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]