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Huawei's 7nm Chip: All Hands on Deck
Huawei's 7nm chip raises questions about U.S. policy and national security. It is to be confirmed if SMIC has violated US export restrictions but this will be a crucial event to follow.
Recent headlines are buzzing with news of Huawei's latest 7nm chip, which has now been shown to be produced in collaboration with China's leading chip manufacturer, SMIC. While some are interpreting this development as a sign of China's growing independence in the semiconductor sector—a "slap in the face" to the U.S., as one commentator put it—closer inspection reveals a more nuanced picture.
The Intricacies of SMIC's Involvement
Firstly, it's crucial to note that Huawei is currently on the U.S. entity list, restricting its ability to engage in trade with American companies or companies that use American technology. SMIC, which helped manufacture the new chip, also faces scrutiny due to the October export restrictions which limit their ability to purchase sub-16nm chip making equipment.
We have written extensively on how Chinese chip making, particularly SMIC, exclusively uses Western equipment for sub 90nm manufacturing. This dependence places SMIC well over the red line if they are selling to Huawei without US licenses. Therefore, two scenarios are possible: either SMIC has violated U.S. export laws, or the Biden administration has granted specific permission for this endeavor.
Not a 'Breakthrough' But Resuming Progress
Despite the fanfare around Huawei's latest 7nm chip, it's important to temper expectations and view it for what it truly is: not a "breakthrough," but rather a resumption of progress in an industry already capable of such feats. Huawei had the know-how to design 7nm chips even before the imposition of trade restrictions. Additionally, SMIC had the equipment and tools to be manufacturing 7nm chips at a low yield well before the restrictions. The new phones from Huawei have sold out in a short period of time which could indicate that SMIC’s production capacity and stock is limited.
Unpacking the Biden Administration's Role
The Biden administration approved more than $23 billion worth of licenses for exporting U.S. goods and technology to blacklisted Chinese companies in the first quarter of 2022 alone. To be specific, around 69.9% of the total license applications were approved, while only 8% were denied, and the rest were returned without action. So it seems plausible that the US could have allowed Huawei’s new chip to be manufactured by SMIC. The question, then, is why the Biden administration might be willing to approve such licenses.
It's important to remember that this is not the first time the U.S. has been down this road. The Trump administration demonstrated similar ambiguity with ZTE, another Chinese tech firm. In 2018, the U.S. Department of Commerce imposed a seven-year ban on American firms selling parts to ZTE, which had severe repercussions on the company's ability to operate. However, as ZTE teetered on the edge of collapse, the Trump administration lifted the ban, citing job losses in China and a negotiated agreement that included a $1 billion fine and oversight by U.S. compliance officers.
The Political Risk for Biden
Either way, this situation puts the Biden administration in a precarious position, raising questions about political calculations versus national security priorities. We see three distinct possibilities, each with its own set of implications for the Biden administration:
SMIC Violated Export Restrictions: If it emerges that SMIC has indeed violated export restrictions, the U.S. will find itself in a position where it must respond. One possibility is that this is merely a limited stock sale from Huawei, potentially timed to coincide with Raimondo’s visit to China as a provocative move. On the other hand, if this turns out to be a significant break in stance from China, ignoring U.S. restrictions altogether, it could mark a new chapter in Sino-American relations that demands immediate and decisive action from the Biden administration.
Administration's Approval for Diplomatic Reasons: If it comes to light that Biden explicitly approved this technological endeavor to maintain diplomatic relations with China, several questions arise. Could it be an attempt to stabilize economic relations in the interest of securing reelection? Or was it a quid pro quo arrangement for other diplomatic or strategic gains? Each possibility suggests a complex calculus that could place political, economic or diplomatic interests above national security.
Bureaucratic Roadblocks: Head of the Department of Commerce, Undersecretary Estevez has made comments that suggest bureaucratic processes could slow down regulatory actions (quotes below). If this turns out to be the case, it may provide some cover for the administration, though questions would still linger about the effectiveness of U.S. export controls and their enforcement.
Conclusion: Much Still to Uncover, But a Crucial Event to Watch Closely
While the collaboration between Huawei and SMIC might seem like a significant milestone for China's semiconductor industry on the surface, a deeper dive reveals that Chinese chip-making is still substantially dependent on Western equipment and licenses. Until that changes, celebrations about China's 'independence' in this sector are premature at best.
For the U.S., this development serves as a complex geopolitical chess piece, with potential implications for future trade relations, technology leadership, and domestic politics. As we've seen, the emergence of Huawei's new 7nm chip is far more than a simple technological advancement; it's a multifaceted issue with far-reaching implications. With SMIC, Huawei and the U.S. Department of Commerce yet to comment, it is an event worth following closely.
Exchange between Undersecretary Estevez and Chairman McCaul
"China in that regard I'm glad you mentioned the Iranian drones that are in Crimea that the Ukrainians, I just got back in from theater, cannot attack the Iranian drones without the longer-range artillery. But having said that, components were found in these Iranian drones that were from the United States of America. And also the Spy balloon and also the Hypersonic, built on the backbone of American Technology. We got to stop doing this, they steal it; we don't have to sell it to them. We got a snapshot of your, Mr. Estevez, from January 2022 to March 2022. BIS denied 8% of license applications and approved more than 23 billion dollars' worth of license applications to the PRC companies on the entities list. How does this align with your statement that quote 'we are doing everything within BIS's power to prevent sensitive U.S Technologies from getting in the hands of PRC Military Intelligence services or other parties'?"
"First, let me quickly address the Iranian drone thing. As you know, we've put companies in Iran on the entity list, invoking the foreign direct product rule so that imports that are American-branded, not necessarily made in America, also can't go to that program. For the point on licensing now, of course, it's an interagency process that is done with my colleagues in defense, State, and energy. We have specific licensing rules; the entity list is not a blanket embargo. So going on the entity list may have a particular rule. In the case of Huawei and SMIC, there were particular rules. SMIC is now, of course, subject to the rule that we put out in October on Semiconductor manufacturing licensing rule. The previous administration that still stands for Huawei allows things below 5G, below the Cloud level, to go. And I will say that all those things are under assessment."
The move also raises questions about SMIC’s compliance with US rules stipulating that any company intending to supply Huawei using American technology — which is present throughout SMIC’s operations — must obtain Washington’s approval.
Representatives for Huawei and SMIC did not respond to requests for comments about the phone’s specs since its release last week. Huawei has said only that the Mate 60 Pro is the most powerful Mate device yet. The Commerce Department did not respond to queries about whether SMIC’s supply of 7nm chips to Huawei violates sanctions.
“It’s a breakthrough, but not unexpected. SMIC already showed it could make simpler chips at 7nm, and this is an advancement on that previous work,” Patel said. Such progress is feasible because older tools, nominally designed to make lesser chips, are still capable of making more advanced semiconductors, Patel said.
A variety of innovative techniques can be deployed to shrink the connections beyond what might be theoretically possible. The most common approach, called multi-patterning, was first conceived 40 years ago and is even used by global leader Taiwan Semiconductor Manufacturing Co. Instead of exposing a slice of silicon to light just once in order to mark out the circuit design, this step is done many times. SMIC, like TSMC before it, can achieve 7nm by running this lithography step four times or more, Patel said.
There is a downside. This increases the number of tools required — four sets instead of one — raising the cost and slowing manufacturing throughput. Yet such extra expenses are marginal, and can be ameliorated by efficiently managing the production process.
The bigger implication is that the restrictions, as they’re spelt out by the Commerce Department’s Bureau of Industry and Security, don’t match their purported goal. The US administration has in effect written rules to curb the means (the equipment), but defined them by the ends (the final product).