China is pushing to develop its personal chips – however the nation can’t do with out international expertise

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A technologist inspects a computer chip.

Sefa Ozel | E + | Getty Images

GUANGZHOU, China – China’s tech giants are pushing to develop their own semiconductors or chips, a move seen as an advancement towards China’s goal of becoming self-sufficient in critical technology.

In reality, China is still a long way from that, even if it is one step closer to self-sufficiency, according to a market expert.

Semiconductors are key components from smartphones to modern refrigerators and cars. They have also become a central focus of the broader technology battle between the US and China.

The world’s second largest economy has been investing heavily in boosting its domestic chip industry for years, but is struggling to catch up with its competitors in the US and other parts of Asia. In many countries, semiconductors are increasingly seen as the key to national security and as a sign of technological prowess.

This year there were a number of announcements from major Chinese tech companies about Chinese-made chips.

In August, Baidu launched Kunlun 2, its second generation artificial intelligence chip. This week Alibaba released a chip for servers and cloud computing. The smartphone manufacturer Oppo is also developing its own high-end processors for its cell phones, the Nikkei reported on Wednesday.

This is a step towards becoming more self-sufficient in semiconductors, but a small one.

Peter Hanbury

Partner, Bain & Company

While these companies develop their own chips, they may still have to use foreign tools to do so. But when it comes to manufacturing and the wider supply chain, China’s internet giants are still heavily dependent on foreign companies.

“This is a step in becoming more self-sufficient in semiconductors, but a small one,” Peter Hanbury, a partner at Bain & Company, told CNBC via email. “Specifically, these are examples of locally developed chips, but a large part of IP [intellectual property], Manufacturing, equipment and materials are still sourced internationally. “

The reason these companies develop their own chips is because they can make semiconductors for specific applications to differentiate themselves from their competitors.

Foreign dominated supply chain

A closer look at the peculiarities of the silicon under development shows the dependence of China on foreign companies.

Take Alibaba’s new Yitian 710 chip. This is based on the architecture of the British semiconductor company Arm. It is also built on what is known as the 5 nanometer process, which is currently the most advanced chip technology.

Baidu’s Kunlun-2 chip is based on the 7 nanometer process. Meanwhile, Oppo is reportedly working on a 3-nanometer chip.

This is where the challenge for China lies.

The country does not have a company capable of producing these leading semiconductors on this scale. You will only have to rely on three companies – Intel from the US, TSMC from Taiwan, and Samsung from South Korea.

China’s largest chip manufacturer, SMIC, is still years behind its companies in terms of production technology.

But it is not just produced. Even companies like TSMC and Intel rely on devices and tools from other companies for the production process.

In this area, power is less concentrated in the hands: ASML, a company from the Netherlands, is the only company in the world capable of building the machine that chipmakers need to make the most advanced chips.

“The semiconductor ecosystem is large and complex, so building self-sufficiency with such a wide range of technologies and capabilities is very difficult,” said Hanbury.

“In general, the most difficult area in building self-sufficiency will be the front runner. The challenge here is that you need both investment funds and the massive demands on technical know-how and accumulated experience.”

Geopolitical vulnerabilities

Read more about China from CNBC Pro

Huawei’s chips were made by TSMC. But when the US rule was introduced, TSMC could no longer make semiconductors for Huawei. That paralyzed his smartphone business worldwide.

SMIC is also on the US blacklist, which restricts its access to American technology.

These sanctions could be a cause for concern for Chinese companies that are now developing their own chips.

“For example, if there were efforts to block smartphone processors from being shipped, Oppo would have a domestically developed chip source, for example,” Hanbury said. “Most of these chips are still manufactured using international technology, however, so they could still lose access to their chips if the manufacturing partner for these chips were excluded from manufacturing.”

Concerns in the supply chain

Governments around the world today view semiconductors as an extremely strategic and important technology.

US President Joe Biden has called for a $ 50 billion investment in semiconductor manufacturing and research and has sought chip makers to invest in the country. In March, Intel announced it would spend $ 20 billion to build two new chip factories, known as fabs, in the United States

“This is about ousting China,” Trade Minister Gina Raimondo told CNBC in March.

Washington has tried to bring semiconductor manufacturing back to the US as it sees it as key to national security as the supply chain is heavily concentrated in Asia.

But like-minded nations are also trying to work together to ensure that their semiconductor supply chains are secure.

The leaders of the United States, India, Japan, and Australia, a group known as Quad, announced plans in September to launch a semiconductor supply chain initiative aimed at identifying vulnerabilities and gaining access to semiconductors and secure their vital components.

Much of the recent discussion about semiconductor supply chains has been sparked by a global chip shortage that has gripped industries from automotive to consumer electronics, and worries about their countries’ ability to secure semiconductors when needed.

Where is China now?

China may be ahead of its competitors in some areas of chip development, but at least in the short term, it will struggle to catch up with cutting-edge technology.

For example, SMIC can produce 28 nanometer chips on a large scale. These could be used in TVs or even cars – an area where China could do well, especially given the current semiconductor shortages.

However, to put things in perspective, TSMC is already working on 3-nanometer technology. SMIC would have to master the manufacturing processes that TSMC has been doing for years in order to be able to catch up.

“Even advancing rapidly on these existing technologies would not be enough to catch up and reduce reliance on the top position as the top position is constantly moving forward,” said Hanbury.

“It’s like running a race to catch a really fast runner while that runner is quickly running away from you.”

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