Huawei, the Chinese telecom heavyweight, is back in the headlines with its new Mate 60 series smartphones. After being hit by U.S. export controls, which took away its ability to use the latest semiconductors, and having been denied access to Google’s software since 2019, Huawei appeared to be fading. So the official launch on September 25 of the Mate series, and other products using Huawei’s new homegrown chips, was a big deal in the industry.

The new chip’s development means Huawei’s devices can once again compete with other companies operating within the current generation of mobile wireless capability. U.S. export controls had, since 2020, cut the company off from using its self-designed advanced semiconductors, which were previously produced at Taiwanese chip making giant TSMC’s foundries. 

Huawei has been clawing its way back into the consumer handset business ever since. While it has developed its own mobile operating system, HarmonyOS, designing the chips at the heart of smartphones, and manufacturing them at scale, has until now proven extremely difficult. What does the breakthrough mean, for U.S.-China relations, for China’s technology capabilities, and for the future of Huawei?

BACKGROUND

To unpack these complex questions, it helps to understand what got Huawei into this predicament. The company has long been a concern of the U.S. government, which feared its telecommunications equipment — and to an extent its consumer products — could be used for nefarious purposes. The U.S. has blocked domestic telecommunications companies from using Huawei gear for more than a decade, first via informal arm twisting, and then through more formal bans. 

Eventually, in 2019, the Commerce Department placed Huawei on its dreaded Entity List, citing a decade-old case alleging that the firm had violated sanctions on Iran. Even so, it continued to license some U.S. suppliers to continue providing semiconductors to the firm. 

The 2020 addition of export controls targeting Huawei, which cut the company off from TSMC, threatened to kill off its global consumer handset business. Smartphones require the most advanced semiconductors to ensure steady performance improvement, optimal energy consumption, and new features to induce consumers to keep upgrading. 

U.S. officials were also using export controls to restrict Chinese chip makers’ ability to manufacture the type of semiconductors used in smartphones. These so-called ‘leading edge’ chips can now be manufactured at the 3 nanometer (nm) level, a measure of the density of transistors on a chip: the lower the number, the higher the performance. On October 7, 2022, U.S. government officials sought to use this metric to ensure that the Commerce Department would not approve licenses for US suppliers to export the tools and machines needed to manufacture the most advanced chips to China. 

This type of end-use control was unprecedented, requiring a complex rewrite of regulations traditionally focused on components used in military applications or weapons of mass destruction. In practice, it meant limiting China’s chip giant, Semiconductor Manufacturing International Corporation (SMIC), from accessing tools used to make chips at 14 or 16nm or below. 

The goal was thus to try and restrict an entire country, China, from accessing a particular level of technology. Another clearly stated goal of U.S. policy, articulated by US National Security Advisor Jake Sullivan in October 2022: maintaining U.S. technology dominance at an absolute versus a sliding or relative level. 

LIMITATIONS

What could go wrong? Well, many things.

Export controls targeting Huawei and SMIC, were implemented over a period of years, and over two administrations — without a clear long-term plan, and with a smorgasbord of justifications. The Trump administration provided half a dozen reasons for placing Huawei on the Entity List, while formally basing the move on then-decade old Iran sanctions violations. Yet it never provided clear guidance to the Commerce Department on licensing, meaning it continued to issue dozens of licenses to Huawei’s U.S. suppliers. 

As for U.S. efforts to restrict China’s semiconductor manufacturing capabilities, different drivers were at work than simply trying to keep its smartphone industry down. Biden administration officials had concerns about China potentially using advanced semiconductors for its military modernization; and became obsessed with China’s potential to develop artificial intelligence (AI) systems that could eventually pose an unclear national security threat. 

These officials settled on restricting China’s access to the manufacturing equipment needed to produce advanced semiconductors, viewing this equipment as a “chokepoint technology.” Hence the heavy focus of the October 7, 2022 controls on semiconductor manufacturing gear. Despite these measures, Huawei has still managed to design a consumer-focused chip — likely using its own software — that can be manufactured using SMIC’s existing tools, which are in a mix of U.S., Dutch, Japanese, and Chinese systems. 

Huawei and SMIC’s progress demonstrates the problem with U.S. efforts to control the feature size at which SMIC can manufacture chips. No tools are designed “only” for a specific feature size: Those that SMIC is using for producing 28nm chips can, it turns out, actually be used at more advanced levels. 

Pushed by Huawei’s chip designers at its subsidiary HiSilicon, SMIC has managed to use its most advanced lithography tools — dense ultraviolet (DUV) gear from Dutch supplier ASML — to produce chips with some features at the 7nm level for the Mate 60 smartphone. SMIC seems to have begun doing this over a year ago, but has never confirmed details of its process. Previously, only TSMC was capable of this difficult technological feat, before it moved to using more advanced systems from Dutch company ASML — so-called extreme ultraviolet (EUV) lithography. 

Leading companies clearly prefer to use the most advanced technologies like EUV, particularly for high volume production of smartphone chips, as they help to reduce costs and allow for more advanced features. Because U.S. export controls mean that SMIC and all Chinese foundries do not have access to EUV equipment, they have been forced to push their existing lithography equipment towards the limits of their capabilities. 

BREAKTHROUGH FOR SMIC AND CHINA?

Is this a breakthrough for SMIC and China, and does it represent a failure of export controls? Answering these questions is complex, so bear with me. 

If SMIC and China can push existing lithography and associated tools to the limits of their capabilities, and produce 10s of millions of chips for Huawei phones, it would be highly significant. 

…U.S. controls have forced many Chinese companies to be more innovative. Huawei has had to develop more original designs, even if they are not using the most advanced manufacturing processes.

For Huawei, there are also some innovative features of the new chip. Its design arm, HiSilicon, has included some unique capabilities, such as parts that allow messaging via the Beidou satellite system, and telephone calls via China’s Tiantong satellite system. This is essentially 5.5G capability, as next generation 6G phones will include satellite communications as a major feature. The firm has also used sophisticated engineering techniques to improve energy consumption and battery life. 

On the other hand, Huawei and HiSilicon, were previously designing chips at the cutting edge, 5 and 3 nm levels: so designing a chip at a less advanced production point appears to be a step back.

Moreover, while recent estimates suggest that around 90 percent of the semiconductors in the Mate 60 are from Chinese producers, its advanced memory still comes from suppliers mainly based outside China, like Korean giant SK Hynix, and likely Samsung and Micron as well. This could be a major issue going forward, as China’s own NAND flash memory leader, YMTC, is on the U.S.’s Entity List and is struggling to obtain equipment and support for existing gear as a result of the 7 October controls. China’s DRAM leader CXMT has apparently been able to obtain equipment from U.S. and other suppliers, but is described as four generations and 8 years behind Micron, and thus unlikely to be able to meet Huawei’s requirements any time soon.

Long term, both Huawei and SMIC will remain somewhat disconnected from the global cutting edge of both hardware and software. Smartphone makers like Apple and Samsung usually have roadmaps that allow them to plan new designs and features, based on ongoing access to the latest design and manufacturing technologies, and close working relationships with key manufacturing giants like TSMC. Those relationships are not now available to the Chinese giants. 

EXPORT CONTROLS – SUCCESS OR FAILURE?

Short answer: it is a mixed bag, and depends on where you are sitting. 

Is the goal of export controls, for example, to prevent Huawei from manufacturing an advanced consumer device? No U.S. official has suggested that it is. Instead, they talk continuously of export controls being narrowly designed to target technologies that could be used for military purposes. Smartphone handsets would not seem to match this description, by definition. 

Going back to the driver behind the manufacturing tool controls, the key concern has been restricting China in AI-related chips. But here again, the vast majority of uses for advanced AI chips are civilian, not military. The original justification for punishing Huawei — Iran sanctions — meanwhile appears to be long forgotten.

As for slowing China’s technology development, the controls have worked to some degree, but only for advanced consumer devices like Huawei’s phones. A better way to look at it would be that U.S. controls have forced many Chinese companies to be more innovative. Huawei has had to develop more original designs, even if they are not using the most advanced manufacturing processes. The real impact may be with SMIC, which appears to have used a combination of Dutch, Japanese, and Chinese tools to manufacture the Mate 60 chip. 

Importantly, the U.S. controls have resulted in significant gains for other Chinese semiconductor manufacturers, such as Naura, SMEE, and AMEC, whose tools are now all capable of being used for 28 nm production, and are getting better by the day. In sum, if the goal of export controls was to slow China’s ability to make advanced semiconductors, it has done so for Huawei and SMIC; but as a whole has enabled major advances in Chinese firms’ capabilities. 

The toughest bottleneck for China remains the capability provided by EUV tools, which are currently only manufactured by the Netherlands’ ASML. These tools are colossally complex, with thousands of suppliers, dozens of complex niche technologies, and amazingly complicated systems integration. The big question is whether the Chinese system can produce an EUV machine that is anywhere near the systems ASML builds, which have taken decades to develop. 

Huawei and other Chinese organizations are currently researching pieces of the EUV puzzle, and there have been some breakthroughs. But it will almost certainly be four to five years before a Chinese firm can get anywhere near a commercially viable version of a production level system. 

The question then becomes, can SMIC and other companies continue to extend the use of existing tools, in the interim; and can companies like Huawei continue to use clever designs and systems engineering approaches to squeeze out newer generations of chips to power competitive smartphones and other devices? The jury will remain out on this for some time. 

THE DOWNSIDES FOR AMERICA

There is no doubt that U.S. export controls, a messy and inefficient tool being used in unintended ways, have produced more harm than benefit to its national security. In addition to pushing Chinese companies forward in the innovation cycle, the controls have also meant the progressive ‘designing out’ of U.S. technology in China. 

This has already resulted in billions of dollars in lost revenue for U.S. tool makers, undercutting their R&D budgets, their future market growth, and — potentially — their competitiveness. U.S. semiconductor product companies like Nvidia, AMD, Intel, and Qualcomm have all lost market share in China, as Chinese companies favor domestic sources, and will continue to do so. Other U.S. companies like Micron have become the target of Chinese retaliation, and are also facing billions in lost revenue and market share. Even Apple has come under pressure, due to informal restrictions on government use of iPhones. 

…no one in the U.S. government appears to know how to do a cost-benefit analysis of the overall impact of export controls on China, and assess the U.S.’s national security gains

The national security gains from all this remain murky, because of the differing and unclear goals of the export control measures taken. If Huawei can produce a commercially competitive smartphone that also leads to major gains for domestic tool makers, what is the U.S. national security gain? If SMIC gains experience with using advanced techniques to manufacture sophisticated designs from companies like Huawei, is that a national security issue? Chinese companies can still acquire advanced GPUs, while already capable GPU companies in China will only get better, driving China’s AI development forward. What are the national security issues here that are being “solved” via the controls? No one can say. 

The big loser from the U.S. approach appears to be the global industry. Results so far suggest the export controls have introduced huge inefficiencies as companies adjust and markets fragment. Foremost among the losers are the individual companies involved — mostly U.S. technology and innovation leaders. 

The saga so far has, then, exposed that no one in the U.S. government appears to know how to do a cost-benefit analysis of the overall impact of export controls on China, and assess the U.S.’s national security gains. That is the ultimate meaning of the Mate 60.

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