China’s semiconductor genius: “Our chip makers are five generations behind”

The Chinese semiconductor industry is years behind the competition. This is said by none other than Gerald Yin, founder of the leading Chinese chip machine manufacturer AMEC. Yin is considered the shining light of China’s semiconductor industry. But he has been seeing black clouds gathering over his homeland for some time, the South China Morning Post reports.

Yin came to Silicon Valley in 1984 and worked for twenty years at American semiconductor companies such as Intel and Applied Materials (AMAT), which designs equipment for the production of chips. He has 74 patents registered in the US, he has a US passport and the Wall Street Journal called him a “semiconductor genius”.

In 2004, he returned to China and founded Advanced Micro-Fabrication Equipment (AMEC) company, which aims to make Chinese chip manufacturing machines competitive.

The latest US sanctions are the ‘deadliest’

Speaking at the annual Chinese semiconductor industry conference this month, Yin said the US’s real goal is to leave China’s microchip industry at least five generations behind the most advanced manufacturing technologies.

With its export ban, the Biden administration wanted to pin China’s semiconductor manufacturers to 28 nanometers (nm) as the state-of-the-art chip manufacturing process, while world leaders produce significantly faster and more efficient chips in the 3 to 14 nanometer process.

Market leader Taiwan Semiconductor (TSMC) and Samsung from South Korea can now produce the latest generation of 3 nm chips – albeit with a high rejection rate. There are about five generations between 3nm and 28nm chips. Yin therefore described the recently tightened US sanctions against Chinese semiconductor manufacturers as the “deadliest” yet.

Microchips can be found in all technical devices, from children’s toys to cruise missiles. The US wants to prevent China from acquiring “sensitive technologies” such as state-of-the-art semiconductor machines, artificial intelligence and quantum computers to arm itself militarily.

China can build modern chips, but…

How far China actually lags behind in semiconductor production is not entirely clear: the US wanted to stop Chinese chip manufacturers at the latest with the 14-nanometer process. This is the most advanced production process that Chinese companies have ever put into series production.

But exactly one year ago, the first 7 nm chip from China electrified the entire semiconductor industry – and Washington. China’s largest chip manufacturer, Semiconductor Manufacturing International Corporation (SMIC), has succeeded in developing a modern 7 nm chip similar to one from Taiwanese technology leader TSMC. Senior SMIC managers previously held senior positions at TSMC.

However, China was still a long way from mass-producing the chip last year. Experts estimate that SMIC could only use 15 percent of the chips produced; So 85 percent would be scrap. This is not an economical way of producing.

But now there are more and more reports that Huawei will start mass production of self-developed 5G chipsets for smartphones in the advanced 7-nanometer process at chip manufacturer SMIC this year. China is said to have narrowed the gap significantly in a short period of time.

It must be said, however, that SMIC will initially not be able to produce more than two to four million 7nm chips per year, as US sanctions prevent Chinese companies from accessing the best chip production machines from abroad. Chinese chip manufacturers can also produce modern 7 nm chips with older machines, but only relatively slowly and with high error rates.

Compared to the production volumes of TSMC and Samsung, which use the very latest production techniques, modern chips ‘Made in China’ are a drop in the ocean for the time being.

The US plan is working – for now

The US plan is currently working, Yin says, because China, despite its best efforts, still has to buy 85 percent of key chip manufacturing machines, some of which cost more than 100 million francs, from the Netherlands, the US and Japan. With Western sanctions, gradually tightened in recent years, these purchases have been increasingly restricted and the Chinese chip industry has been thrown back years.

The Chinese problem: About 80 to 90 percent of the most modern chip machines in the world come from the Dutch ASML group. No other company can provide exposure machines of the same quality in comparable quantities, and without them it will not be possible to produce the latest generation chips in China for the time being.

The US therefore exerted strong pressure on the Netherlands and ASML to prevent the latest generation of chip machines from reaching authoritarian countries such as China. This is possible because ASML’s machines also contain knowledge from the US.

In March 2023, the Dutch government imposed a corresponding export ban to China. From September, exports will be further restricted. ASML is then only allowed to sell older machines to Chinese manufacturers that are in principle suitable for 7 nm production, but work more slowly and have a higher rejection rate.

ASML dominates the market for lithography systems because it is the world leader in the use of so-called ‘Extreme Ultraviolet Radiation’ (EUV). This technology is necessary to produce high-quality chips.

Samsung and by far the largest contract manufacturer of chips, Taiwan’s TSMC, therefore rely on ASML machines for their smallest and most powerful chips, which are used in smartphones, computers and Nvidia graphics cards, for example.

Chinese machines are often inferior to those of foreign competitors, said Li Jinxiang, deputy secretary general of the Association of Semiconductor Machinery Builders. ASML’s exposure machines, which cost around USD 140 million, are therefore held back by the too slow Chinese technology. For example, Chinese machines for coating wafers – the starting material for microchips – could not keep up with ASML’s machines, slowing down the entire chip production.

The (self-)critical tones serve a purpose: when industry representatives publicly complain about problems and difficult framework conditions, it is always a nod to politicians: Chinese semiconductor companies, just like their rivals in Taiwan, South Korea, Japan, the US and Europe further state subsidies in the billions.

“We can’t accept that”

For the time being, China remains dependent on Western patented chip design and high-precision machines. Another problem: because of the US sanctions, US citizens are no longer allowed to work on modern semiconductor technology for Chinese companies without official approval. This could pose even more problems for China, “because many specialists are Chinese natives who have naturalized after studying and working in the US – and are likely to be reluctant to give up their US passports,” according to the NZZ.

Yin is nevertheless belligerent about the US sanctions: “We cannot accept that,” he said in his speech. He believes China will have a competitive semiconductor machine industry in a few years. This is thanks to an army of Chinese who, like him, have worked for US companies over the years and decades and have returned in no small part because of US sanctions.

Conversely, the semiconductor industry in the US has a shortage of skilled labor everywhere. Like the EU, the US is trying to expand domestic chip production with billions in subsidies. The lack of skilled labor is the biggest problem on both sides of the Atlantic. Semiconductor machines are more complex than a space shuttle and require constant maintenance.

In the US, the semiconductor industry expects 67,000 jobs in chip manufacturing alone to be unfilled by the end of this decade and new semiconductor manufacturing plants to come on line later than planned.

The state-sponsored development of the semiconductor industry in China is also leaving its mark in Europe: “More than 30,000 professionals from European technology companies have moved to China over the past 20 years, bringing home important industry knowledge,” reports financial portal Bloomberg.

U.S. officials have been warning for years that “China is encouraging intellectual property theft through a massive system of cash subsidies, tax breaks, and other perks to entice overseas Chinese to bring expertise and trade secrets.” China dismisses such reports as “false information” that served only to “pollute” the country.

Meanwhile, chip development is progressing rapidly: market leader TSMC is already planning to start test production of 2 nm chips, which will probably appear in smartphones and laptops in about two years. The Chinese dragon could grit its teeth even longer in this generation.