HUAWEI’S MATE 60 PRO

• Huawei has been riding the wave of its recent success in the launch of its flagship smartphone capable of 5G, the Mate 60 Pro. Huawei was effectively barred from obtaining semiconductors capable of 5G or the equipment necessary for their manufacturing. The breakthrough came with the presumably successful manufacturing of the 5G capable chip that is used in this phone with the 7 nanometre (nm). The 7nm process requires sophisticated machines and manufacturing equipment that was previously thought China was not in possession of.
  
  
• The Mate 60 Pro utilises the Kirin 9000s chip, which was developed by Huawei’s HiSilicon and manufactured by the Semiconductor Manufacturing International Corp. (SMIC), a partially state owned manufacturing company, using the 7 nanometre (nm) manufacturing process. To put this in context, Apple and Samsung started releasing phones with 7nm chips back in 2018, however owing to sanctions and export controls imposed during the Trump presidential era and subsequently under the current Biden administration, Chinese companies found it extremely difficult to obtain semiconductor chips with 5G technology or the requisite equipment needed to manufacture them.
  
  
• The 7nm chips brings SMIC closer to those global firms that mass manufacture 3nm and 4nm chips. This may not be the state of the art technology but it is a significant breakthrough within the context of the enormous sanctions levied by the US. Taiwan Semiconductor Manufacturing Company (TSMC), the leader in chip-making already mass produces chips with 3nm and 4nm process with the 2nm process in development.

History of sanctions

• In May 2019, Huawei was added to the U.S. entity list due to its violations of U.S. sanctions for selling technology to Iran and its obstruction of justice. A foreign legal person named in the “entity list” is subject to license requirement for export/import. The move was aimed to prevent Huawei from using U.S. technology against U.S. national security interests, initially focusing on 5G infrastructure rather than smartphones. However, it expanded to include concerns about Huawei's use of U.S. technology to bypass export controls, particularly in chip design and manufacturing.
  
  
• This export control action marked a shift in Chinese national security policy, with semiconductor self-sufficiency becoming a top priority, receiving substantial government support and the attention of Chinese leaders. Reducing supply chain dependence on US also became a priority for various Chinese chipmakers, with companies like Yangtze Memory Technologies Corporation (YMTC) actively working to reduce their reliance on U.S. equipment and partners.
  
  
• Subsequently, department of commerce officials realised the sanctions were not having the intended effect as private companies like Intel, Qualcomm etc. continued to engage in providing chips to Huawei as these chips were not produced in US and were not subject to licensing requirements. In May 2020, updated export controls imposed a modified Foreign Direct Product Rule (FDPR) to prevent foreign entities from aiding Huawei and its chip design subsidiary, HiSilicon, in creating chips directly using U.S. technology. As a result, Huawei's access to semiconductors was significantly restricted, leaving it with weak options such as less advanced chips with U.S. licenses, chips produced and assembled outside the U.S. not subject to U.S. rules, and finally, a substantial reserve of essential chips purchased while they were still legal. Chinese chip manufacturers willing to cooperate with Huawei generally were not up to mark and inferior compared to what Huawei used.
  
  
• Huawei saw significant decline in revenue in the aftermath of the sanctions, in 2021, the company reported loss of revenue, however profits were on the rise. In the year 2022, the company reported a decline in profits and the revenues remained flat. Huawei attributed it to factors like pandemic-related lockdowns, U.S. sanctions, increased commodity prices due to supply-chain disruptions, higher investments in research and development, and a prior year's profit boost from selling its mobile phone branch, Honor.
  
  
• The Mate60 Pro signifies Huawei's return to the 5G smartphone market, indicating that the impact of Trump-era controls is diminishing. Huawei is reconfiguring its supply chain by relying more on its HiSilicon subsidiary for chip design and SMIC for manufacturing, instead of TSMC in Taiwan. The company's revised 2023 sales projections anticipate shipping approximately 40 million smartphones, with half using new 7 nm chips. In the wake of the release of smartphone, many suppliers for Huawei along with SMIC saw a significant jump in their share prices.
  
  
• Huawei has become a symbol of the tech competition between the U.S. and China, highlighting how Chinese tech firms adapted to U.S. efforts to restrict China's access to crucial technologies. American officials have long suspected Huawei's close ties to the Chinese government, expressing concerns that its technologies, especially 5G telecommunications equipment, could potentially be used for surveillance. Huawei, however, denies any such state connections.
  
  
• In China, private enterprises are required to have local CPC cells in their offices; sometimes the presence of the party takes the form of “special management shares” that allows the party to have a board seat and the right to veto significant decisions made by private companies. Most executives working in these enterprises have been co-opted as party members as well. A parliamentary committee in the UK also found close links between Huawei and the CPC.
  
  
• Furthermore, regulatory authorities in the US were aware of Huawei’s alleged activities back in 2019 itself when they voted to impose new restrictions over their equipment. The Biden administration is investigating Huawei over suspicions that U.S. cell towers equipped with its technology could capture sensitive information from military bases and missile silos and transmit it to China. The Commerce Department began the probe in 2021, seeking information on Huawei's policy regarding data captured by its equipment. Huawei’s Chief Finance Officer (CFO) was arrested in Canada over request by US in connection with allegations of bank fraud only to be released after intense negotiation with the Chinese.

The manufacturing conundrum

• Chinese firms, including SMIC, have advanced ultraviolet lithography (DUV) capabilities, allowing them to create integrated circuits on semiconductors using light beams. While DUV lithography is typically used for producing chips ranging from 28 nm to 14 nm, it can create 7 nm chips through a method called "multi-patterning," involving multiple exposures to DUV lithography to achieve finer patterns down to the 7 nm level.
  
  
• However, the DUV process is not cost-effective and lacks requisite efficiency in producing these chips at large scale. This approach yields imperfect results, with a potential wafer yield as low as 15 percent, leading to higher chip costs and reduced commercial viability. Moreover, DUV lithography machines have limitations in printing fine patterns, necessitating multiple uses to achieve sub-14 nm nodes. For example, in SMIC's process, a single chip may require three to four uses of the DUV machine to reach a 7 nm result. As machine usage increases, energy costs and maintenance become significant concerns.
  
  
• The absence of extreme ultraviolet (EUV) lithography machines, which are ideal for producing 7 nm and smaller chips, in China is due to the lack of export licenses from Dutch-based ASML, the sole manufacturer of EUV equipment. The Trump administration waged a massive effort in pressuring the Dutch government to prohibit transfer of EUV machines to China. TSMC had started producing semi-conductor chips with 7nm process back in 2018 itself using the EUV lithography machines manufacturing 1 billion chips by 2020. For China to achieve this feat with DUV machines will be a herculean task if not impossible. China has already started working on developing its own EUV machine indigenously in order to eliminate dependence on US.
  
• However, China's quest for advanced semiconductor technology faces multiple challenges, with its investments in the domestic semiconductor industry encountering issues related to COVID-19, ineffective subsidies, and corruption. Despite significant funding and political emphasis, China has struggled to achieve indigenous semiconductor production. The primary challenges are not solely technical but also political and institutional, including top-down innovation, a lack of oversight, and perverse incentives for businesses and local governments. China's focus has been on applied and production aspects of semiconductors rather than basic science, which is crucial for original innovation. While China may make incremental improvements, major breakthroughs remain elusive due to systemic constraints.

The aftermath

• Administration officials in the United States were caught off-guard with the announcement of the smartphone and the subsequent information about the advanced nature of the chip embedded in the phone. The US National Security Advisor (NSA), when asked about the smartphone and the chip, stated that he will refrain from making comment until relevant information is collected. The news also alarmed Republican lawmakers who urged the administration to undertake a serious crackdown on Huawei and SMIC. This incident has highlighted the capabilities of Chinese semiconductor industry and the persisting problem in the US policy of sanctions. Officials in US were, however, quick to point out that they found no evidence that China is capable of producing these chips at scale.
  
  
• The United States has been trying to purge Huawei from its systems ever since allegations of espionage surfaced. However, the "rip and replace" program, initiated by Congress in response to concerns over Chinese hardware threatening America's internet, has become a costly and ineffective effort. The program was meant to remove Chinese equipment, primarily from Huawei and ZTE, from U.S. networks due to fears of spying and cyberattacks. However, as President Biden's first term nears its end, it's facing challenges as only 2 percent of approved projects have been completed, and 15 percent haven't even started.
  
  
• Officials in US launched an investigation into the alleged theft of technology or violation of export controls that enabled Huawei to achieve this feat. The waves were also felt in South Korea after it was revealed that chip manufacturing company SK Hynix's LPDDR5 DRAM chip and NAND flash chips were used in the new Mate 60 Pro, although SK Hynix has stopped selling these chips to Huawei since the advent of export control regime enacted by US. The company has initiated an investigation to understand how this happened. Analysts speculate that Huawei might have had leftover inventory or obtained the chips through various Chinese distributors.
  
  
• Recently it was reported that DUV technology from ASML was used to manufacture the new chip prompting. ASML's DUV machines were employed in combination with tools from other companies to create the chip for Huawei. Reports also surfaced of alleged spying by its former employees who then went on to work for Huawei. In a sign of growing concern in the US, the administration imposed yet another curb that limited ASML’s ability to export another piece of technology that could be used to manufacture both relatively advanced computer chips and mid-range older chips.
  
  
• Despite China's efforts to use more locally produced tools, a significant portion of the equipment used at Chinese foundries still comes from the US, Netherlands, and Japan, accounting for 85 percent of machines. Recently, Japan also imposed restriction for imports of chip making tools tacitly aligning itself with the vision put forth by the US.

Conclusion

• The export controls were taking a toll on Huawei after TSMC had stopped supplying them chips in 2020 and it had depleted its stockpile of 7nm chips. The chips based on older technology are not efficient enough to handle 5G networks, with issues such as battery drainage, slow processing speeds, greater cost to produce acting as bottlenecks. Within this context, the breakthrough with the 7nm chip may not be ground-breaking for the world, but for China and Huawei, it has acted as a lifesaver. These chips can also be used for military, aerospace and other purposes. Problems with production and manufacturing of these chips, however, are a big cause for concern, the DUV process which has become a boon for now, will prove to be cumbersome in the long run with spiralling cost and other problems with efficiency.
  
  
• For now, Huawei’s comeback is seen as a major victory by China over export control levied by the United States. In the global rivalry for technological supremacy, China has perhaps made a significant leap in narrowing the gap with United States but if it can  bridge the gap remains to be seen. Industry experts claim that US sanctions will not be able to prevent China from making progress in chip manufacturing industry and that it should instead focus on maintaining its position as the global leader in Chip design technology.
  
  
• Yangtze Memory Technologies Co (YMTC), China's leading memory chip producer, has manufactured a highly advanced 3D NAND memory chip, considered the world's most advanced in a consumer device, according to TechInsights. Despite sanctions and being placed on the US Commerce Department's Entity List, YMTC developed this technology. This achievement, along with the creation of a powerful chip by Chinese foundry Semiconductor Manufacturing International Corp (SMIC) for Huawei's Mate 60 Pro smartphone, suggests China's progress in building its domestic semiconductor supply chain is more successful than expected.
  
  
• Dutch firm ASML has received approval from The Hague to continue shipping advanced chip-making tools to China through 2023. However, from January 1, 2024, ASML will no longer ship its most advanced immersion deep ultraviolet (DUV) lithography systems, the Twinscan 2000 series, to China. New export control rules in the Netherlands, effective on September 1, require a license for exporting certain DUV systems to China, significantly impacting China's semiconductor industry.
  
  
• Huawei faces a dilemma as it seeks to compete with the latest iPhone models using cutting-edge 3nm chips. To keep pace with this, it must employ advanced technologies in its smartphones. However, this exposes the technology to scrutiny as smartphones are consumer devices, revealing China's technological advancements. Despite signs of recovery in its once-lucrative business, Huawei must be cautious in introducing new chip technology, as it carries political risks due to US sanctions. Balancing its ambitions to rival the iPhone with the potential impact of further US actions on chip development presents a significant challenge.