Commentary on Political Economy

Thursday 21 September 2023



What the most ‘Chinese’ phone yet tells us about polit­ics

What is the sig­ni­fic­ance of Hua­wei’s new smart­phone chip? The con­tro­ver­sial Chinese tele­coms com­pany has attrac­ted head­lines because its new Mate 60 Pro phone has a soph­ist­ic­ated homegrown chip. SMIC, the Chinese chip­maker that Hua­wei col­lab­or­ated with, has never pre­vi­ously made such an advanced semi­con­ductor.

The chip industry is divided on what this means. On the one hand, SMIC has suc­ceeded only in rep­lic­at­ing a man­u­fac­tur­ing pro­cess — called 7 nano­metre — that Taiwan’s TSMC, the world’s lead­ing chip­maker, was already pro­du­cing at high volume in 2018. SMIC gen­er­ally lags half a dec­ade behind TSMC in rolling out new man­u­fac­tur­ing pro­cesses so, by that met­ric, the Chinese com­pany’s 7nm pro­cess has arrived right on sched­ule.

Moreover, to pro­duce Hua­wei’s chips, SMIC has used DUV litho­graphy machines rather than more advanced EUV tools, which it is barred from buy­ing. For­eign chip­makers such as TSMC and Intel learnt how to pro­duce 7nm chips with DUV machines years ago, before turn­ing to more effi­cient EUV tools. SMIC’s man­u­fac­tur­ing costs are thus prob­ably only com­pet­it­ive because the Chinese state is foot­ing the bill. The com­pany’s 7mn chip is, then, far from an unpre­ced­en­ted break­through.

Nev­er­the­less, the fact that SMIC has pro­duced mil­lions of such chips is real pro­gress — and evid­ence that US, Dutch, and Japan­ese con­trols are far from water­tight. The Neth­er­lands will con­tinue to allow ship­ment of advanced DUV litho­graphy tools until the end of this year. Mean­while, com­pan­ies from all three coun­tries and other west­ern nations con­tinue to ship less advanced tools to China, as well as key chem­ic­als, gases and chip pack­aging equip­ment. China hawks in the US Con­gress ques­tion the logic of ban­ning the trans­fer of cer­tain tools but selling the chem­ic­als needed to oper­ate them.

Yet focus­ing only on the main chip in Hua­wei’s new phone misses the broader rami­fic­a­tions: the Mate 60 Pro shows that Beijing is as com­mit­ted as ever to squeez­ing out west­ern chip­makers and elec­tron­ics com­pan­ies from the Chinese mar­ket.

Sub­sti­tut­ing impor­ted chips with domestic com­pon­ents has been China’s stated goal since around 2014, when it launched its first major semi­con­ductor sub­sidy fund. Yet until now, most phones sold in the coun­try — even from local brands such as Oppo and Xiaomi — have been full of for­eign-made chips.

Hua­wei’s Mate 60 Pro is dif­fer­ent: it may be the most “Chinese” advanced smart­phone ever made. As well as the phone’s primary 7nm pro­cessor, many of the phone’s aux­il­i­ary chips are homegrown, includ­ing the Bluetooth, WiFi, and power man­age­ment chips.

Of course, no one knows whether, in a com­pet­it­ive mar­ket, Hua­wei’s homemade sup­pli­ers could com­pete on cost. But cost mat­ters less when the gov­ern­ment is bank­rolling a self-suf­fi­ciency drive. As the new phone hit the shelves, Beijing announced a new $40bn fund to pour sub­sidies into chip­makers. The gov­ern­ment is also help­ing with new restric­tions tar­get­ing the Mate 60 Pro’s primary com­pet­itor — the iPhone. Hua­wei’s phone launched along­side reports that Chinese gov­ern­ment insti­tu­tions and state-owned com­pan­ies are dis­cour­aging employ­ees from buy­ing Apple products.

All this threatens the for­eign com­pan­ies that have advoc­ated sta­bil­ising trade ties between China and the west. As recently as July, US semi­con­ductor chief exec­ut­ives made pil­grim­ages to Wash­ing­ton to argue against new restric­tions on China. Now, their mar­ket share is at stake. If the Chinese mar­ket looks lost, Amer­ican com­pan­ies have no reason to lobby for access to it.

And as their chips are replaced by local ver­sions, they may ques­tion whether the west’s decision to keep sup­ply­ing China with chip­mak­ing tools and chem­ic­als is really in their interest.

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