The Chinese chipmaker at the heart of the US-China tech war

In a sprawling factory in eastern Shanghai, where marshy plains have long since been converted into industrial parks, China’s most advanced chipmaker has been hard at work testing the limits of U.S. authority.

Semiconductor Manufacturing International Corp., or SMIC, is manufacturing chips with features less than one-15,000th of the thickness of a sheet of paper. The chips pack together enough computing power to create advancements such as artificial intelligence and 5G networks.

It’s a feat that has been achieved by just a few companies globally — and one that has landed SMIC in the middle of a crucial geopolitical rivalry. U.S. officials say such advanced chip technology is central not just to commercial businesses but also to military superiority. They have been fighting to keep it out of Chinese hands, by barring China from buying both the world’s most cutting-edge chips and the machinery to make them.

Whether China can advance and outrace the United States technologically now hinges on SMIC, a partly state-backed company that is the sole maker of advanced chips in the country and has become its de facto national semiconductor champion. SMIC pumps out millions of chips a month for other companies that design them, such as Huawei, the Chinese technology firm under U.S. sanctions, as well as U.S. firms such as Qualcomm.

So far, SMIC hasn’t been able to produce chips as advanced as those of rivals such as Taiwan Semiconductor Manufacturing Co. in Taiwan, or others in South Korea and the United States. But it is racing forward with a new AI chip for Huawei called the Ascend 910C, which is expected to be released this year.

Huawei’s chip is not as fast or sophisticated as the coveted processors from Nvidia, the U.S. chip giant, which the White House has banned for sale in China. SMIC can also most likely make only a small fraction of what Chinese firms want to buy, experts said.

But the chip would still be a boon for China’s AI ambitions. Nvidia’s components are the secret sauce in AI computing clusters that can train chatbots, unlock new medicines and help design hypersonic missiles. If Huawei, with SMIC’s help, can make more AI chips in the coming years, that could blunt the impact of U.S. technology restrictions — and perhaps one day cut into Nvidia’s lead.

SMIC did not respond to requests for comment. Huawei and the U.S. Department of Commerce, which oversees technology controls, declined to comment.

In an interview in June, Commerce Secretary Gina Raimondo said the United States led the world in AI, and that tech restrictions were helping to maintain that lead. “We have protected, to a large extent, our most sophisticated technology from getting to China,” she said.

Liu Pengyu, a spokesperson for the Chinese Embassy in the United States, said China opposed “politicizing and weaponizing trade, scientific and technological issues. Sanctions and repression will not deter the development of China and Chinese enterprises.”

China has invested more than $150 billion in the chip industry, including a $47 billion investment fund announced in May, helping to fuel a stunning factory expansion. SMIC alone operates more than a dozen chip manufacturing facilities, called fabs, around China, and is planning or constructing at least 10 more, according to Paul Triolo, a tech expert at Albright Stonebridge who tracks the industry.

SMIC, which has nearly 19,000 employees, spent $4.5 billion on capital expenditures in the first half of this year, more than it earned in revenue, according to its financial filings. Among contract chipmakers, it lags only TSMC in Taiwan and Samsung in South Korea in sales. It shipped nearly 4 million wafers in the first half of the year, each of which can be split into hundreds or thousands of chips.

U.S. export controls have “forced China and Chinese companies to get better across the board,” Triolo said. While these companies face major hurdles, “they have already made significant progress to get where they are now, and you can’t really underestimate their ability to doggedly pursue overcoming the other obstacles.”

A National Chip Champion

SMIC was founded in eastern Shanghai in 2000 by Richard Chang, a Taiwanese American who worked for decades at U.S. chipmaker Texas Instruments and became known as the father of Chinese semiconductors. SMIC was immediately viewed as China’s answer to TSMC, which is the world’s biggest maker of cutting-edge chips.

To court overseas engineers, SMIC created a housing development with an international school and opened churches near its factories. The company hired from TSMC’s research and development team, including Liang Mong-song, SMIC’s current co-CEO.

SMIC built new fabs at a breakneck pace, becoming the world’s third-biggest chip foundry — the term for a business that makes chips on behalf of other companies — within four years of its founding. It offered cheap prices to firms including Qualcomm, Broadcom and Texas Instruments. In 2004, it listed on stock exchanges in New York and Hong Kong.

SMIC’s ties with the Chinese government have grown closer over time. Its biggest shareholders — China Information and Communication Technology Group, Datang Holdings and China Integrated Circuit Industry Investment Fund — are all state-owned. By 2015, about half of SMIC’s board seats were controlled by people with close ties to the state.

Government support did not guarantee success. After a spate of overbuilding, SMIC was forced to sell off several facilities. In 2019, it delisted from the New York Stock Exchange, listing in Shanghai the next year.

By then, China’s chip industry had attracted U.S. attention as a national security issue. In 2019, the Trump administration persuaded the Netherlands to block a sale by Dutch firm ASML to SMIC of its most advanced chipmaking machine over concerns that it would aid China militarily.

In 2020, the White House slapped trade restrictions on SMIC after the publication of a report detailing its links to a major Chinese defense conglomerate and military-affiliated universities. SMIC denied connections to the military. The Biden administration later tightened the restrictions.

But the rules have allowed for workarounds. Companies have continued selling less advanced equipment to SMIC’s new factories by obtaining special licenses and routing sales through non-U.S. subsidiaries and employees.

Given these loopholes, some said it was no mystery that SMIC had progressed.

“The fence has gotten higher, but we’ve decided to leave open the front, side and back gate,” said Jimmy Goodrich, a senior adviser for technology analysis to the Rand Corp.

Today, North American customers account for about one-sixth of SMIC’s revenue. The company’s boxy silver factory in eastern Shanghai where it makes advanced chips for Huawei sits in a compound connected to other factories that sell chips that go into products sold in the United States, and buy machinery from U.S. companies.

According to Chinese customs data, China’s imports of chipmaking equipment in the first seven months of this year surged 53% from the same period in 2023.

Officials seeking tougher limits on SMIC have faced pushback from those who say that could damage the United States economically, since SMIC also works with U.S. companies.

When Congress tried in 2022 to pass a law barring the Pentagon from buying products containing SMIC chips, automakers, weapons companies and others complained, saying the components were woven through their supply chains, people familiar with the discussions said.

The law, which eventually passed, was changed to give defense suppliers five more years to cut their ties with Chinese chipmakers that had military connections.

“U.S. companies would say, accurately, if you tried to put SMIC out of business tomorrow, there would be collateral damage for U.S. companies,” said Chris Miller, the author of “Chip War,” a history of the industry.

Necessity Breeds Innovation

In August 2023, as Raimondo visited China on a diplomatic trip, Huawei released a phone with a SMIC chip that exceeded the technology limits previously set by U.S. restrictions. The timing was viewed as a slap in the face to the United States.

Analysts and U.S. chip executives concluded that SMIC had repurposed less advanced equipment to make a more advanced chip.

TSMC and Intel, the U.S. chip giant, tried the same method in the past. But the strategy can result in many faulty chips, and Intel found it wasn’t commercially viable, semiconductor experts said.

In response, U.S. officials have been drafting even tighter rules that would target some SMIC factories. They have also pushed Dutch and Japanese officials to stop supplying SMIC’s most advanced fabs. This month, the Netherlands issued new rules that brought its export controls in line with U.S. regulations.

The limited access to advanced equipment has undoubtedly held SMIC back, and some experts argue that, as competitors such as TSMC and Intel innovate, and as the United States and its allies ramp up their technology controls, China will be left further behind. The constraints appear to have slowed the rollout of some of Huawei’s new products.

Galen Zeng, a senior research manager at IDC, a market intelligence firm, estimated that SMIC would most likely lag other international chip giants by three to five years even if China developed substitutes soon for critical chipmaking equipment.

Still, Dylan Patel, the chief analyst at SemiAnalysis, a research firm, estimated that SMIC could make 1.2 million AI chips for Huawei next year, double this year — far fewer than what China needs or what U.S. chip designers make, but indicating an upward trajectory.

In an electronics market in Shenzhen in April, John Wu, a Huawei vendor, said Huawei’s AI chips had limited availability. But he expressed confidence that Chinese firms would continue to develop, and that competition would ultimately hurt the United States.

He described the U.S. restrictions using a Chinese expression — like “lifting a rock only to drop it on one’s own feet,” he said.