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There are many challenges in Chip Manufacturing in China. What are the reasons?

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It is reported that the US government has blacklisted Huawei Technologies Limited and banned American companies from doing business with them, which has prompted Chinese leaders to talk boldly about how to be self-sufficient in key semiconductor businesses.

But industry insiders are not optimistic about China's rapid rise in chip manufacturers to meet all the needs of Huawei and other domestic technology companies.

The prospectuses offered by China Chip Company to stock exchanges with emphasis on science and technology are blunt, that is, the domestic industry is "relatively backward" and lacks talents, so it needs to "catch up for a long time".

Analysts also pointed out that China still relied on many areas of technology in the United States, Taiwan, South Korea, Japan and Europe, and questioned whether the government's policies were applicable in the right place.

"Compared with the restrictions on equipment, materials or talent, I think what China lacks is an understanding of the industry," said Gu Wenjun, chief analyst at ICWise, a Shanghai consultancy. He called some government subsidies in the industry "counterproductive" because too many well-funded companies will eventually pursue the same talent.

A former senior engineer at a chip design company in China revealed that the company was often encouraged to use chips from domestic companies. But in many cases, domestic companies can not provide enough advanced technology.

"What we're saying internally is that we're going to look at chips made in China first, because we really want to support the supply chain in China," the Engineer said. "But we never get anything we can use." Companies did not respond to requests for comment, Reuters said.

Better Technology

Experts in the chip industry outside China say that the country has made good progress in some areas and should not be underestimated. For example, for a key type of memory chip called NAND, Chinese companies are closing the gap with the world's advanced level.

"Money is not a problem for the Chinese government," said an executive of a Korean memory chip manufacturer who declined to be named. He acknowledged that China has made progress in NAND or Flash chips, which provide long-term data storage. "We can't stop Chinese companies. It's a free competition, but we believe we have better technology and better products." He emphasized.

However, one of the biggest challenges facing China is chip manufacturing, which is a rigorous process that requires highly specialized tools and years of experience to master.

A report issued by Everbright Securities in May also touched on relevant issues.

"The chip manufacturing process depends on equipment, while American companies such as AMAT, LAM, KLA and Teradyne have very high market share in many niche markets," wrote Everbright. "There is no production line in China that can produce chips using only Chinese equipment, so it will be very difficult to make chipsets that do not use American equipment."

But the report further points out that even if Chinese chipmakers do own equipment from top chipequipment companies in the United States, Japan and Europe, they cannot always make full use of it.

A former engineer at China's leading chip manufacturer, SMIC, said equipment suppliers usually sign a confidentiality agreement (TSMC) with Taiwan Semiconductor Manufacturing Corporation (TSMC), which is the global leader in chip manufacturing. The manufacturing process of advanced chips requires a lot of fine-tuning, and NDAs covers key techniques and tips on how to best use machines and achieve the required level of "yield" or working chips per batch, he said.

"The equipment suppliers all follow TSMC's NDA," the Engineer said. "If SMIC requests instructions from suppliers, in order to show sincerity, suppliers will only disclose very basic information about the instructions." He said.

A spokesman for TSMC also said: "TSMC has been working hard to protect our business secrets, including signing new NDAs with our counterparts."

Industry experts say that even with the most advanced equipment, Zhongxin International still lags behind TSMC for two generations. In 2018, TSMC launched a chip with a circuit width of only 7 nanometers, but Zhongxin International is currently preparing to produce 14 nano-chips, and TSMC launched this technology in 2014.

Huawei uses TSMC's wafer factory for most advanced chipset manufacturing, while Zhongxin International's product insurance is used for low-end products. A former Huawei employee said that the company chose TSMC instead of Zhongxin International as its proxy manufacturer of server chips because its semiconductor division, Heise, designed a 7-nanometer chip. Technically, we can redesign the process for MCI, but this will lead to a decline in chip quality.

Talent gap

The problem of talent shortage is often mentioned in China's integrated circuit industry. Some analysts point out that it took decades for Japanese, Korean and Taiwan companies to develop their expertise. China has been trying to recruit top overseas talent, especially from Taiwan and South Korea, through profitable contracts, but this is not a success. Chipmakers in China, for example, want to recruit leading storage engineers from Samsung, but the Korean government has blocked them.

For microprocessors, the most complex chip, Huawei has developed sophisticated designs for its Kirin chip, which powers many high-end mobile phones. But it still relies on key IP and production from overseas companies.

Eric Yang, who invested in Glory Ventures, a venture capital firm that invested in China's chip companies, said that the complexity of contemporary "on-chip systems" microprocessors makes it difficult for existing leading players to break through.

"Because it requires a lot of expertise to build a large chip," Yang said, adding that these SOCS point to separate areas that contain CPU, GPU and several other components. "Qualcomm may have 800 people working on a part of the chip. So if you don't have talent, you can't win, but almost all talent is in the United States, "Yang added.