As the US moves to cut Huawei off from global chip manufacturing, experts say the domestic market doesn’t offer a replacement. Flagship domestic semiconductor fabrication company SMIC can’t handle state of the art products, and itself is vulnerable to being disrupted by a US export ban.

The Chinese telecommunications equipment manufacturer and handset maker could be cut off from global chip manufacturing by a new regulation announced by the US Department of Commerce May 15. The regulation requires companies around the world to obtain licenses for sales to Huawei of semiconductors made with US technology.

Affected Huawei suppliers include Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker that produces high-end chip design for Huawei; Taiwan’s Win Semiconductors, which makes Huawei’s radio frequency chip designs; and South Korea’s Samsung Electronics, which ships memory and storage to the Chinese company.

Guo Ping, the rotating chairman of Huawei, told reporters Monday that the rule would “inevitably harm Huawei’s business to a great extent” and that the company is confident that it would find a solution soon.

“If Huawei finds no way around this and TSMC closely follows the US ban, this would be a severe blow to Huawei’s business—which is exactly what the US administration is aiming for,” Jan-Peter Kleinhans, director of the project IT Security in the Internet of Things at the Stiftung Neue Verantwortung, told TechNode.

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An onshore option

On the same day the Commerce Department rule was made public, two Chinese state-backed funds announced they would inject a total of $2.2 billion into a domestic chipmaker, Shanghai-based Semiconductor Manufacturing International Corp. (SMIC). The investment is seen as China’s measure to foster chip-making capacity at home amid international supply chain uncertainty faced by Chinese companies. Experts say the company is the only domestic supplier comparable to TSMC.

SMIC also uses US-made equipment, but it is unlikely to cut ties with Huawei at Washington’s behest.

Huawei reportedly had started shifting some production of its chip designs from TSMC to SMIC by April, but the new export ban may drive Huawei to accelerate the transfer. The Nikkei Asian Review reported Monday that TSMC, a key manufacturer of chips designed by Huawei’s Hisilicon, has halted new orders from Huawei in response to Washington’s new rule change.

Generations behind

However, experts said SMIC may not have the capacity or capability to produce chips Huawei needs, including its 5-nanometer Kirin 1100 processor for servers and 7-nanometer Kirin 810 chip for smartphones. Hisilicon, a subsidiary of Huawei, designs those chips.

“SMIC has no production capabilities for anything close to 7-nanometer,” said Kleinhans.

SMIC has the capability to produce 14-nanometer wafers and the company has already started producing the Kirin 710 chipset for Huawei’s low-end Honor smartphones, according to Kleinhans. However, the company currently only has a production capacity of 6,000 14-nanometer wafers per month, which, according to an expert cited by Chinese media The Paper, is nowhere near enough for Huawei.

Losing access to higher-end chips produced by TSMC, such as Kirin 1100 and Tiangang, a 7-nanometer chipset designed for 5G base stations, would leave Huawei unable to make its flagship smartphones and 5G towers.

The $2.2 billion injections from state-based funds will go to a SMIC wafer plant. The company said the investment would help the plant to increase capacity of 14-nanometer wafers to 35,000 per month.

Nomura Holdings, a Japanese securities firm, said in a report recently the defect rate of 14-nanometer chips made by SMIC was around 70% and it would take the company one to two years to demonstrate proficiency, according to Chinese media Caixin.

“SMIC can’t produce anything smaller than 10-nanometer and the cutting edge chips that Hisilicon needs for the Kirin chips is 5nm…It’s generations behind,” said Alex Capri, visiting senior fellow at the National University of Singapore Business School.

Trendforce, a Taiwan-based semiconductor research firm, said in an investment note that the defect rate of 14-nanometer chips produced by SMIC is so high that Huawei will have no choice but to rely on TSMC to produce wafers under 16nm.

Another Huawei?

SMIC is also vulnerable to pressure from Washington, because the Chinese company also uses US technologies to produce chips. American authorities will likely claim it is a violation of the new rules if it continues to supply Huawei.

“About 50% of all the microchips that are made anywhere by anyone involve US manufacturing equipment,” said Capri. An even higher percentage of chips have use American-made design software, he added.

The US hasn’t targeted the Shanghai-based contract chipmaker yet, but a deeper collaboration with Huawei would potentially enrage the US government.

“The US could just put SMIC on a restricted entity list. In which case, you would have the same situation,” said Capri.

Wei Sheng is a Beijing-based reporter covering hardware, smartphone, and telecommunications, along with regulations and policies related to the China tech scene. Before joining TechNode, he wrote about...