Export control breach reveals China’s continuing struggle to produce high-end semiconductors

The discovery of a semiconductor chip made by Taiwan’s TSMC inside Huawei’s Ascend 910B AI processor, a clear violation of US export controls, was a revealing moment in the US campaign to slow China’s tech advancement. While raising questions about the effectiveness of those controls, the incident also highlights China’s struggle to independently produce high-end semiconductors – a sign that export controls are having their intended effect.

Huawei has been strictly forbidden since 2019 from accessing advanced chips made with US technology due to its placement on the US Entity List of companies subject to trade restrictions. It allegedly bypassed those controls by placing orders through another Chinese company that is not restricted.  

China has tried to maintain that export controls have not hindered its tech progress. Huawei has worked closely with SMIC, China’s largest chipmaker. They surprised everyone in 2023 by launching a chip made with the 7 nanometer process, a process first adopted by industry leader TSMC in 2018. This was a feat achieved in remarkably short time, without access to Extreme Ultraviolet (EUV) lithography machines made by Dutch ASML. But reports suggest that the 7nm manufacturing process at SMIC suffered without the advanced machinery, and that as many as 80 percent of the chips produced were faulty. Huawei and SMIC have pushed on, however, with nearly unlimited state funding and strong domestic demand for AI chips. While SMIC claims to have reached the more advanced 5nm process node, it is unlikely to produce these chips at scale. Therefore SMIC will likely remain at the 7nm process until at least 2026, leaving them several generations behind world leaders in the field.

Meanwhile, Huawei’s breach has engendered discussions about the effectiveness of the US Commerce Department’s targeted approach to export controls. The US has asked TSMC to halt shipment to all Chinese customers of any AI chips that are 7nm or below. If this were to become permanent, it would be a shift toward more comprehensively restricting access, which would further hamper Chinese efforts to develop AI capabilities. The latest round of restrictions announced on December 2 further limits China’s access to chipmaking equipment by adding 140 Chinese entities to the Entity List, many of them suppliers to Huawei.

Wendy Chang, MERICS Analyst, says: “The discovery of a TSMC chip inside a Chinese processor may be a watershed moment in the US-China semiconductor battle, demonstrating that significant loopholes still exist to give key players access to advanced chips. While the latest round of controls shows a steady update to existing restrictions, we may see the Trump administration move toward a more blanket approach in export controls.”