There is a growing perception in the Chinese semiconductor industry that the government’s ambitious semiconductor project has reached its limit. This is happening at the same time that the United States is putting more pressure on China, forcing domestic businesses to prioritize developing their legacy semiconductor skills over pursuing cutting-edge technology.

Zhang Ping’an, CEO of Huawei Cloud Services, voiced worries on June 9 at the Mobile Computility Network Conference in Suzhou on China’s incapacity to obtain 3.5 nanometers (nm) chips in the face of U.S. sanctions. “TSMC, a company in Taiwan, is expanding the number of 3.5 nm chips it offers. Zhang stated that China is unable to obtain these products due to U.S. sanctions. “We’re lucky to have resolved the 7 nm issue,” he continued. The truth is that because of US sanctions, we are unable to import sophisticated production machinery, so we must figure out how to make the most of the 7 nm semiconductors.”

Many in the industry were taken aback by Zhang’s remarks because they so dramatically contradicted the previously expressed optimism over China’s growth in semiconductors.

The Chinese government reaffirmed its commitment to investing in the semiconductor industry in May by announcing a record-breaking third semiconductor fund of $47.5 billion (65.6 trillion won), despite the ongoing U.S. sanctions. Huawei has established itself as a leader in supporting government programs. In August of last year, the company shocked the world semiconductor market by mass-producing 7 nm circuits without the need for extreme ultraviolet (EUV) technology. Some even conjectured that Huawei was prepared to mass-produce 5 nm chips, potentially changing the paradigm in the chipmaking industry, in collaboration with its local foundry, SMIC.

However, according to recent remarks made by a senior Huawei executive, the local semiconductor ecosystem is still in its infancy and immature compared to the significant investments and rumors.

The harsh reality facing the Chinese semiconductor industry is that meaningful advancements appear unattainable without equipment from top global manufacturers.

As Zhang pointed out, Huawei is apparently developing EUV lithography equipment on its own in order to produce 3.5 nm semiconductors. It is thought to be extremely difficult to absorb this technology while avoiding Dutch and American patents.

The sector of local memory is also having problems. The United States has imposed limitations on its equipment businesses’ ability to export 128-layer NAND equipment to Chinese enterprises. According to reports, businesses such as YMTC are having trouble investing because they are unable to obtain equipment from American companies like Lam Research in a timely manner.

Although Zhang’s comments offer important perspectives on the situation of China’s semiconductor sector, some contend that it would be incorrect to undervalue the “semiconductor boom” in the region. Leading Chinese DRAM manufacturer CXMT, for example, is getting ready to create 18.5 nm DRAM by deftly evading US restrictions on sub-18 nm DRAM equipment. Another industry insider indicated the existence of a “gray market” for parts sourced from American equipment, implying the existence of alternate procurement routes.

Given the continued rise in power of SMIC and Hua Hong Semiconductor in the legacy foundry sector, Zhang’s remarks suggest a deliberate shift towards controlling the market. China’s market share in the legacy semiconductor market is expected to rise from 29% in 2023 to 33% by 2027, according to market research firm Trend Force.

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