At a sprawling factory in eastern Shanghai, where marshy grounds have long been transformed into industrial parks, China's most advanced chipmaker is hard at work testing the limits of American dominance.
Semiconductor Manufacturing International Corporation, or SMIC, is making chips with features less than one-15,000th the thickness of a sheet of paper. These chips provide enough computing power to make advancements like artificial intelligence and 5G networks.
It's a feat that only a few companies globally have achieved – and one that has put SMIC in the middle of a key geopolitical rivalry. US officials say such advanced chip technology is vital not just to commercial businesses but also to military superiority. They're fighting to keep it out of Chinese hands, by preventing China from buying both the world's most cutting-edge chips and the machinery to make them.
Whether China can overtake the U.S. technologically now depends on SMIC, a partly state-backed company that is the only company making advanced chips in the country and has become its de facto national semiconductor champion. SMIC makes millions of chips each 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 advanced chips like Taiwan Semiconductor Manufacturing Co. in Taiwan or other rivals in South Korea and the United States. But it is moving ahead with a new AI chip for Huawei called the Ascend 910C, which is expected to be released this year.
Huawei's chips are not as fast or sophisticated as U.S. chip giant Nvidia's coveted processors, which the White House has banned for sale in China. SMIC can likely make only a small portion of the product Chinese firms buy, experts said.
But the chip would still be a boon to 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, it could reduce the impact of U.S. technology sanctions — and perhaps one day reduce Nvidia's lead.
SMIC did not respond to requests for comment. Huawei and the US Commerce Department, which oversees technology controls, declined to comment.
In an interview in June, Commerce Secretary Gina M. Raimondo said the United States has led the world in AI, and tech restrictions are helping maintain that lead. “We have largely protected our most sophisticated technology from reaching China,” she said.
Liu Pengyu, a spokesman for the Chinese Embassy in the United States, said China opposes “the politicization and weaponization of trade, scientific and technological issues.” He added, “Sanctions and suppression will not impede the development of China and Chinese enterprises.”
Beijing has poured more than $150 billion into the chip industry, including a $47 billion investment fund announced in May, helping fuel a stunning factory expansion. SMIC alone operates more than a dozen chip manufacturing facilities, called fabs, around China, and is building or planning at least 10 more, according to Paul Triolo, a tech expert at Albright Stonebridge who tracks the industry.
SMIC, which has about 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 documents. Among contract chip makers, it trails only TSMC in Taiwan and Samsung in South Korea in terms of sales. It shipped about four million wafers, each of which can be broken down into hundreds or thousands of chips, in the first half of the year.
Mr. Triolo said U.S. export controls have “forced China and Chinese companies to be better in every area.” Although these companies face major hurdles, “they have already made significant progress to get to where they are, and you really can’t underestimate their ability to persevere and overcome other obstacles.”
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 touted as China's answer to TSMC, the world's biggest maker of cutting-edge chips.
To attract foreign engineers, SMIC built a residential development with an international school and opened churches near its factories. The company hired from TSMC's research and development team, including SMIC's current co-chief executive Liang Mong-song.
SMIC built new fabs very quickly, and within four years of its founding became the world's third-largest chip foundry – the term for a business that makes chips on behalf of other companies. It offered cheap prices to firms such as Qualcomm, Broadcom and Texas Instruments. In 2004, it listed on the New York and Hong Kong stock exchanges.
Over time, SMIC's ties to the Chinese government have grown even closer. Its largest shareholders – China Information and Communication Technology Group, Datang Holdings and China Integrated Circuit Industry Investment Fund – are all state-owned. As of 2015, nearly half of SMIC's board seats were controlled by people with close ties to the government.
Government support was no guarantee of success. After overbuilding, SMIC was forced to sell many facilities. In 2019, it was delisted from the New York Stock Exchange, listing in Shanghai the following year.
By then, China’s chip industry had captured US attention as a national security issue. In 2019, the Trump administration persuaded the Netherlands to block the sale of its most advanced chipmaking machinery to SMIC by Dutch firm ASML because of concerns it would provide military support to China.
In 2020, the White House imposed trade sanctions on SMIC following the publication of a report detailing a major Chinese defense group and its ties to military-affiliated universities. SMIC denied ties to the military. The Biden administration later tightened the sanctions further.
But the rules allow a workaround. Companies have continued to sell less advanced equipment to SMIC’s new factories by obtaining special licenses and selling through non-U.S. subsidiaries and employees.
Looking at these shortcomings, some people said that it is no secret that SMIC has made progress.
“The fence has gone up, but we decided to leave the front, side and back gates open,” said Jimmy Goodrich, senior consultant for technology analysis at the RAND Corporation.
Today, North American customers account for about a sixth of SMIC’s revenue. The company’s boxy silver factory in eastern Shanghai, where it makes advanced chips for Huawei, is located in a complex linked to other factories that sell chips used in products sold in the United States, and buy machinery from American companies.
China's imports of chipmaking equipment rose 53 percent in the first seven months of this year compared with the same period in 2023, according to Chinese customs data.
Officials seeking to impose stricter limits on SMIC have faced resistance from those who say it could harm the United States economically since SMIC also works with American companies.
When Congress attempted to pass a law in 2022 to block the Pentagon from buying products containing SMIC chips, automakers, weapons companies and others complained, saying these components were woven through their supply chains, people familiar with the discussions said.
The law that eventually passed was amended to give defense suppliers an additional five years to end their relationships with Chinese chipmakers that have military ties.
“U.S. companies will rightly say that if you tried to put SMIC out of business tomorrow, it would hurt U.S. companies tremendously,” said Chris Miller, author of “Chip Wars,” a book about the history of the industry.
innovation is born out of necessity
In August 2023, when Ms. Raimondo visited China on a diplomatic trip, Huawei released a phone with an SMIC chip, which exceeded the technology limits previously set by US sanctions. This time was seen as a slap in the face to the United States.
Analysts and US chip executives concluded that SMIC reused less advanced equipment to make more advanced chips.
Both TSMC and US chip giant Intel have tried this approach in the past. But semiconductor experts say the strategy can lead to many defective chips and Intel found it was not commercially viable.
In response, U.S. officials are preparing even tougher regulations that will target some SMIC factories. They have also pressured Dutch and Japanese authorities to stop supplying SMIC's most advanced fabs. This month, the Netherlands issued new rules that bring its export controls in line with U.S. regulations.
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 increase their technology controls, China will fall even further behind. The barriers have already slowed the rollout of some of Huawei's new products.
Galen Zeng, senior research manager at market intelligence firm IDC, estimated that even if China quickly develops alternatives for crucial chip manufacturing equipment, SMIC would likely remain three to five years behind other international chip giants.
Still, Dylan Patel, chief analyst at research firm SemiAnalysis, estimated that SMIC could make 1.2 million AI chips for Huawei next year, double this year’s number — which is far below China’s needs or the chips made by U.S. chip designers, but it points to growth.
John Wu, a Huawei salesman at a Shenzhen electronics market in April, said the availability of Huawei's AI chips was limited. But he expressed confidence that Chinese companies would continue to develop and that competition would eventually hurt the United States.
He described US sanctions using a Chinese proverb – like “lifting a stone and letting it fall at your feet”.