China's number one semiconductor manufacturer, SMIC, awaits a bailout.

Currently, the company has achieved chip manufacturing capabilities using the 7nm process, matching Intel and several other semiconductor companies. However, SMIC has been on the US blacklist since 2020 and continues to be restricted by broader semiconductor export controls from Washington since last year.

"SMIC simply cannot achieve commercial profitability by manufacturing chips with less advanced equipment," said Phelix Lee, an analyst at Morningstar Asia.

Chris Miller, author of the book "Chip War," argues that SMIC could not commercially produce hundreds of thousands to tens of millions of finished products without the most advanced semiconductor manufacturing machinery.

Moreover, following the agreement between the three semiconductor companies—the US, Japan, and the Netherlands—ASML, the world's only manufacturer of extreme ultraviolet (EUV) lithography machines, was forced to apply for an export license for its sophisticated equipment, even though it had never previously sold such advanced equipment to customers in mainland China.

Falling behind

Even the world's most advanced semiconductor chip manufacturers, such as TSMC and Samsung, rely on a small number of companies located primarily in the United States, Japan, and the Netherlands for their machinery supplies.

"Nanometers" on a chip refer to the size of the transistors. The smaller the size, the more transistors are on a chip. Therefore, smaller nanometers generally result in higher performance and power for the processor.

TSMC and Samsung began mass production of 7nm chips in 2018. Both companies have a roadmap to launch chips on the 2nm process by 2025. The South Korean giant said it will begin manufacturing 1.4nm processors from 2027. Until last year, the two industry leaders were mass-producing 3nm chips.

With 7nm technology, SMIC is still several generations behind TSMC and Samsung. Without the most advanced chip foundry machines, this gap will only widen.

"To date, I haven't seen any domestic company that can provide a replacement for SMIC's machinery," Lee remarked, adding that even if domestic companies try to develop similar tools, they are still lagging far behind.

Waiting for "rescue"

However, given its leading role in China's chip ambitions, SMIC is expected to soon receive even more support from the Chinese government .

"I'm seeing a lot of resources flowing into SMIC, from bank loans, new share issuances, or the establishment of subsidiaries with state financial support," Lee said.

In its five-year development plan, China says it will increase spending on research and development by more than 7% annually for the period 2021-2025 in order to create a “significant breakthrough” in technology and self-reliance.

Mainland tech giants like Alibaba and Baidu have been given the "green light" to design their own chips, a move that shows Beijing is boosting its domestic microprocessor technology capabilities.

“The Chinese government has shown it wants to close the gap with the top players as much as possible by not hesitating to pour capital into this industry,” Miller said. “SMIC will benefit from new, greater government support, who don’t want to see failure and, if possible, want to continue making technological progress.”

(According to CNBC)

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