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China’s AI Chip Firms Downgrade Designs to Keep Access to TSMC

TSMC is currently prohibited from producing advanced processors for China, as it uses American chipmaking tools, and hence falls under the purview of recent sanctions


illustrative image to show chine chip firms
US sanctions have exposed just how limited China's production capacity for advanced chips is. Image: Freepik, edited by Aarushi Agrawal

 

Several Chinese artificial intelligence (AI) chip firms are designing less powerful processors to retain access to production by Taiwan Semiconductor Manufacturing Co (TSMC), four sources have revealed.

TSMC is currently prohibited from producing advanced processors for China, as it uses US chipmaking tools, and hence falls under the purview of recent American chip sanctions targeting Beijing.

Those sanctions — in place since October 2022, and reviewed annually — have exposed just how limited China’s production capacity for advanced chips is.

 

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They have also shown how dependent Chinese AI chip design companies are on TSMC – the world’s leading chip contract manufacturer, the sources told Reuters.

Among the companies downgrading their processors are top Chinese AI chip firms MetaX and Enflame. Both firms submitted downgraded designs of their chips to TSMC in late 2023 to comply with US restrictions, according to two of the people.

TSMC declined to comment on individual customers, saying only that it works with clients to make sure it is in compliance with jurisdictions relevant to its operations.

 

‘Little giants’

Both companies previously marketed their chips as being comparable to graphics processing units (GPUs) sold by US chipmaker Nvidia.

Shanghai-based MetaX has developed a downgraded product called the C280, sourced said. The company, founded in 2020 by former Advanced Micro Devices executives, ran out of stock of its most advanced GPU, the C500, in China earlier this year.

Meanwhile, Enflame, which is also Shanghai-based and founded in 2018, counts tech behemoth Tencent among its backers and raised $2.7 billion last year. The firm also sells its chips to state-owned enterprises and has cooperated with several local governments on projects.

Both MetaX and Enflame are so-called “little giants” – young companies selected by Chinese authorities for their potential in critical sectors, making them eligible for state support.

MetaX last month gained government funding for a project to develop a domestically produced high-level AI training chip and has multiple R&D and fab projects across China.

Pumping state-funds into chip firms is part of China’s efforts to develop self-sufficiency in chips and counter increasing US sanctions.

Last month, Beijing announced the third iteration of its China Integrated Circuit Industry Investment Fund with $48 billion of funding for the industry. The infusion brought the total amount provided by the fund for semiconductors, since 2014, to over $100 billion.

 

SMIC stepping in

China’s chip sector has also benefitted from separate local government funds and a range of subsidies including tax breaks and low-interest loans.

But the real challenge lies in the country’s lack of fabs.

China has an estimated 44 foundries, but of these, only Semiconductor Manufacturing International Corp (SMIC) is capable of producing large volumes of highly advanced GPUs, sources said.

SMIC is the country’s largest chipmaker and has close ties to Huawei — a firm directly sanctioned by the US. Huawei has over the past year emerged as the biggest rival to Nvidia in China.

Until recently, SMIC’s production capacity of that level was entirely reserved for Huawei, they added.

But sources say SMIC agreed just this year to allot a limited amount of its production capacity to some Chinese AI chip firms that had been individually sanctioned by the US and blocked from overseas production.

One such firm was state-backed Cambricon which the sources said has been struggling since it was hit with US restrictions in late 2022 on concerns it could supply AI chip technology to the Chinese military.

Cambricon, which said in a call with analysts last year that it was facing product supply pressures, did not respond to a request for comment.

 

  • Reuters, with additional editing by Vishakha Saxena

 

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Vishakha Saxena

Vishakha Saxena is the Multimedia and Social Media Editor at Asia Financial. She has worked as a digital journalist since 2013, and is an experienced writer and multimedia producer. As a trader and investor, she is keenly interested in new economy, emerging markets and the intersections of finance and society. You can write to her at [email protected]

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