Chinese AI chip companies downgrade designs to safeguard TSMC production

Some Chinese AI chip companies are now designing less powerful processors to maintain access to Taiwan Semiconductor Manufacturing Co’s (TSMC) production despite US sanctions, four people with knowledge of the matter said.

Aiming to hinder breakthroughs in artificial intelligence and supercomputing by the Chinese military, Washington has imposed a series of export controls on highly advanced processors from companies such as Nvidia and chip manufacturing equipment. These restrictions also prevent TSMC — which uses U.S. chipmaking tools — and other foreign chipmakers from taking orders to produce them.

The latest round of US export controls imposed last October has exposed how limited China’s advanced chip manufacturing capacity is and how dependent Chinese AI chip design companies are on TSMC – the world’s largest chip contract manufacturer, the sources said.

The four sources, one of which has direct knowledge of the matter, could not be identified due to the sensitivity of chip-related matters in China.

Two top Chinese AI chip makers, MetaX and Enflame, submitted downgraded designs of their chips to TSMC in late 2023 to comply with U.S. restrictions, two of the people said.

The companies have previously marketed their chips as similar to Nvidia’s graphics processing units (GPUs).

Shanghai-based MetaX has developed a downgraded product called the C280, the two people said, adding that its most advanced GPU, the C500, ran out of stock in China earlier this year.

MetaX, founded in 2020 by former Advanced Micro Devices executives, did not respond to a Reuters request for comment.

Enflame, also based in Shanghai and founded in 2018, also did not respond to a request for comment. It counts technology giant Tencent among its backers and raised $2.7 billion last year.

TSMC declined to comment on individual customers, saying only that it works with customers to ensure it complies with jurisdictions relevant to its operations.

Both MetaX and Enflame are so-called ‘small giants’: young companies selected by the Chinese authorities for their potential in critical sectors, making them eligible for state aid.

MetaX secured government funding last month for a project to develop a domestically produced high-level AI training chip and has multiple R&D and factory projects across China. Enflame sells its chips to state-owned companies and has collaborated on projects with several local governments.

In addition to tech giant Huawei, China has about 50 AI chip startups that want to compete with Nvidia, the US company’s CEO Jensen Huang estimated in December.

However, some of these companies have been directly imposed on U.S. export restrictions and are no longer able to find foundries overseas, leaving them in an even bigger production problem.

Production problems for Chinese AI chip startups are likely to further benefit Huawei, which is advancing against Nvidia in China after the US company had to develop weaker chips specifically for the Chinese market due to export restrictions.

SMIC access

Since technical tensions with the United States increased in 2018, China has stepped up efforts to develop chip self-sufficiency, pumping huge amounts of money into the sector.

Last month, the government announced the third edition of its China Integrated Circuit Industry Investment Fund with $48 billion in financing for the industry, bringing the total amount provided by the fund since 2014 to more than $100 billion.

The sector has also benefited from separate local government funds and a range of subsidies, including tax breaks and low-interest loans.

But while China has an estimated 44 foundries, only Semiconductor Manufacturing International Corp (SMIC) is capable of producing large quantities of highly advanced GPUs, two sources said. And until recently, SMIC’s production capacity at that level was entirely reserved for Huawei, they also said.

SMIC did not respond to a request for comment.

Huawei, whose access to overseas chip production was cut off by US sanctions in 2020, declined to comment. Washington says the company poses a threat to US national security, a charge the company denies.

Three of the four sources said SMIC agreed this year to allocate a limited portion of its production capacity to Chinese AI chip companies that had been directly sanctioned by Washington and barred from manufacturing abroad.

One such company was state-backed Cambricon, which sources said had been in trouble since being hit by the US

restrictions at the end of 2022 over 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 pressure on its product offering, did not respond to a request for comment.

First print: June 5, 2024 | 7:04 am IST