China’s Semiconductor Dreams Under Challenge: SMIC Faces Production Woes
China’s ambition to achieve technological autonomy in the semiconductor sector has hit a new setback. A report from Morgan Stanley indicates that the country’s leading foundry, Semiconductor Manufacturing International Corporation (SMIC), is facing alarmingly low yields in producing AI chips for Huawei, prompting the investment bank to slash its revenue forecasts by over 50%.
Yields at 30%: A Burden on Costs
In semiconductor manufacturing, the concept of “yield” is critical as it measures the percentage of functional chips produced from a wafer. Higher yields translate to lower costs per unit, while low yields inflate prices and constrain revenue.
According to shared data, SMIC is expected to finish 2025 with a yield of only 30% on its Huawei GPUs, falling far below industry standards. Currently, the company is producing around 7,000 twelve-inch wafers per month, focused on Huawei’s Ascend 910B chips, with plans to transition to the Ascend 910C in 2026.
Each wafer can potentially house 78 chips of the 910B series or 39 chips of the 910C. Unfortunately, the low yield means a significant portion of these processors are non-functional.
Price and Revenue Implications
The report details that:
- An Ascend 910B will cost Huawei approximately 50,000 RMB (about €6,400).
- The Ascend 910C, which combines two 910B dies, will reach 110,000 RMB (around €14,000).
These prices reflect not just the manufacturing costs but also the high packaging expenses and inefficiency linked to low yields.
Morgan Stanley estimates that, with these yields, SMIC’s revenue tied to Huawei will be:
- 58.5 million RMB in 2025
- 94 million RMB in 2026
- 136 million RMB in 2027
This represents a drastic cut from previous forecasts that projected revenues of 146 million, 212 million, and 286.5 million RMB respectively.
Technological Limitations: No Access to EUV
A significant hurdle for SMIC is the restrictions imposed by the U.S., which prevent access to Extreme Ultraviolet (EUV) lithography from ASML, essential for scaling up advanced chip production.
SMIC has resorted to multi-patterning techniques using Deep Ultraviolet (DUV) lithography—a theoretical solution for achieving 7-nanometer processes, albeit at the cost of more steps, increased complexity, and lower yields.
The contrast with global competitors like TSMC and Samsung, which manufacture 3nm and 5nm chips with mature industrial yields, is stark.
Huawei at the Center of Strategy
Huawei, which has already launched its Ascend 910B, views the 910C as a local response to the demand for AI training and deployment chips, especially in a context where access to NVIDIA GPUs is blocked due to sanctions.
However, the high unit costs and limited production capacity of SMIC cast doubt on the viability of competing directly with U.S. giants.
Prospects: Short-Term Improvements?
The report notes that SMIC’s yields could improve to 70% by 2027, but they would still fall short of industry standards. Meanwhile, Huawei’s reliance on these domestically produced chips becomes a double-edged sword: it ensures a certain level of sovereignty, but with significant economic and operational overhead.
Morgan Stanley’s assessment starkly outlines China’s dilemma: advance in semiconductors using homegrown technology, albeit at higher costs and lower efficiency, or depend on foreign sources in a strategically crucial sector for AI and defense.
Frequently Asked Questions
1. What does it mean for SMIC to have yields of 30%?
This means only 3 out of every 10 chips produced are functional, resulting in higher production costs and drastically reduced revenues.
2. Why can’t SMIC improve its results quickly?
Due to the absence of access to EUV lithography equipment from ASML stemming from international sanctions, SMIC is forced to use less efficient alternative processes.
3. What impact does this have on Huawei?
It elevates the costs of their Ascend chips, limiting their competitiveness against foreign alternatives like NVIDIA or AMD.
4. Can yields improve in the future?
According to Morgan Stanley, yields could reach up to 70% by 2027, but would still lag behind leaders like TSMC or Samsung.
This article sheds light on the complex landscape of China’s semiconductor industry, demonstrating the challenges and implications of their current trajectory in the global market.