Breaking the Silicon Straitjacket: How Huawei and SMIC Are Rewriting China's AI Chip Future

The U.S. export control regime has long functioned as a digital Maginot Line, aiming to stifle China's ambitions in advanced semiconductors. Yet, as Huawei's HiSilicon and SMIC (Semiconductor Manufacturing International Corporation) accelerate their march toward 5nm AI chip self-reliance, the cracks in this strategy are widening. Their progress—driven by the Ascend 910C GPU and SMIC's DUV-based 5nm manufacturing—doesn't just erode U.S. leverage; it creates a compelling investment narrative in Chinese tech equities.

The Dual-Pronged Assault on U.S. Export Controls

1. The Ascend 910C: A Direct NVIDIA Challenger
Huawei's Ascend 910C AI chip, fabricated by SMIC using a 5nm process, is designed to rival NVIDIA's A100 GPU. While the 910C's raw performance lags slightly behind its U.S. counterpart, its strategic value lies in self-reliance. By domesticating AI infrastructure, China reduces its vulnerability to U.S. sanctions and supply chain shocks.

The chip's adoption in hyperscale data centers (e.g., Alibaba Cloud, Tencent Cloud) signals a shift: China's AI industry is no longer held hostage by NVIDIA's dominance.

2. SMIC's 5nm Manufacturing: Costly but Strategic
Despite U.S. and Dutch restrictions on EUV lithography, SMIC has leveraged stockpiled DUV equipment and advanced patterning techniques (like self-aligned quadruple patterning, SAQP) to mass-produce 5nm chips. While yields remain one-third of TSMC's levels, and costs are 50% higher, this is a calculated trade-off.

*SMIC's valuation reflects its role as a geopolitical play, not just a pure-play foundry.

The strategic rationale is clear:
- Subsidized Breakthroughs: Chinese policymakers are willing to absorb short-term inefficiencies to secure long-term autonomy.
- Technology Leapfrogging: SMIC's 5nm process, while imperfect, enables HiSilicon to iterate on AI chip designs without foreign bottlenecks.

The EUV Wildcard: Q3 2025's Make-or-Break Moment

The true test comes this autumn. SMIC and Huawei's partner, SiCarrier, are reportedly set to trial a domestically produced EUV lithography machine using laser-induced discharge plasma (LDP). If successful, this could:
- Halve production costs by eliminating the need for multi-patterning.
- Boost yields to competitive levels, potentially making 5nm chips commercially viable.

*A successful EUV trial could narrow this gap by 30–40% by 2026.

The geopolitical stakes are immense. A working LDP system would destabilize ASML's EUV monopoly, which currently underpins U.S. export control efficacy.

Why This Is an Investment Grade Risk

Bearish skeptics cite SMIC's 27% year-over-year revenue growth in 2024 as a mirage, arguing that high costs and low yields make its 5nm process economically unviable. But this misses the broader picture:

The Market Isn't Just About Profitability—It's About Sovereignty
- AI Infrastructure Demand: China's AI spending is projected to hit $170 billion by 2027, with 60% allocated to domestic chip solutions post-U.S. sanctions.
- Supply Chain Diversification: Companies like Baidu and JD.com are already shifting to HiSilicon-based AI clusters, creating a self-reinforcing ecosystem.

Investment Thesis
- SMIC (00981.HK): A core holding for exposure to China's semiconductor ambitions. While profitability is distant, its foundry utilization rate of 85.6% (Q4 2024) suggests strong demand.
- SiCarrier (subsidiary of Huawei's supply chain): A speculative play on EUV breakthroughs; its LDP technology could unlock a $10 billion domestic lithography market.
- HiSilicon (indirectly via Huawei): The AI chip designer's valuation is tied to its ability to outpace NVIDIA's A100 in energy efficiency—a key metric for data center operators.

Risks and Reckoning

• Technical Hurdles: LDP's current power output (50–100W vs. the 250W needed for commercial viability) and component bottlenecks (e.g., multilayer mirrors) remain unresolved.
• Geopolitical Blowback: U.S. could ramp up sanctions on EUV-related materials, though China's progress has already diluted the impact of existing curbs.

Final Verdict: Buy the Fracture, Not the Chip

The U.S. semiconductor embargo is akin to a dam holding back a rising tide. Huawei and SMIC's advances—flawed but functional—prove that China will find a way around the barriers. For investors, the question isn't whether these firms will hit all their targets, but whether the strategic necessity of AI self-reliance justifies owning their stocks.

In a world where supply chains are weaponized, betting on the winners of the tech cold war isn't just about profit—it's about backing the architects of a new digital order.

Disclosure: This article reflects analysis of public information and is not financial advice. Readers should consult with a licensed professional before making investment decisions.