Chinese AI chip startups are reducing performance specs to secure TSMC access

In this post:

  • Chinese chip manufacturers are lowering their performance specs to ensure TSMC manufacturing.
  • US sanctions pose export restrictions on silicon makers to curb supply to China.
  • The Chinese government is funding several national AI chip makers for self-reliance.

Chinese AI chip startups are designing processors with reduced power. This is to retain their access to international semiconductor manufacturers, which are bound by restrictions imposed by the United States.

Chinese AI companies are designing low-power processors to maintain their access to companies like Taiwan Semiconductor Manufacturing Company (TSMC). US sanctions restrict the supply of advanced and sophisticated processors from companies like Nvidia to China. Reuters, citing four unnamed sources familiar with the matter, revealed this new strategy of Chinese startups.

Chinese AI chip makers rely on TSMC

The latest US sanctions imposed in October last year have revealed the dependency of Chinese AI chip startups on TSMC. TSMC is the world’s largest chip contract manufacturer. According to the sources, China’s chip production capacity is too limited.

Also read: Huawei Fills Nvidia Gap in China by Supplying Locally Produced AI Chips

The restrictions also prohibit the supply of tools and equipment used in chip manufacturing to China or companies involved in supplying advanced chips to China. TSMC also uses US tools for chip making along with many other overseas chip makers, and the restrictions prevent them from taking orders to produce processors for the Chinese market.

Chinese AI Chip Startups Are Reducing Performance Specs to Secure TSMC Access
TSMC’s largest customers. Source: Datagravity.

Before the announcement of the US restrictions, Nvidia had a 90% share of the AI chip market in mainland China. Nvidia was also the first company to introduce a downgraded version of its AI processor called H20, especially for Chinese customers, after being restrained from supplying its cutting-edge H100 processors to the country.

Chinese chip makers are introducing low-spec designs

Two Chinese semiconductor designing firms, namely Metax and Enflame, provided lower-spec designs to TSMC last year. This was an effort to comply with US restrictions, said two sources, according to the publication. 

Metax, which is based in Shanghai, exhausted its stock of its top-tier GPU called C500 earlier in 2024. As a solution, it came up with a new processor design called C280. Both Chinese companies have previously touted their silicon as being on par with Nvidia’s graphics processing units. 

Chinese AI Chip Startups Are Reducing Performance Specs to Secure TSMC Access
Chinese chip startup Metax’s pre-round B financing in 2022. Source: Yicaiglobal.

Metax and Enflame are two of the top Chinese AI chip makers. Metax was founded by former AMD executives in 2020. The company gained government funding last month to develop advanced chips and multiple fabrication facilities in the country.

Enflame was established in 2018 and is also based in Shanghai. The firm raised $2.7 billion in funding last year and is backed by Tech giant Tencent. State-owned organizations are the primary customers of Enflame’s chips. Metax and Enflame are both backed by the government and were selected by Chinese authorities for their potential ability to design advanced chips.

Local tech giants are replacing international players

Huawei is currently the major shareholder in the AI chip market in China, with solid backing from the government. Huawei has also been filling the market gap since Nvidia was forced to stop its supply of top-end processors. Huawei’s 910B processor is giving tough competition to Nvidia’s downgraded H20 processor in the Chinese market as it performs a little better on some benchmark tests. 

Nvidia’s struggle in China is also evident by its announcement of less revenue from the Chinese data center sector, which amounted to one-third of Nvidia’s total data center market share. Jensen Huang, Nvidia’s CEO, estimated that China had nearly 50 AI chip startups in December. 

Also read: Saudi Arabia AI Fund Can Divest from China if US Desired, Says CEO

Many of these firms are restricted from using the production facilities of overseas silicon foundries as US restrictions are directly imposed on them. This has put them in production woes, which will benefit Huawei, which is replacing Nvidia in China.

China has also initiated a fund to support its national chip manufacturers called the China Integrated Circuit Industry Investment Fund. The government announced its third installment of $48 billion of financing for the sector, bringing the total amount to $100 billion in funding since 2014. The electronic chip industry also enjoys different subsidies, such as low-interest loans and tax breaks, along with funds from local governments.

Cryptopolitan reporting by Aamir Sheikh

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