Huawei Technologies' recent achievement in developing an advanced chip has drawn attention to China's determination to counter U.S. sanctions. However, analysts warn that these efforts may come at a substantial cost and could lead to increased restrictions from Washington.

Last week, Huawei surprised the tech world by unveiling its latest smartphone, the Mate 60 Pro, during the visit of U.S. Commerce Secretary Gina Raimondo to China. This move coincides with the Chinese government's launch of a new $40-billion investment fund aimed at strengthening its burgeoning chip sector.

The Mate 60 Pro is powered by Huawei's proprietary Kirin 9000s chip, manufactured by China's top contract chipmaker, SMIC (0981.HK), using advanced 7-nanometer (nm) technology, as confirmed by a teardown conducted by TechInsights, based in Ottawa.

TechInsights' findings, along with early user reports praising the phone's high-performance capabilities, suggest that China is making significant progress in developing high-end chips. This progress comes as the U.S. has escalated sanctions to restrict China's access to advanced chipmaking tools.

Dan Hutcheson, an analyst at TechInsights, noted, "It demonstrates the technical progress China's semiconductor industry has been able to make without EUV tools. The difficulty of this achievement also shows the resilience of the country's chip technological ability." EUV refers to extreme ultraviolet lithography, essential for making 7 nm or more advanced chips.

However, analysts at Jefferies caution that TechInsights' findings might trigger an investigation by the U.S. Commerce Department's Bureau of Industry and Security. This development could intensify debates in the U.S. about the effectiveness of sanctions and potentially lead Congress to enact even stricter tech-related sanctions against China.

In a note, Jefferies analysts stated, "Overall, the US-China tech war is likely to escalate."

As of the time of reporting, there has been no response from the U.S. Department of Commerce. Huawei, SMIC, and China's State Council, responsible for handling press queries on behalf of the Chinese government, have not provided comments.

While SMIC had previously been known for producing 14 nm chips due to restrictions on obtaining EUV machines, TechInsights suggested last year that SMIC had managed to produce 7 nm chips by modifying existing DUV machines.

There is speculation that Huawei may have either acquired the technology and equipment from SMIC or collaborated with them in producing the chip.

Regardless of the chip's origin, Tilly Zhang, an analyst at Gavekal Dragonomics, downplayed the success, citing a low yield rate, which increases costs and reduces the number of usable chips per wafer. Zhang also pointed to new export controls imposed by the Netherlands that may limit SMIC's access to immersion DUV machines.

Zhang emphasized that Huawei's ability to use these chips at standard market prices is likely due to its substantial financial resources and government subsidies.

Research firms estimate that SMIC's 7 nm process has a yield rate below 50%, significantly lower than the industry norm of 90% or higher. This could limit shipments to around 2-4 million chips, potentially hindering Huawei's efforts to regain its former dominance in the smartphone market.

Jefferies analysts suggest that Huawei may have to turn to 10 nm chips, which have an estimated yield rate of only 20%, far below the typical 90% for most consumer devices.

Doug Fuller, a chip researcher at the Copenhagen Business School, commented on the situation, stating, "The (U.S.) controls are imposing high costs for producing controlled technologies in China." He added that the Chinese government was likely covering these costs.