This Is How Huawei Shocked America With a Smartphone

This, at first glance, is just a smartphone. But once you know what's inside, it becomes clear it's so much more than that. What really changed everybody’s view of this device was what was at the heart of it, the microprocessor that was designed and manufactured in China.

It's at the center of tensions between the world's two biggest economies. The phone, made by Chinese tech giant Huawei, represents a breakthrough by Beijing as it tries to escape Washington's controls on its access to technology and establish a self-sufficient chip industry. If those US controls had been successful, then a smartphone as advanced as this simply should not be possible without importing key components.

China now is more capable than ever of building advanced technologies. And it worried US officials who are more concerned about advanced chips going into military equipment than smartphones. It left them wondering how exactly did China do it?

US Secretary of Commerce Gina Raimondo’s visit to Beijing in late August was supposed to calm a standoff that has set China and the US at odds with each other on everything from geopolitics to trade. Her department has spent the past few years making it harder for China to buy or manufacture the advanced semiconductors needed to fuel the upcoming technology revolutions. US hawks say it's about restricting China's military capabilities.

The Chinese side say it's more to do with restricting the nation's economic growth. There is no room to negotiate when it comes to protecting Americans’ national security. Her visit was quickly overshadowed by this.

The Mate 60 is made to compete with Apple's iPhone. But unlike the iPhone, the Mate 60 didn't get a splashy launch event. Instead, it was quietly released for sale online.

It still managed to sell out within hours. What it made the timing of that device look like was though that Beijing was trying to send a significant signal to the US to say, “Hey, look, you've taken all of these steps, you've tried to hold us back, but here we are, this is what we can do. ” My colleagues in Asia commissioned what's called a teardown.

Literally, you pull the phone apart and then you point a microscope and other pieces of technology at the innards of the phone. During the process, we found out that Huawei’s new smartphone is powered by a self-designed chip manufactured by SMIC. SMIC is China's biggest chip maker, a contract manufacturer that makes semiconductors designed by other firms such as Huawei.

And that shows that the two companies are now making certain progress in their semiconductor capabilities. The chip industry distinguishes chips by referring to them in nanometers or billionths of a meter. That's about half the diameter of a DNA double helix.

Basically, the smaller you can make a transistor, the better you can make the capabilities of a chip. If you're looking at Samsung's latest Galaxy or obviously Apple's iPhone, these devices are going to be based upon chips that are using three nanometer technology. US export controls were aimed at keeping China's tech capabilities 8 to 10 years behind the US.

But the Kirin 9000s chip found in the Mate 60 Pro demonstrated that it may only be four or five years behind the world's most advanced technology. This chip was made with seven nanometer production and that is a lot closer to where the industry is to the state of the art than the US had been hoping. So how did Huawei and SMIC pull this off?

In recent years, the majority of the world's most advanced chips have come from here, Taiwan. And there's one single company that makes most of them. TSMC.

In the past, the Huawei unit HiSilicon was able to design chips that it delegated TSMC to manufacture and import. The US sanctions stopped that. China does seem to be able to find its way to find alternatives when there is a lack of Western technologies available.

The single most important piece of equipment for making the most advanced chips is what's known as an extreme ultraviolet lithography or an EUV machine. It took decades to develop and each one costs more than $100 million. They're able to etch patterns into chips as small as three nanometers.

Only one company in the world makes them, the Dutch firm ASML. ASML hasn't been allowed to export its EUV machines to China. Never.

It has been allowed to export something called DUV, a different type of technology, an older type of technology. It was thought that by basically limiting them to that type of technology that they'd never get beyond a certain stage. What we've found and this chip would appear to indicate, is that actually they were able to squeeze the capabilities of this DUV machinery to get way more advanced lines in those pieces of silicon than the US had hoped.

Bloomberg reporting discovered that SMIC did actually use some of these older DUV machines from ASML. But the key question is whether it can produce the component at scale and efficiently enough to make it cost effective. In fact, the reason the handsets sold out may have had more to do with supply, not enough chips, than demand.

It also means it may be harder to get to the next stage, below seven nanometers. I was obviously, I don't know what the right word, upset, you know, when I saw the Huawei announcement. The only good news, if there is any, is we don't have any evidence that they can manufacture seven nanometer at scale.

On what's called the China hawk side of the equation, this is the last chance that America has to cut off China from access to advanced technology. Some Republican lawmakers are now calling for the Biden administration to cut off Huawei and SMIC from American technologies completely. In the short term, there's likely to be a degradation of their capabilities.

But if you look at this from a long-term perspective, you've given them every, every incentive in the world to go out and do it themselves. China remains the biggest semiconductor consumer, and if the companies like Intel and Nvidia loses this major market, that means that they could generate significantly less revenue and hurt their ability to continue to innovate and keep the US ahead of China. Chinese spending plans on semiconductor have been widely reported to be in excess of $100 billion.

That's three or four times the annual spending of a major chip maker like TSMC. Given that kind of capital, given that kind of patience, there is a chance that they will get to advanced capabilities over time.