China may be making more advanced chips despite U.S. sanctions — but it still faces big problems

China’s biggest chipmaker SMIC seems to have been manufacturing advanced chips in the last few months — defying U.S. sanctions designed to slow down Beijing’s progress.

But there are still some major challenges to China’s bid to become more self-sufficient in the semiconductor industry, with questions swirling around the long-term viability of its latest advancements.

It was a big deal at the time. But last week, the Financial Times reported that SMIC is setting up new production lines to make 5 nanometer chips for Huawei. That would signal even further advancement for China’s biggest chipmaker.

The chips in Apple’s latest high-end iPhones are made on a 3 nanometer process.

Without EUV tools, experts thought, SMIC would find it difficult to make 7 nanometer and smaller chips, or would at least find it expensive to do so.

So when the Huawei Mate 60 came out last year with a 7 nanometer chip, that raised a lot of eyebrows.

One expert told CNBC at the time that SMIC is likely using older chipmaking tools to make more advanced chips.

The FT reported something similar last week. The newspaper, citing two people with knowledge of the plans, reported that SMIC is aiming to use its existing stock of U.S.- and Dutch-made semiconductor equipment to produce 5 nanometer chips, an advancement on the 7 nanometer.

“SMIC is working very closely now with both domestic tool makers, leveraging its existing base of advanced lithography gear, and drawing on other outside expertise, such as from Huawei, to constantly improve yields on advanced node processes,” Paul Triolo, an associate partner at consulting firm Albright Stonebridge, told CNBC via email.

“So for now it is possible for SMIC to continue to improve capabilities and yields at 7 and soon 5 nm, for a small number of customers, mostly Huawei.”

TSMC, or Taiwan Semiconductor Manufacturing Company, is the world’s largest and most advanced contract chip manufacturer. TSMC makes semiconductors for companies from Apple to Nvidia.

Pranay Kotasthane, chairperson of the high tech geopolitics program at the Takshashila Institution, told CNBC that SMIC and China could keep throwing money at the process, but ultimately, costs will continue to rise with each more advanced generation of chips — unless the company can get its hands on an ASML EUV machine.

“SMIC might overcome current yield issues by investing more money. This investment might even come from governments as this has become an issue of national prestige,” Kotasthane said via email.

“But the extent of underwriting higher costs will only increase with every subsequent generation of chips. The costs will keep compounding unless China finds a major alternative for EUVs.”