Even as China spends billions to build up its domestic semiconductor sector, it is still some time away from achieving the capabilities needed to produce cutting edge chips, an analyst said on Wednesday.

Semiconductors are used in everything, from smartphones and computers to cars as well as home appliances.

“I still believe that [China is] probably three or four generations behind what is considered leading edge,” Mario Morales, group vice president for enabling technologies and semiconductors at the International Data Corporation, told CNBC’s “Squawk Box Asia.”

“So, if you look at leading edge, we’re talking about 16-nanometer or 14-nanometer and below. The majority of that comes, primarily, from Taiwan and Korea, and to a certain degree in the U.S., with Intel,” Morales added.

Chips are made using a process called lithography where highly complex and expensive machines shine very narrow beams of light onto silicon wafers that have been treated with “photoresist” chemicals to create intricate patterns.

Employees work on the production line of silicon wafer at a factory of GalaxyCore Inc. on May 25, 2021 in Jiashan County, Jiaxing City, Zhejiang Province of China.
Guo Junfeng | Visual China Group | Getty Images

The process leads to the formation of the all-important transistors — more transistors on a chip equals a more powerful and efficient microprocessor. So, essentially, the nanometer number indicates the size of the transistors. A small number means a higher number of transistors can be packed per square millimeter on a chip.

To be clear, the likes of Samsung and Taiwan Semiconductor Manufacturing Company already mass produce 7-nanometer chips as Taiwan and South Korea have established unrivaled positions in high-end chip manufacturing capacity.

China’s need for self-sufficiency

For several years now, China has talked about doing more — like spending additional money on research and development — to achieve self-reliance in science and frontier technologies, including semiconductors and artificial intelligence.

Beijing stepped up its efforts as the United States targeted Chinese tech companies like Huawei and SMIC with sanctions amid escalating tensions between the two superpowers.

China’s tech giants Alibaba, Tencent, Baidu and Meituan have all started investing into chip development.

IDC’s Morales explained that despite heavy investments from China, the country still needs to gain access to both software as well as equipment needed to produce the high-end chips.

Analysts previously said that Chinese semiconductor companies that focus on legacy, long-tail technologies are expected to do well. These companies essentially produce a variety of less advanced chips for areas like power management, microcontrollers, sensors and other consumer-related segments to meet the growing local demand. These chips are still considered very important to the overall supply chain.

“That’s where you are going to see some of the Chinese ecosystem thrive and grow and begin to take market share,” IDC’s Morales told CNBC. “But it’s going to take China some time, it could take them more than a decade before they can actually get more competitive, at least at the very leading edge.”

He pointed to SMIC, which is China’s largest and most important chipmaker.

“They have capabilities to support 28-nanometer and they’ve started some sampling of 14-nanometer,” Morales said. “But, the reality is that they need customers to really scale that capability, and a lot of the Chinese ecosystem is just not using that technology.”

“So they need U.S. partners and customers or European customers, or even Taiwanese customers, to be able to ramp that technology effectively, so that they can bring down the cost structure that they need,” he added.

CNBC’s Sam Shead contributed to this report.

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