Some Chinese AI chip companies are now designing less powerful processors to retain access to Taiwan Semiconductor Manufacturing Co production in the face of US sanctions, four people with knowledge of the matter said.

Aiming to impede breakthroughs in artificial intelligence and supercomputing by China's military, Washington has imposed a series of export controls on highly sophisticated processors from companies such as Nvidia and on chip manufacturing equipment. Those restrictions also prevent TSMC - which uses US chipmaking tools - as well as other overseas chip manufacturers from taking orders to produce them.

The most recent set of US export controls imposed last October have exposed just how limited China's production capacity for advanced chips is and how dependent Chinese AI chip design companies are on TSMC - the world's leading chip contract manufacturer, the sources said.

The four sources, one of which has direct knowledge of the issue, declined to be identified due to the sensitivity of chip-related matters in China.

Two top Chinese AI chip firms, MetaX and Enflame, submitted downgraded designs of their chips to TSMC in late 2023 to comply with US restrictions, according to two of the people.

The companies have previously marketed their chips as being comparable to Nvidia's graphics processing units (GPUs).

Shanghai-based MetaX has developed a downgraded product called the C280, the two people said, adding it ran out of stock of its most advanced GPU, the C500, in China earlier this year.

MetaX, founded in 2020 by former Advanced Micro Devices executives, did not respond to a Reuters request for comment.

Enflame, also Shanghai-based and founded in 2018, also did not respond to a request for comment. It counts tech behemoth Tencent among its backers and raised $2.7 billion last year.

TSMC declined to comment on individual customers, saying only that it works with clients to make sure it is in compliance with jurisdictions relevant to its operations.

Both MetaX and Enflame are so-called "little giants" - young companies selected by Chinese authorities for their potential in critical sectors, making them eligible for state support.

MetaX last month gained government funding for a project to develop a domestically produced high-level AI training chip and has multiple R&D and fab projects across China. Enflame sells its chips to state-owned enterprises and has cooperated with several local governments on projects.

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