Some Chinese artificial intelligence chip companies are now designing less-powerful processors to retain access to Taiwan Semiconductor Manufacturing Co. (TSMC) production in the face of U.S. sanctions, four people with knowledge of the matter said.

Aiming to impede breakthroughs in AI 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 U.S. chipmaking tools — as well as other overseas chip manufacturers from taking orders to produce them.

The most recent set of U.S. 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.