Does that mean smaller chips are made from smaller wafers?
With careful design, you can tolerate some defects. A multi-core CPU might have the ability to disable a core that's affected by a defect, and then it can be sold as a different SKU with a lower core count. Cerebras uses an extreme version of this, where the wafer is divided up into about a million cores, and a routing system that can bypass defective cores.
They have a nice article about it here: https://www.cerebras.ai/blog/100x-defect-tolerance-how-cereb...