Technology Sep 07

US ban clouds China's hopes for chip self-sufficiency

The country's biggest chipmaker SMIC plunged a fifth in response to news of potential US sanctions against the company; but exports jumped in Taiwan because of a rush by Huawei to buy chips before the US curbs take effect next week

by Reuters
US ban clouds China's hopes for chip self-sufficiency
A security guard stands outside the Semiconductor Manufacturing International Corporation (SMIC) office during its grand opening in Shanghai in late 2001.

China's biggest chipmaker SMIC plunged a fifth on Monday in response to news of potential US sanctions against the company, wiping about HK$28 billion ($3.61 billion) off its market value and prompting analysts to predict doom if a ban is implemented.

On Friday, Reuters reported that the US Department of Defense might block American companies from providing goods and services to the company, Semiconductor Manufacturing International Corp (SMIC).

That could dash what some view as China's best hope to develop a self-sufficient semiconductor industry via SMIC and further escalate the Sino-US spat that involves trade and technology, analysts said.

"The company could go under within a few years," says Mark Li, who tracks China's chip industry at Bernstein Research.

SMIC did not immediately reply to a request for comment.

SMIC trails rival Taiwan Semiconductor Manufacturing Co Ltd (TSMC) in production volume, technology, and efficiency despite state support since it was founded two decades ago.

It only recently introduced capacity for chips at the 14 nanometre process node, making it about two generations behind that of TSMC.

Like TSMC and other fabs, SMIC relies on a number of US-based companies, such as Applied Materials, to obtain key production equipment. Research firm Jefferies estimates that roughly half of SMIC's suppliers are American.

Sources have told Reuters that the United States is investigating alleged ties between SMIC and the People's Liberation Army in China. SMIC says it has no relationship with the Chinese military.

SMIC shares in Hong Kong fell more than 23% to HK$18.10 on Monday, their lowest since June 12.

Its shares in Shanghai, where it raised $6.6 billion in a secondary listing in July, fell as much as 11%.

The potential sanctions echo those placed by the United States on Huawei Technologies that bar US companies from selling products and technology to the Chinese smart-phone maker. The restrictions have muzzled Huawei's once-promising chip division and is squeezing its overseas phone sales.

The news comes amid reports that China is planning to develop its computer chip industry to counter restrictions by the Trump administration, with Beijing allegedly ready to provide major over the five years to 2025, Bloomberg has said. 

But good for Taiwan

But the US move has been good news for Taiwan.

The island state's exports jumped in August, boosted by China's Huawei rushing to get in orders at Taiwanese firms before they have to comply with US curbs that take effect this month.

Exports rose 8.3% from a year earlier to $31.17 billion in August, the finance ministry said on Monday, the highest monthly tally on record.

Beatrice Tsai, the ministry's statistics chief, said Huawei's stampede to stockpile goods before the US restrictions kicked in had caused a flurry of activity for Taiwanese suppliers, to the tune of an estimated $1.5 billion to $2 billion.

Exports to China were the main driver of growth last month, she added.

Last month, the Trump administration expanded its curbs on Huawei and banned suppliers from selling chips made using US technology to the Chinese firm without a special licence. That came on top of May restrictions, which fully take effect on Sept. 14.

TSMC, the world's largest contract chipmaker, said in July it had stopped taking new orders from Huawei in May and does not plan to ship wafers after Sept. 15.

Tech powerhouse Taiwan, whose largest trading partner is China, could see September exports expand 1.5% to 4.5% on year, Tsai said, again helped by Huawei rushing to stock up.

While the coronavirus pandemic and US-China trade tensions remained sources of uncertainty, the upcoming shopping season in the United States and Europe and work-from-home trend should keep export demand steady, the ministry added.

Taiwan's August imports rose for the first time since April, up 8.5% against economists' expectations for a 0.7% increase.

Taiwan's manufacturers are a key part of the global supply chain for tech giants such as Apple Inc.

Earlier on Monday, data showed China's exports rose for the third consecutive month in August, pointing to a more sustained economic recovery as lockdowns ease around the world.

Other countries likely affected

US sanctions could also impact supplies from non-American vendors, analysts said, as chip equipment vendors from countries such as Japan and the Netherlands, which have friendly ties with the United States, could "shadow follow" the US order.

A precedent for such a possibility exists. In 2018, the Trump administration prevented Dutch machinery maker ASML from shipping to SMIC a $150 million chip-lithography machine that is needed to manufacture advanced microprocessors.

Analysts said that while SMIC could potentially continue to use its existing line of equipment in the face of a supplier ban, its business would suffer because equipment providers would no longer be able to service its production lines.

Losing this official support service would put SMIC in "serious trouble", said Doug Fuller, who researches China's chip industry at the City University of Hong Kong. "The machines need to be tended to by suppliers every two to three months."

SMIC could potentially look to local companies, unaffiliated with their official suppliers, to service their production lines, he said. "But that will just compound SMIC's well-known operational inefficiency."

(Reporting by Josh Horwitz and Donny Kwok, plus Jeanny Kao and Ben Blanchard).