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Proposed US curbs on Chinese chipmaker SMIC could rattle supply chains

Proposed US export curbs on SMIC threaten to derail China’s nascent but growing domestic semiconductor supply chain, and also hit American and Japanese companies who count the Chinese chipmaker as an important customer.

Reuters reported on Friday that the Trump Administration was considering barring US companies from supplying goods and services to SMIC (Semiconductor Manufacturing International Corp), China’s biggest chipmaker.

SMIC shares plunged more than 22% on Monday before recovering only slightly, by 3%, on Tuesday.

The planned curbs come at a time when SMIC had been expected to more than double its spending this year to make higher-end chips, helped by $6.6 billion in funds from a secondary share listing in July and support from state firms.

But analysts said the proposed restrictions would prevent American suppliers, such as Applied Materials, Lam Research Co and KLA Corp, from selling manufacturing machinery to SMIC and thereby prevent it from making advanced chips.

Companies like Netherlands-based ASML, and Japan’s Tokyo Electron and Advantest, might also restrict sales to SMIC if their governments follow a US move.

The planned curbs could hit China’s chip industry across the board.

SMIC filings say 65% of its revenue comes from Hong Kong and mainland China. Along with Huawei, it produces comparatively low-tech chips for a bevy of little-known Chinese firms.

Analysts said only one Chinese-owed chipmaker, Hua Hong Semiconductor Ltd, had the requisite know-how to absorb lost capacity from SMIC. As a result, most Chinese chip vendors would be forced to turn to the local factories of foreign manufacturers, most notably Taiwan’s TSMC and UMC.

“If SMIC can’t get access to US technology, China will face an even harder, and maybe an impossible, climb to the cutting edge in semiconductors,” Kevin Allison, director of research firm Eurasia Group, wrote in a note.

The proposed SMIC restrictions also raised the possibility that Washington might target China’s other chipmakers, which include Hua Hong, Yangtze Memory Technologies Co Ltd, Changxin Memory Technologies Co Ltd.

President Donald Trump spoke of a “decoupling” of the US and Chinese economies on Monday.

The proposed US curbs on SMIC could deal a blow to manufacturing machinery providers, like American firms Applied Materials, Lam Research and KLA, and Japan’s Tokyo Electron.

Aside from denting their current sales and service business, they could rob them of the opportunities presented by SMIC’s expansion plans.

However this is unlikely to benefit rival chip equipment suppliers in China as none can fill the shoes of the more advanced foreign players, analysts say.

However some Chinese suppliers were making advances. The likes of Naura Technology Group Co Ltd and Advanced Micro-Fabrication Equipment Inc (AMEC), for example, were expected to become big equipment providers to SMIC in the years to come, but that future could now be under threat.

“One may think Chinese equipment and material suppliers would be further boosted due to de-Americanisation, which may be true in the long-term, but if SMIC’s production lines are paralyzed, these Chinese equipment/materials would be of no use,” wrote CLSA analyst Bin a research note.

Naura and AMEC saw their share prices fall 9% and 10.1%, respectively, on Monday.

Paul Cheng, general manager at Taipei-based brokerage Masterlink Securities, said Taiwan’s Winbond Electronics Corp and Macronix International Co Ltd might now be in a position to acquire SMIC’s NOR flash memory business. Both companies’ share prices rose on Monday.

However that would run counter to Beijing’s desire to boost homegrown chip production. It would also force Chinese chip companies to devote resources to switching foundries – a costly, time-consuming endeavor.

“It’s doable, sure, but not without at least 12 months of work,” said one executive at a Chinese chip vendor.—Reuters

Josh Horwitz, "Proposed US curbs on Chinese chipmaker SMIC could rattle supply chains," Business recorder. 2020-09-09.
Keywords: Economics , Trump administration , Eurasia Group , Chinese economies , Japan , Hua Hong , SMIC

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