The Trump administration is considering whether or not to add Semiconductor Manufacturing International Corp (SMIC) to the Commerce Department’s “Entity List” – the same mechanism used to restrict the export of American technology to Huawei.
SMIC is the largest Chinese semiconductor foundry.
This would cause SMIC a great deal of inconvenience and further undercut American semiconductor production equipment (SPE) sales to China. A sword is hanging over the share prices of SMIC and leading American SPE makers including Applied Materials, Lam Research and KLA.
Another act of economic war intended to cripple China’s high-tech industries, it would also convince the Chinese government – if any further convincing was necessary – that eliminating dependence on American technology is an absolute necessity.
Some form of retaliation also seems likely. Has anyone calculated the valuations of American companies assuming no further growth in sales in China, declining sales in China or no sales in China at all? Not only technology companies are at risk.
Potential beneficiaries of American sanctions include established Japanese and European SPE makers, and Chinese upstarts, which ordinarily would find it next to impossible to compete with the market leaders.
Even South Korea, which leads the world in semiconductor memory production, has not been able to build a competitive SPE industry.
Negative for capex
Nevertheless, the immediate concern is the impact of the US-China trade war on semiconductor capital spending, which in the short to medium term at least is negative for all concerned.
SEMI, the industry association serving the global electronics design and manufacturing supply chain, is alarmed. On August 24, it issued this statement:
SEMI recognizes the role of export control measures to address threats to US national security. However, we are very concerned the new export control regulations issued on August 17, 2020, by the US Department of Commerce will ultimately undermine US national security interests by harming the semiconductor industry in the US and creating substantial uncertainty and disruption in the semiconductor supply chain.
Commerce’s decision to significantly expand these unilateral restrictions will likely lead to more lost sales, eroding the customer base for US-origin items. The new restrictions will also fuel a perception that the supply of US technology is unreliable and lead non-US customers to call for the design-out of US technology.
In July this year, SMIC listed on the Shanghai STAR market, raising US$6.6 billion to finance the expansion of 300mm wafer processing capacity, as well as technology upgrades to meet the requirements of Huawei and other customers and to compete more effectively with TSMC and other leading foundries.
This will be expensive, time-consuming and difficult. SMIC’s most advanced processing technology is 14nm (nanometer circuit design rule). TSMC has a well-established 7nm service, which started volume production at 5nm earlier this year and is developing 3nm capability.
SMIC not only uses equipment made by Applied Materials, Lam Research and KLA, it depends on electronic design automation (EDA) tools from Mentor Graphics and Synopsys.
If the US government blocks SMIC’s access to American technology, its capacity expansion, technology upgrade and production plans will be seriously disrupted.
TSMC stopped taking orders from Huawei in May in order to comply with US export controls. Shipments of devices ordered before the ban took effect will stop on September 14. Any restrictions placed on SMIC – which hopes to replace TSMC at Huawei – would probably take effect with similar rapidity.
China has joined Taiwan and South Korea as one of the three largest SPE markets. According to data from SEMI, Chinese purchases of wafer fab equipment have doubled over the past four years to account for nearly 25% of global demand.
This is the opportunity that the US government seems intent on throwing away and that SEMI is so worried about keeping.
Most major SPE makers have significant exposure to China, but American companies’ exposure is notably high. Export restrictions would not put all their sales in China at risk, but they are intended to lock them out of new Chinese investments in leading-edge equipment.
The stock market does not like this. On Saturday, September 5, Reuters reported that the Trump administration was considering whether to put restrictions on SMIC. On Monday, September 7, SMCI’s share price dropped 22.8%.
On September 8, Applied Materials was down 5.3%, Lam Research was down 9.1% and KLA was down 9.8%.
The justification for sanctions on SMIC, should they be imposed, would be that it supplies the Chinese military. Although it claims not to, Datang Telecom, a producer of commercial and military telecommunications equipment controlled by the Chinese government, is one of SMIC’s largest shareholders and business partners.
The Sword of Trump appears likely to hang over SMIC at least until the American presidential election in early November, if it doesn’t drop before then.
Scott Foster is an analyst with Lightstream Research, Tokyo.