The future of China’s largest chip maker and Beijing’s best hope to catch up with rivals in the critical field of semiconductor manufacturing is under a cloud after the company said it would have trouble developing advanced chipmaking processes after it was put on a US trade blacklist.
“[The addition to the blacklist] will have significant negative impacts on research and development of advanced processes smaller than 10 nanometre [based] upon our initial assessment,” SMIC said in a statement on Monday, adding that the short-term impact on the company’s operation and finances would be limited.
The curbing of SMIC’s ability in advanced chipmaking could have a profound impact on China’s efforts to catch-up in semiconductors, a key part of Beijing’s broad strategy to counter US technological dominance.
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SMIC is only able to mass produce chips at the 14 nanometre node, lagging far behind state-of-the-art foundries like TSMC which are aiming to produce 3 nanometre node chips by 2022.
Arisa Liu, an analyst for the Taiwan Institute of Economic Research, said SMIC’s short-term approach will now be titled towards smaller wafers and third-generation semiconductors and that it could only return to advanced process nodes once the deadlock between the US and China has eased.
However, one analyst believes the sanctions will have a broader reach. “Frankly, the impact on its mature nodes will also be significant because it’s hard to find substitutes for US suppliers in the short-term,” said Sheng Linghai, senior semiconductor analyst at Gartner. “The magnitude of the impact is at the discretion of the US government.”
SMIC’s mature 55 and 65nm nodes contributed to 25.8 per cent of total wafer revenue in the July-September quarter compared with a 14.6 per cent contribution from the more advanced 14 and 28 nm nodes.
The tighter US restrictions could further complicate SMIC’s efforts to continue making technological progress in semiconductors, where China lags behind the world. Last week the company underwent a boardroom shake-up with co-CEO Liang Mong Song’s abrupt resignation although the company has been trying to keep him on, according to reports.
Liang, who backed an aggressive leading edge strategy for SMIC, was at odds with co-CEO Zhao Haijun, who preferred to develop commercially viable products using older technology, according to a report by the Financial Times last year.
In his leaked resignation letter widely published in Chinese-language media, Liang pointed out that since his appointment as co-CEO in November 2017 he had led a team that completed the development of process nodes from 28nm to 7nm - although the 7nm node has not been put into volume production. Liang said such a task would have taken other companies more than 10 years to complete.
“SMIC hired Liang Mong Song to turbocharge the development of advanced process nodes,” said Gartner analyst Sheng. “That direction seems to be hitting a snag due to the largely expanded US tech export controls.”
Lin Liang, a Beijing-based semiconductor industry insider, said SMIC was considering using domestically-sourced equipment for 70 per cent of the gear it needs for the third stage of its new wafer foundry being constructed in Beijing Yizhuang economic development zone. However, using the Chinese equipment would add to the difficulties of trying to produce chips at the 14nm node or below, he added.
As well as SMIC, China’s top drone maker DJI and dozens of other Chinese companies were added to the US Department of Commerce Entity List on Friday. Huawei Technologies was added to the list in May 2019.
DJI said it was disappointed by the US decision. “Customers in America can continue to buy and use DJI products normally,” DJI said in a statement on Monday, adding it remains committed to developing the industry’s most innovative products.
The trade blacklist means SMIC’s US suppliers now must apply for a licence from the US Commerce Department before supplying products and technologies to the Chinese company. SMIC, the world’s fourth largest wafer foundry, relies on core US equipment in nearly all its processing nodes, according to its Shanghai Star market IPO prospectus.
SMIC said the Commerce Department will apply “presumption of denial” in the process of granting licences to US suppliers when it comes to advanced technologies like extreme utra-violet (EUV) lithography required for manufacturing processes smaller than 10nm. “Presumption of denial” means that the application will be denied in most cases.
Trading in Hong Kong-listed SMIC closed at HK$19.14 (US$2.46) per share on Monday, down 3.63 per cent. Rival Hua Hong Semiconductor was down 4.86 per cent. The Hong Kong Hang Seng Index fell 0.72 per cent for the day.
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