Commentary on Political Economy

Monday, 7 September 2020



SMIC Dives 15% on Report U.S. Is Considering Blacklisting Chipmaker

Bloomberg News
Updated on 
  • Shares plunge the most in more than seven weeks in Hong Kong
  • Chipmaker denies any relationship with China’s military

Semiconductor Manufacturing International Corp. tumbled the most in seven weeks following a report that the Trump administration was considering adding the chipmaker to a blacklist amid an escalating crackdown on Chinese technology companies.

The shares plunged 23%, the most since July 16, at the close of trading in Hong Kong, contributing to a 4.6% rout in the Hang Seng Tech Index. Fellow Chinese chipmaker Hua Hong Semiconductor Ltd. plummeted more than 14%. The Defense Department is working with other U.S. agencies to determine whether to take action against SMIC, which would force American suppliers to seek a special license before shipping to the company, Reuters reported on Friday.

China's top chipmaker is still outpacing TSMC this year

SMIC’s ties to the Chinese military are under scrutiny, according to the report. The company subsequently said it is “in complete shock and perplexity to the news,” adding that it has no relationship with the Chinese military.

Chinese tech companies including Huawei Technologies Co. have been caught in the middle of worsening tensions between the two countries, which have clashed on a multitude of issues ranging from trade to the coronavirus pandemic and a Beijing-imposed security law for Hong Kong. Sanctions against SMIC would be an additional blow to Huawei, which has already been shut out from access to U.S. technologies and equipment.

“If implemented, this will severely undermine SMIC’s ability to advance technologies,” Bernstein analysts led by Mark Li wrote in a note. “As U.S. equipment is indispensable for advanced semiconductor R&D and production, such a restriction, once implemented, effectively allows the U.S. government to decide how fast, or slow, SMIC’s technology progress would be.”

Chinese Foreign Ministry spokesman Zhao Lijian accused the U.S. of “blatant bullying” in response to a question about the SMIC report Monday.

“What it has done has violated international trade rules, undermined global industrial supply and value chains and will inevitably hurt U.S. national interests and its own image,” Zhao told a regular news briefing in Beijing. “We urge the U.S. to stop over-stretching the concept of national security to oppress foreign companies.”

As much as 50% of SMIC’s equipment is from the U.S., Jefferies estimated. “Should the U.S. export ban on SMIC materialize, it will signal an escalated attack by the U.S. on China’s semi industry and more Chinese companies will likely be included,” analysts led by Edison Lee said. “This is negative not only for China’s semi industry but also for semiconductor production equipment (SPE) makers globally, as China could account for 24% of global SPE procurement in 2020.”

Clients and suppliers of SMIC also sank, with Gigadevice Semiconductor Beijing Inc. and Naura Technology Group Co. losing more than 9% and Datang Telecom Technology Co. sliding 3.1%. The chipmaker’s Taiwanese rival, United Microelectronics Corp., jumped more than 9%.

In response to the widening U.S. crackdown, China is planning to provide broad support for so-called third-generation semiconductors in its next five-year plan to increase domestic self-sufficiency in chip manufacturing, according to people with knowledge of the matter. These chipsets are mainly made of materials such as silicon carbide and gallium nitride and are widely used in fifth-generation radio frequency chips, military-grade radars and electric vehicles.

“The equipment to make third-generation semiconductors has only limited exposure to U.S. vendors. The technology is unique, but does not involve high barriers, and China is well positioned thanks to its strength as the largest manufacturer of MOCVD tools with the largest installed base worldwide,” Citigroup analyst Roland Shu wrote in a note. “However, development on first-generation semiconductors, i.e. integrated circuits on silicon substrates, are ultimately under the control of the U.S. government, without any clear long-term alternatives.”

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