How SMIC will overcome its recent challenges

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SMIC requests trade licensee to resume selling semiconductors to Huawei
Image: SMIC

The U.S. Department of Defense recently designated Semiconductor International Manufacturing Corporation (SMIC) as a company owned or controlled by the Chinese military. The government’s action restricts American suppliers from selling tools and materials to the business. Washington also took action to bar United States-based organizations from investing in the chipmaker.

While those developments will undoubtedly hurt the firm, its current challenges are temporary. SMIC’s unmatched expertise and strategic importance could enable it to become a leading provider in the global electronic components industry.

Market Leading Technology

Currently, SMIC is China’s largest pure-play foundry and the fifth-biggest chipmaker in the world. The company achieved its status in part because it developed industry-leading technology within its domestic market.

Earlier this year, SMIC began taping out its N+1 7nm node, which makes it the only Chinese firm with that level of production sophistication. In addition, market insiders believe it will begin utilizing the technology at scale next year.

The company managed to improve its production despite the mounting inaccessibility of American-derived semiconductor technology. The chipmaker reached the 7nm threshold without using tightly controlled, extreme ultraviolet lithography (EUV) equipment as opposed to its foreign rivals.

That indicates it will continue to advance its production proficiency even with Washington’s recent policy changes.

Robust Financial Resources

If the Chinese foundry is to realize its full potential, it will need a lot of money. The work of semiconductor research, design, fabrication, and testing is hugely expensive. SMIC estimates it will spend $5.9 billion on its operations this year. The process is even more costly for businesses that cannot purchase production tools for leading third-party vendors.

Nevertheless, SMIC looks poised to bring its business to the next level.

The chipmaker has shown it has the potential for long-term growth by generating record revenue throughout the year. In the first nine months of 2021, it made $2.925 billion, with its highest sales coming in Q3. That is notable because it made $3.11 billion in all of 2019. It also raised $7.57 billion in July via an initial public offering (IPO) on the Shanghai Stock Exchange.

The company’s robust quarterly income and outside financial backing will enable it to develop advanced component nodes.

SMIC also has Beijing’s support because it views its success as an important part of its national semiconductor independence initiative. The country’s government, via the China Integrated Circuit Industry Investment Fund, contributed $500 million to its Shanghai IPO. The region’s leaders are working with the manufacturer to establish a state-of-the-art wafer fabrication facility in Beijing.

Its government partnerships will enable SMIC to dedicate more of its cash on hand to research and development, recruitment, and facility upgrades.

Strong Headwinds will not Capsize the Ship

Like all businesses, SMIC is not immune to the impact of geopolitical headwinds. In November, the corporation revealed it would cut its 2020 capital expenditures by 12 percent due to newly enacted U.S. export controls. Its Q4 revenue will likely take a hit because of its fundraising restrictions and sourcing challenges.

That said, SMIC’s strong domestic market position should give it the wherewithal to overcome the obstacles it is now facing.

In fact, the manufacturer might be able to substantially increase its revenue in the next few years. IC Insights recently issued a forecast indicating China will spend an estimated $14.85 billion on pure-play foundry services this year. Because of the region’s interest in rapid national digitalization, its semiconductor market will likely continue growing.

SMIC, with its domestic market-leading technology and healthy cash stores, is positioned to meet Chinese chip demand.

Even if U.S.-China relations significantly improve soon, the worldwide electronic component reshoring and realignment trend will continue. The trade war and coronavirus pandemic made it clear that traditional, globalized supply chains are not fit for purpose in the 21st century. Consequently, SMIC has the opportunity to transition from being a domestic champion into a corporate institution.

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