China’s biggest chipmaker bets on Shanghai listing

At the heart of China’s drive to become technologically self-sufficient is a company that few have heard of.

That is partly by design: Semiconductor Manufacturing International Corporation, China’s largest computer chipmaker, has not spoken to the media for at least six months.

The state of China’s chip industry is an “extremely sensitive” topic, said analysts and executives in the sector.

China has long been trying to build domestic factories that can compete with advanced plants elsewhere in the world and provide the chips that power everything from smartphones to 5G base stations to missile guidance systems.

But that desire is now a necessity, after a steady rise in US pressure culminated last year in companies being banned from using US technology to supply Huawei, the country’s telecoms company.

SMIC is China’s best bet at reducing its dependence on foreign-made chips. It is now planning to raise more money, after delisting from the New York Stock Exchange in June and preparing for an offering on Shanghai’s new Star market. In doing so, it fulfils China’s push for domestic companies listed abroad, called “red chips”, to return home.

The pressure is high for a smooth debut. “When we write our reports [about SMIC] we carefully consider every word. If we make a mistake, the securities regulator will come for us,” said a leading industry analyst.

Analysts expect the relisting in the A-share market, where there are willing domestic investors held captive by capital controls, will give SMIC some of the fresh capital it needs to narrow the gap with international competitors.

Domestic players also say the US sanctions have spurred more domestic demand for Chinese chips, helping to scale up smaller firms in the supply chain.

But the gap is huge. Chip manufacturers compete over who can etch the smallest circuits, so squeezing more components into the same amount of chip space, and SMIC has neither the equipment nor skills to compete with leading players such as Taiwan’s TSMC.

“Technology wise, SMIC is at least five years away from TSMC,” said Xu Tao, semiconductor analyst at Citic Securities.

The Chinese company plans to raise Rmb20bn ($2.8bn) in Shanghai after raising $2.25bn from Chinese state-backed funds earlier this year. Government funding has also steadily increased, to about 7 per cent of revenues excluding deferred funding. SMIC took in $3.3bn in the year to April.

SMIC said it will spend Rmb8bn of that fundraising on expanding production of its most advanced 14nm logic chips, which it began mass manufacturing in 2019.

SMIC's R&D is rising, but falls far behind Taiwan's TSMC

China has also aggressively hired chip talent from Taiwan, with reports last year suggesting that 3,000 Taiwanese chip engineers were now working on the mainland.

Nevertheless, TSMC still has a clear lead. It achieved mass production of 5nm chips this year and its capital spending last year was $14.9bn, with a further $3bn on research and development.

While Huawei has started buying chips for its low-end Honor Play 4T smartphone from SMIC, it still relies on TSMC for its flagship phones and 5G base stations. High-end chips remain out of SMIC’s, and China’s, reach.

“From the timeline, you can see that there hasn’t been a significant decrease in the competitive gap,” said Si Yan, semiconductors analyst at Chasing Securities.

“Money can’t solve everything, although it is necessary,” he said, adding that perhaps a slowdown in Moore’s Law — which states that the number of transistors on a chip doubles every two years — could allow SMIC to eventually catch up “if there are not breakthroughs in new fields”.

Huawei’s founder Ren Zhengfei last year said that unlike building roads and bridges, “throwing money” is not enough for the semiconductor industry — one also needs to “throw mathematicians, physicists, chemists”.

SMIC’s co-chiefs were previously split over whether to spend money on ramping up existing production or to focus on trying to catch up in advanced chips. But seven people familiar with the situation said scores of executives were being replaced to align management around the goal of reaching the cutting edge.

SMIC lags behind in the global race to shrink semiconductors

In the short term, SMIC faces more risks from US sanctions, and its Shanghai prospectus is filled with warnings. Several of its customers could be affected by increased sanctions, the company said, in which case “the company could face production limits and lower orders”. SMIC also warned of obstacles in obtaining equipment or raw materials from abroad.

It remains a question whether Chinese chipmakers such as SMIC will comply if the US Department of Commerce strictly enforces its ban on selling to Huawei.

Doing so would not hit SMIC’s sales critically, but would seem to defeat the point of creating a domestic chip champion. But refusing to comply could see it cut from US technology, which is present in all stages of the chip supply chain.

SMIC’s largest vulnerability in such a scenario would be its reliance on what are known as EDA tools, the software needed to design chips and turn them into customised sets of instructions for specific plants to carry out, said Velu Sinha, telecoms partner at Bain & Co in Shanghai.

“China has been looking at domestic alternatives [to EDA tools] too; it’s not been sitting still there,” said Mr Sinha. “I don’t imagine a situation where SMIC is lights out.”

The bigger issue, Mr Sinha said, is the broader bifurcation of the semiconductor supply chain — companies using one set of designs, tools, testing procedures for China, and another for the rest of the world.

Additional reporting by Yunyi Yan in Beijing