SMIC: wrong bargaining chip

The US government has imposed long-rumoured sanctions on China’s biggest chipmaker. China’s tech industry relies heavily on Semiconductor Manufacturing International Corporation for its micro processors. But the damage from this latest escalation of the trade war will be felt by US as well as Chinese businesses.

The group’s Shanghai-listed shares fell 7 per cent on Monday after Washington said exports to SMIC posed an “unacceptable risk” of being diverted to “military end use”. Nearly a third of SMIC’s suppliers are American. They now need approval to export US chipmaking software and equipment to SMIC. Military use is a broad enough risk for supplies to be cut off entirely.

Without US machinery, China’s short-term chip production will suffer. But much of the hurt that can be inflicted on SMIC has already been done. ASML Holding, the Dutch maker of crucial equipment needed to make high-end chips, was once SMIC’s biggest supplier. It has been unable to secure approval to export to SMIC since last year, reportedly due to US influence.

Earlier US sanctions mean SMIC has already lost its biggest customer, Huawei. The telecoms equipment group, which the US accuses of spying, previously generated a fifth of SMIC’s revenues.

New curbs are likely to leave US tech groups with a serious headache. A quarter of SMIC’s customers are based in the US. Qualcomm, which produces chips for Apple and Google, is one of the largest, yielding nearly a tenth of SMIC’s revenue.

SMIC has about 5 per cent of the world market for outsourced chip production. That rises to 10 per cent for some older-generation micro processors. If the group is forced into a shutdown, however partial, costs would rise steeply for its clients. Taiwan Semiconductor Manufacturing Company and Samsung are much pricier chip suppliers. The loss of SMIC’s capacity would push up world micro processor prices as a secondary effect

The Trump administration’s tough line on China is popular with voters. But reducing free trade always raises costs, whatever the political logic. China may now retaliate against the US using its “unreliable entity” blacklist of foreign groups.

As for SMIC, it raised Rmb53.2bn ($7.6bn) in July to speed up development of its own chip designs — and progress towards Chinese tech self-sufficiency. It can be sure of support from the Chinese state, its largest shareholder, in proportion to US hostility.

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