U.S. Considers Adding SMIC to Trade Blacklist

The author is an analyst of KB Securities. He can be reached at  jeff.kim@kbfg.com. -- Ed.

 

U.S. considers adding SMIC to trade blacklist

The U.S. government is considering adding China’s no. 1 foundry, SMIC, which is also the world’s fifth largest, to its trade blacklist, according to foreign media outlets (Sept 6). The restriction would require U.S. companies to receive government approval before exporting U.S. technology (e.g., semiconductor equipment components and software) to SMIC. If approved, the ban would deal a heavy blow to China’s aggressive plan to manufacture 70% of its semiconductors domestically by 2025. 

Ban to deepen supply-demand imbalance

China produces 7% of global foundry supplies, which is less than half of China’s share of global demand (19%). The currently tight supply-demand dynamics could be exacerbated by the ban given that past tightened U.S. restrictions on Huawei led to a boost in rush orders to secure inventory. We see this recent development compelling Chinese IT companies to place rush orders with foreign foundry companies. As of 3Q20, SMIC earned around 70% of its revenue from Chinese companies, with its production lines in full operation (98%). The company, which is key to China’s push for domestic semiconductor production, has been expanding its domestic market share via ramp ups in supply of camera image sensors, PMICs, DDIs and fingerprint sensors for the smartphone, display and consumer electronics markets. 

SEC, SK hynix to benefit

If SMIC is added to the U.S. trade blacklist, Korean companies such as SEC and SK hynix stand to benefit: (1) SEC is capable of mass-producing memory chips using a 7nm process. SMIC aims to produce 7nm chips by end-2021, an endeavor that may be disrupted by the U.S. ban. (2) A Wuxi foundry owned by SK hynix’s wholly owned subsidiary SK hynix System IC will go into full operation starting 4Q20. We note that SK hynix System IC is focusing on China’s niche market in 8-inch wafers (vs. TSMC/SEC focus on 12-inch wafers), and its multi-item, small-volume production system can cater to the needs of Chinese clients regarding CIS, PMIC and DDI production.  

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