U.S’ Next Attack Against China’s Semiconductor Industry

At first, it was Huawei and now, it is SMIC. Why is the U.S going after Chinese semiconductor companies?

What Happened?

Semiconductor Manufacturing International Corporation (SMIC), China’s largest chipmaker, was added to the U.S Commerce Department’s blacklist known as the entity list on Friday. The U.S said that exports to SMIC carried an “unacceptable risk” of being diverted to “military end use”. If companies want to supply specific products to SMIC, they would need licenses to do so.

The company felt the impact of the U.S’ move in the stock exchange today. SMIC’s Shanghai-listed shares plunged 7% while its stock slumped nearly 7.9% in Hong Kong and closed 3.9% lower for the day.

Same Story. Different Time.

When you read about the U.S’ move on SMIC, you might feel like you’re having a déjà vu. If you are having that feeling, then you are right on money, because the U.S did something similar to another Chinese company, Huawei. Huawei was added to the same list that SMIC has been added, in the year 2019.

Once Huawei was added to the list, it’s access to high-end chips were restricted and other countries, including UK, Canada, Japan, New Zealand, Australia imposed restrictions on the company to be on the good side of the U.S. This affected Huawei to a great extent. The company didn’t meet its revised targets and fell short by $12 billion because of the U.S sanctions.

Stewart Randall, head of semiconductors at consultancy Intralink in Shanghai was quoted by FT, saying, “SMIC will lose access to US equipment but also potentially equipment from other countries that want to keep the US on their good side.” So, there is a high possibility that SMIC will face restrictions in other countries too. Exactly like what happened with Huawei.

The Future

The question here is, will this move by the U.S affect SMIC in the same way it affected Huawei? And the answer is a big YES!

Since 2019, SMIC has signed orders worth over $2 billion with the U.S companies Applied Materials and Lam Research. The American businesses were the Chinese chip maker’s top and third-largest equipment suppliers, respectively, between 2017 and 2019, as stated in its listing prospectus.

Because of the fact that SMIC has been added to the list, U.S companies including Lam Research, KLA Corp and Applied Materials, which supply chipmaking equipment, will now have to get licenses to supply certain goods to SMIC.

Think about it — If you are a U.S company who supplies goods to SMIC, you now have to go through a tedious process. Instead of going through all of that, you would rather find a local company or any other company in any other continent, to supply your goods.

Despite SMIC saying that their products have “no relationship with the Chinese military and do not manufacture for any military end-users or end-uses”, we feel that this statement wouldn’t be enough for the U.S to revoke the ban. This also makes us wonder how many more Chinese companies does President Donald Trump have in his list that would see restrictions in the future.

Since he has already gone after Huawei and now he is going after SMIC, we can be sure that more Chinese companies are at the risk of being banned by the U.S. However, only time will tell how well this strategy will work for the U.S and whether this will affect China’s domestic semiconductor industry?

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