Ban on SMIC stirs call for 'Long March' to counter US dominance

(ATF) The imposition of US export bans against a second Chinese tech firm – Semiconductor Manufacturing International Corp or SMIC – has stirred calls for a “long march” to overcome US dominance in the semiconductor industry.

The state-backed Global Times carried an opinion piece on Sunday that was critical of export restrictions imposed on SMIC, the country’s largest chip manufacturer.

The unnamed author of the report argued that US dominance of the global chip or semiconductor supply chain was a “fundamental threat” to China, Reuters said.

“It now appears that China will need to control all research and production chains of the semiconductor industry, and rid itself of being dependent on the US,” the author wrote.

It follows news that the US government sent letters to companies to inform them that they must obtain a license to supply SMIC – because SMIC and its subsidiaries “may pose an unacceptable risk of diversion to a military end use.”

The restrictions against SMIC, and earlier ones against Huawei Technologies showed that the US was leading a protracted battle of “high-tech suppression” against China, the op-ed author argued.

And while companies such as Tencent and ByteDance had made tech breakthroughs, they were based on US chip technology, it conceded.

“The foundation of the entire industry is still in Americans’ hands. For now at least. China must leap from zero to one to provide solid support for the country’s competition with the US,” the author wrote.

The Global Times is a tabloid published by the People’s Daily, the official newspaper of ruling Communist Party, but does not speak on behalf of the party and government, unlike its parent publication.

SMIC confirms the bad news

On Sunday evening (Oct 4), SMIC confirmed that it was subject to US export restrictions, having earlier denied the news. With China currently in the middle of its 11th ‘Golden Week’ holiday, the US move came at a particularly bad time. (As China tends to announce unpopular moves to Western countries on Christmas Day, it is hard to say if the timing was intentional or not.)

The Hong Kong Stock Exchange website said SMIC was aware that the US Department of Commerce’s Bureau of Industry and Security had issued letters to some suppliers in accordance with the US Export Control Regulations to say that certain US equipment, accessories and raw materials exported to SMIC would be further restricted by US export control regulations. The company had to apply for export licenses in advance before they can be supplied.

In response, SMIC said it had begun preliminary exchanges with the US Bureau of Industry and Security and would continue to actively communicate with relevant US government departments.

SMIC said it was evaluating the impact of the restrictions on the company’s production and operation activities. Due to the prolonged or inaccurate supply period of some equipment, accessories and raw materials exported from the United States, it may have important adverse effects on the company’s future production and operation. SMIC would continue to follow up on this matter and will issue further announcements in due course, it said.

SMIC reiterated that it has always adhered to compliance operations and abided by relevant laws and regulations in its place of operation.

‘Unacceptable risk’

This news had leaked out on September 26, when a letter suspected to be sent by the US Department of Commerce’s Bureau of Industry and Security (BIS) to a US chip company was revealed by the US and UK media. In the document, the Bureau stated that supplying to SMIC and its affiliates may ultimately lead to the risk of those products being used by the Chinese military. That is the reason, the bureau requires US chip companies to apply for a license before suppling SMIC, China Fund news reported.

According to Reuters, the reason why the US government imposed export restrictions on China’s largest chip manufacturer is because the US believes that the equipment exported to SMIC poses a military risk – a risk deemed as “unacceptable.”

This makes SMIC the second top Chinese technology company subject to US trade restrictions after Huawei.

On Sept 27, SMIC issued a statement saying the company saw a media network forwarded a report suspected to be issued by the US Bureau of Industry and Security, suggesting that certain products exported by SMIC, and its subsidiaries and joint ventures would be subject to export controls.

But at that time, the company said had not received any official news to say that. The company reiterated that SMIC only provides products and services for civilian and commercial end users. It said it had nothing to do with the Chinese military and does not produce products for any military users.

SMIC said it would continue to pay attention to relevant information and strictly comply with relevant laws and regulations to fulfil its information disclosure obligations. Investors were kindly requested to invest rationally and pay attention to investment risks.

‘Abuse of export controls’

China’s Ministry of Foreign Affairs also responded on Sept 28, saying that as a principle, it firmly opposes the US government’s generalisation of the concept of national security, as it violated the principles of a market economy and fair competition, plus international economic and trade rules.

It claimed the US move was an abuse of export controls and other restrictive measures to unreasonably suppress Chinese companies. China would continue to take necessary measures to safeguard the legitimate rights and interests of Chinese enterprises, it said.

China, of course, stands on very shaky ground given the way it interferes with foreign business operations. It is also impossible to say whether SMIC is supplying the Chinese military or not.

But, given that Datong Telecom is a major supplier provide service to the Chinese military, it is not a great leap for the US to make such a connection.

‘Storing grain for the winter’

It was also reported that SMIC had been hoarding equipment and parts, according to vendors.

These reports said that SMIC was already “storing grain for the winter” – as in stocking up on key equipment, chemicals and parts.

As China’s largest chip manufacturer, SMIC has been “stockpiling” key production equipment and important replacement parts, and is even cooperating with other Chinese chip manufacturers to establish a shared reserve of such parts – they have already established a central warehouse created to store these products.

A person familiar with the matter told China Fund news that the scale of SMIC’s procurement from upstream suppliers in the United States, Europe, and Japan had exceeded the full-year demand for 2020. The items procured include etching, lithography and wafer cleaning materials. Other processing equipment, testing machines, and related consumables it had bought would be used to maintain the operation of the company’s equipment. SMIC had more than one year’s supply of such goods on hand, the source said.

SMIC’s second-quarter financial report showed that its sales in Q2 of 2020 were US$939 million, an increase of 3.7% month-on-month and a rise of 18.7% year-on-year. The gross profit in the second quarter of 2020 was $249 million, an increase of 6.4% from the previous quarter and a year-on-year increase of 64.5%.

Mass production of 14nm chips has already begun, and 14/28nm advanced manufacturing accounts for 9.1% of its business. Currently, 25% of SMIC’s customers are in the United States.

In July this year, SMIC was listed on the Science and Technology Innovation Board, Currently, the market value of SMIC in A shares, Hong Kong stocks and US stocks is 382.227 billion yuan, HK$139.495 billion, and US$5.465 billion, respectively.

With reporting by Reuters