SMIC and Beijing’s Quest for Semiconductor Self-Reliance

Advanced computer chips are quickly shaping up to represent one of the most competitive and high-stakes assets in today’s global economy. In the face of recent headwinds, including various market pressures and geopolitical obstacles, Chinese regulators are on a mission to achieve self-sufficiency in this vital industry.

At the core of this task is Semiconductor Manufacturing International Corporation (SMIC), a Shanghai-based chip maker that now finds itself on the front lines in meeting the production demands of China’s vast and dynamic tech sector.

As societies around the world carry on integrating digital technology into nearly every facet of daily life, semiconductors – which guide electronic devices ranging from cell phones and EVs to washing machines and satellites – increasingly serve as the basic building block for constructing the modern environment.

Despite the simplicity their pervasiveness and humble size may suggest, chips depend on a tightly integrated and complex international coalition of firms, each specializing in a particular aspect of the technology. Recent months have exposed the fragility of this system as manufacturers struggle to keep up with demand, causing ripple effects across a range of major industries, including automobiles and smartphones.

The current chip shortage was sparked by a rise in consumer demand during the initial stages of the COVID-19 pandemic, as professional and personal communication shifted to laptops, tablets and smartphones. At the same time, lockdowns prevented assembly line workers at the world’s leading foundries from showing up in person to build the semiconductors, adding a further drag on production levels.

Even as economies recovered from the initial jolt caused by the pandemic and workers returned to their posts, a series of other factors – including many that predate the coronavirus – have slowed the industry’s recovery.

Caught up in the heightening competition between the world’s two biggest economies, leading Chinese telecommunications firm Huawei has grappled with sanctions from the United States preventing it from purchasing products that use U.S. technologies. Moreover, the accelerating adoption of 5G products globally has underpinned a further surge in demand that chip makers are struggling to meet.

China’s drive to achieve chipmaking self-reliance

Regulators in Beijing have been developing a strategy over recent years to achieve what no single nation has yet been able to accomplish: the ability to produce cutting-edge semiconductors, from design through to production and delivery, all within its domestic borders.

For China, a reduction of the country’s dependence on overseas providers for its chip supply offers two key advantages. First, local production would bring profound economic benefits to the domestic tech industry by reducing costs and shipping times, also helping transform homegrown firms into global manufacturing powerhouses. Secondly, it would help shield players in the Chinese market from shocks to global supply chains or sanctions from foreign governments.

In the country’s 14th Five Year Plan, which was drafted last year to guide economic policy from 2021 through 2025, officials stress the need to promote what it defines as the seven “frontier technologies,” including artificial intelligence, biotechnology and semiconductors.

This approach fits in alongside a wider push to shore up high quality manufacturing within its borders, a campaign dubbed “Made in China 2025.” Regarding the semiconductor industry, authorities have set the ambitious target of producing 70% of the computer chips used domestically by 2025 – this would be up from just 16% in 2019. SMIC, as China’s leading chip maker, will inevitably need to play a central role in meeting these benchmarks.

In July of last year, the State Council released a document (in Chinese) on “promoting the integrated circuit industry,” issuing a “notice of several policies for the high-quality development of the software industry.” Among the suggestions included in the framework are generous tax exemptions for chip makers and support for domestic research and development of semiconductor technology.

In one notable case earlier this year, SMIC received funds from the Shenzhen government to construct a chipmaking facility with a price tag of $2.35 billion. According to Bloomberg, the firm plans to begin production at the new factory by 2022, with the final goal of churning out 40,000 12-inch wafers each month.

However, industry experts are skeptical that generous subsidies alone can help China achieve semiconductor independence.

The highly specialized nature of the global semiconductor industry does not always present a favorable environment for newcomers. Chip makers face a high barrier to entry in terms of hiring key employees with experience, setting up reliable and timely international supply chains and securing intellectual property rights – all factors must come together in order to produce cutting-edge chips suitable for today’s market.

SMIC: China’s semiconductor champion

Semiconductor Manufacturing International Corporation (SMIC) was founded at the turn of the 21st century by Richard Chang Ru-gin, incorporated in the Cayman Islands and headquartered in Shanghai. Since its inception, it has swelled to become the undeniable national champion of the Chinese mainland semiconductor industry.

2020 was a busy year for SMIC. In July, the firm successfully completed China’s biggest IPO in a decade, listing to Shanghai’s Nasdaq-style STAR board and raising funds totaling $7.6 billion. In September, the Trump administration declared sanctions on SMIC, requiring U.S. suppliers to obtain a license prior to engaging with the company. In December, it was included on the U.S. Commerce Department’s Entity List, adding further restrictions on SMIC’s trade networks.

Despite the setbacks posed by U.S. sanctions, SMIC reported strong growth for the first half of this year, posting an impressive 278% increase in net profits year-on-year and nearly $2.5 in total revenues – 22% higher than the previous year.

This trajectory is expected to continue for several years to come, with one analyst forecasting that with SMIC’s current rate of growth, its production is likely to double by 2025. This would place SMIC amongst the top tier of the global industry, squaring off with competitors such as Taiwanese Semiconductor Manufacturing Company (TSMC), currently the world’s tenth most valuable company with a $570 billion market capitalization.

While the annual production capacity of China’s leading chip firm continues to climb, it still lags behind in terms of technology. By some measures, SMIC’s most advanced chip still lags behind that of TSMC by approximately five years. In the meantime, demand from domestic Chinese tech giants for top-of-the-line semiconductor products is surging.

At a recent conference in Beijing, Chief Technology Officer for bike-sharing and travel firm Hello, Inc. Liu Xingliang emphasized the critical role smart chips must play in the future development of its business. Each of Hello’s vehicles, said Liu, “has a smart chip in it…providing for a good management, operation and maintenance mechanism for each device through the AIoT (Artificial Intelligence of Things) platform.”

SEE ALSO: TCL to Spend Over 20 Billion Yuan on Semiconductor Development, Will Carry Out R&D with Other Tech Giants Including Meituan and Baidu

So far, SMIC and other Chinese firms have not produced enough chips to meet the country’s ambitious targets. According to recent reporting by Nikkei Asia, Ye Shengji, Deputy Secretary General of the China Association of Automobile Manufacturers, has stated that domestic carmakers currently source “less than 5%” of their semiconductors from the Chinese mainland.

SMIC has been enjoying a sustained period of growth of late, despite ongoing supply chain shortages and U.S. sanctions, propelled forward by a robust domestic tech industry and generous regulatory support. In the longer term, whether or not China’s semiconductor champion can lead the charge in bringing about regulators’ dream of self-reliance in the crucial sector remains obscure.