Sanctions could be devastating to the Chinese fab and Huawei, but they could also sharpen China's focus on becoming self-reliant.

Iain Morris, International Editor

September 8, 2020

5 Min Read
China's SMIC in US firing line

The denials sound eerily familiar to anyone who has monitored Huawei's long battle with US authorities.

"We have no relationship with the Chinese military," read the statement. "Any assumptions of the company's ties with the Chinese military are untrue statements and false accusations. The company is in complete shock and perplexity to the news."

Figure 1: PLA time: SMIC has denied it has links to the Chinese Army as the US looks to sanction it. (Source: Steve Webel on Flickr CC 2.0) PLA time: SMIC has denied it has links to the Chinese Army as the US looks to sanction it.
(Source: Steve Webel on Flickr CC 2.0)

Seemingly ripped from Huawei's book of standard responses to US threats, the statement came from SMIC after the Chinese semiconductor fab was tipped by a Reuters source for inclusion on the US naughty list.

Its alarmism is warranted. Just as they have strangled Huawei, US sanctions would choke off SMIC's access to important US technology, without which it might not be able to function.

Besides ruining SMIC, that could further devastate Huawei: SMIC was probably its next best option after TSMC, a Taiwanese fab that has stopped supplying Huawei due to US measures.

Last year, Huawei is thought to have ranked as TSMC's second-largest customer, behind Apple, accounting for about 14% of its revenues, or roughly $5.2 billion.

TSMC was preferred because SMIC is thought to lag it on manufacturing expertise. Essentially, it has not been able to shrink designs to as few "nanometers" (usually abbreviated to "nm") as its Taiwanese rival, meaning the performance of its products is not as good.

"SMIC doesn't have 7nm capability," said Linley Gwennap, a principal analyst with The Linley Group, during an earlier conversation with Light Reading. "They are several years behind TSMC in that regard."

US dependency
Nevertheless, what SMIC has in common with TSMC is reliance on US manufacturing tools or design expertise.

Most of the fab equipment used to produce semiconductors is supplied by a coterie of US firms, including Applied Materials, KLA and Lam Research.

Similarly, the electronic design automation (EDA) software that fabs use to lay out complicated circuitry comes mainly from three US-based companies: Cadence, Synopsys and Mentor Graphics.

SMIC acknowledges it relationships with US firms in its statement, without disclosing their identities.

"SMIC has maintained long-term strategic partnerships with multiple US-based semiconductor equipment suppliers," it says. "Over the years, the Bureau of Industry and Commerce (BIS) has granted numerous export licenses for the company."

If those are rescinded, and SMIC is unable to procure American technology, it would have nowhere to turn, according to Richard Windsor, an analyst at Radio Free Mobile.

In a blog describing the chip manufacturing sector as "a series of mini-monopolies," he writes that "no one can make a silicon chip without using a piece of equipment or software from a US company."

Want to know more about 5G? Check out our dedicated 5G content channel here on Light Reading.

Chinese efforts to develop alternatives and become self-reliant will probably not bear fruit for several years, according to Gwennap.

"These are very complicated machines developed over decades of evolution, and to start from scratch and try to duplicate that is not impossible, but will take China some number of years," he previously told Light Reading.

Unsurprisingly, then, SMIC's share price took a pounding in Hong Kong on Monday this week, after news of possible US sanctions broke at the weekend. Its share price fell nearly 23% on September 7 as investors considered the probable impact.

Shaky defense
SMIC's defense looks far weaker than Huawei's. While both companies deny links to the Chinese military, SMIC's shareholders include Datang Telecom, a state-backed enterprise that supplies telecom equipment to the People's Liberation Army, says Windsor.

"In my opinion, the fact that Datang Telecom is a shareholder with a seat on the board provides a fairly strong link to the military which seems to contradict SMIC's own statements," he writes in his blog.

Rather like Huawei, SMIC has also been embroiled in intellectual property disputes with foreign companies.

Fifteen years ago, it paid $175 million to settle a US lawsuit brought against it by TSMC. Shortly after that, an Oakland jury found it liable for 61 of the 65 claims made by TSMC, according to Windsor.

There are echoes here of the court battles around the same time between Huawei and Cisco, the US maker of Internet equipment that accused the Chinese firm of patent infringement.

Many analysts remain undecided on the Trump administration's goals.

Despite the extremity of the sanctions and the unrelenting nature of the campaign against Chinese companies, Windsor thinks the US government does not aim to force Huawei and SMIC out of business but rather to exert pressure on Chinese authorities and eventually secure trade concessions.

That will not convince some observers. Once squeezed out of European markets, Huawei is unlikely to mount a comeback, as former customers forge long-term relationships with alternative vendors.

Similarly, as SMIC and Huawei look to non-US technology suppliers, they will probably never return to their original providers.

Therein lies the worry for some US companies. Last month, Qualcomm was reported to have lobbied the US government for permission to sell 5G components to Huawei. Sanctions would cost it dearly and fatten the pockets of foreign competitors, it said.

A technologically strong and self-reliant China, with no need for US expertise, could be a more frightening prospect than one that deals with American firms.

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— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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