China’s leading chip maker SMIC (0981.HK) is stepping up production of a decade-old chip technology, crucial to many industries’ supply chains, sounding alarm bells in the United States and causing some lawmakers to attempt to stop them.
The United States and allied nations could further intensify restrictions if China declares a trillion yuan ($144 billion) support package for its chip industry, as Reuters exclusively reported on Tuesday, said TechInsights’ chip economist Dan Hutcheson.
Starting with the Trump administration, the United States has been clamping down on China’s high-tech ambitions. It cut out the world’s biggest telecommunications company Huawei Technologies from the U.S. market and technologies, along with cutting off air supply to China’s advanced chip manufacturing through a set of rules this year.
But why be concerned about older chip technology?
China, which in 2020 had 9% of the global chip market, has a history of dominating key technologies by flooding the market with lower-priced products and taking out global competition, say China watchers.
They did it with 5G telecom equipment and solar panels, and could do it with older technology chips, said Matt Pottinger, former Deputy National Security Advisor of the United States during the Trump administration who has been reviewing chip policy at the Hoover Institution.
“It would give Beijing coercive leverage over every country and industry – military or civilian – that depend on 28 nanometer chips, and that’s a big, big chunk of the chip universe,” he said.
“28 nanometer” is the name of a chip technology commercially used since 2011. It is still extensively used in weapons, automotive, and the explosive category of internet of things gadgets, said Hutcheson.
Hutcheson, who has been studying chip production capacity for forty years, said the concern is that Semiconductor Manufacturing International Corp (0981.HK) and other chipmakers in China could use government subsidies to sell chips at a cheaper price. And a possible fresh round of financial support from Beijing would ramp up chip production even more.
“The Chinese could just flood the market with these technologies,” he said. “Normal companies can’t compete, because they can’t make money at those levels.”
U.S. Legislators Oppose SMIC
Those concerns have compelled some lawmakers to use legislation for setting the defense budget to hold back SMIC.
While the measure is weaker compared to what was initially suggested, this week U.S. Senators are expected to approve the annual National Defense Authorization Act 2023 that includes a section prohibiting the U.S. government from using chips from SMIC and two other Chinese memory chip manufacturers. It is not clear what impact the ban, which takes effect five years after it becomes law, will have on SMIC.
Founded in 2000 with funding from Beijing, SMIC has long grappled to rise through the ranks of the world’s largest chip manufacturers.
But it is a titan in older technology, including chips that control power flows in electronics. And its revenue was about $2 billion in the third quarter of 2022, almost double the same period a year ago on the back of the global chip shortage.
SMIC Filling Supply Gap
With U.S. export curbs impeding the production of advanced chips, SMIC is doubling down on mature technology chips and has announced four new factories, or fabs, since 2020. When those begin operations, it would more than triple the company’s output, estimates Samuel Wang, Gartner chip analyst. He said there is a huge increase in new chip fabs across China.
Buy Crypto Now“All this will start to have an impact from early 2024 and will be full-blown by 2027,” said Wang, adding the chip supply increase will reduce pressure on chip prices.
The significance of older chip technology hit the industry in the face last year as a shortage of those chips hampered the production of millions of cars and consumer electronics.
Mark Li, Bernstein Research’s chip analyst in Asia, said the company is becoming a powerful rival to U.S.-headquartered GlobalFoundries Inc (GFS.O) and Taiwan’s UMC Microelectronics Corp (6615.T).
“SMIC has been much more willing to add capacity than other fabs at the low-end, and especially in this shortage we’ve seen in the past two years,” he says. “It’s not an issue now…but who knows, maybe in a few years there will be another shortage and capacity will be a big problem.”
($1 = 6.9430 Chinese yuan renminbi)
