SMIC: Failed U.S. Sanctions Have Turned The Company Into An AI Foundry

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SMIC, China's top chipmaker, is progressing towards producing chips at 5nm, despite U.S. sanctions and restrictions.SMIC and Huawei are top recipients of local subsidies in China's semiconductor ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSMIC: Failed U.S. Sanctions Have Turned The Company Into An AI Foundry\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-02-22 04:41 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4672079-smic-failed-us-sanctions-have-turned-the-company-into-an-ai-foundry><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SMIC, China's top chipmaker, is progressing towards producing chips at 5nm, despite U.S. sanctions and restrictions.SMIC and Huawei are top recipients of local subsidies in China's semiconductor ...</p>\n\n<a href=\"https://seekingalpha.com/article/4672079-smic-failed-us-sanctions-have-turned-the-company-into-an-ai-foundry\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0198837287.USD","symbol_name":"UBS (LUX) EQUITY SICAV - USA GROWTH \"P\" (USD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4672079-smic-failed-us-sanctions-have-turned-the-company-into-an-ai-foundry","article_id":"2413406563","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2413406563","pubTimestamp":1708548107,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"I noted in the article bullets:  With U.S. government restrictions on China's Huawei, SMIC  will take over production of Kirin modem chips at 14nm from TSMC at 7nm. 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Government documents indicate their prominence in China's semiconductor industry and underscore the country's commitment to supporting key players in its efforts to bolster domestic chip production and reduce reliance on foreign technology. The projects receiving subsidies include SMIC's two 300mm production lines, which are currently being constructed. These production lines are capable of processing 5nm and 7nm chips, technologies that the state-supported chipmaker aims to mass-produce. According to a report by The Financial Times, SMIC is establishing production lines in Shanghai with the goal of mass-producing 5nm chips for smartphones produced by Huawei. The Ascend chipsets are positioned as China's sole contender against the cutting-edge artificial intelligence (AI) chips produced by the US chipmaker Nvidia. These chipsets are rapidly capturing market share within China, particularly as Washington intensifies its restrictions on Nvidia's sales capabilities to the country. This dynamic underscores the escalating competition in the global semiconductor market, where geopolitical tensions influence technological advancements and market access. China's push to develop and deploy its own AI chipsets, like the Ascend series, reflects its broader strategy to achieve technological self-reliance amidst ongoing international trade and tech disputes. These moves are a result of continued sanctions on China by the U.S. government, which I have discussed in numerous Seeking Alpha articles over the past two years, and as a result have enabled SMIC to become a foundry competing against Taiwan Semiconductor Manufacturing Corp. (TSMC) (TSM) and has propelled SMIC as the premier foundry for <7nm chips in China. As a background, on July 17, 2020, prior to the U.S. sanctions, I published a Seeking Alpha article entitled “China: Who Needs TSMC When They Have SMIC?” I noted in the article bullets:  With U.S. government restrictions on China's Huawei, SMIC (HKG:0981, SHA:688981) will take over production of Kirin modem chips at 14nm from TSMC at 7nm. SMIC, the fifth-largest pure-play foundry, will be able to produce chips at 7nm even without EUV lithography, as early as next year. SMIC's n+1 process already offers performance at 14nm close to TSMC's at 7nm.  Six weeks later on September 4, 2020, Reuters reported the Trump administration was considering whether to add China's top chipmaker SMIC to a trade blacklist, as the United States escalated its crackdown on Chinese companies. The rationale was SMIC’s relationship to the Chinese military. Then in December, SMIC was added to the U.S. Commerce Department’s Entity List. The Entity List designation requires U.S. exporters to apply for a license to sell to SMIC. \"Items uniquely required to produce semiconductors at advanced technology nodes — 10 nanometers or below — will be subject to a presumption of denial to prevent such key enabling technology from supporting China's military-civil fusion efforts,\" the US Commerce Department said. Move to 7nm I predicted SMIC would get to 7nm without EUV in 2021 based on the date of this article. I was off by a year, reporting in a May 18, 2022 Seeking Alpha article entitled Applied Materials: SMIC Move To 7nm Node Capability Another Headwind. Yes, it was off by a year, but still four months before TechInsights reversed engineered a Bitcoin chip and reported it. While my July 17, 2020 Seeking Alpha article may have been a catalyst for the U.S. to sanction the company, the move to 7nm by SMIC is clearly an indication of U.S. sanctions that aren’t working. In fact, through numerous Seeking Alpha articles, I presented data and statistics to support my claim. Added to List of Chinese Military Companies SMIC and its subsidiaries, including SMIC Beijing, SMIC Shanghai, SMIC Tianjin, SMIC Shenzhen, SMIC Holdings, SMIC Southern Integration, and SMIC Northern Integration were also put on the US Department of Defense (DoD) 1260H list of Chinese military companies. Foundry Company Business In the fourth quarter of 2023, SMIC's sales revenue increased by 3.6% month-on-month to $1,678.3 million, slightly surpassing expectations, with a gross margin of 16.4%, aligning with the company's guidelines. However, for the full year of 2023, unaudited sales revenue totaled US$6.32 billion, marking a 13% decline year-on-year, with a gross margin of 19.3%, consistent with the company's initial guidelines for the year. Chart 1 shows SMIC revenues from Q1 2020, prior to sanctions, and Q4 2023. Revenues increased during this period indicating they were not impacted by sanctions. Revenues dropped in Q4 2022 due to the weak demand in the mobile phone and consumer market.   SMICChart 1 The unaudited profit attributable to company owners for 2023 was $902.5 million, a significant 50.4% decrease compared to 2022, attributed to various factors including industry cyclicality, weak global market demand, high industry inventories, and intensified competition. Additionally, the company's increased investment and depreciation further impacted its financial performance. At year-end, the 8-inch monthly production capacity stood at 806,000 wafers, with an average annual capacity utilization rate of 75%. SMIC's single wafer revenue (equivalent to 8 inches) this quarter was US$1,002, down 5% from the previous quarter.   SMICChart 2 For the first quarter of 2024, SMIC forecasts a 2% sequential increase in revenue, aiming for US$1.71 billion, which slightly exceeds market expectations of US$1.67 billion. However, the projected gross profit margin of 9-11% falls notably below the anticipated market figure of 16.59%. In the fourth quarter of 2023, SMIC reported a capacity utilization rate of 76.8%, indicating a continued period of low utilization. Dolphin Jun suggests that despite an increase in shipments for the quarter, the utilization rate remained subdued, primarily due to the company's recent expansion of production as part of a counter-cyclical strategy.   SMICChart 3 My indicators show a recovery in both mobile phone and PC sectors. The introduction of new products by downstream manufacturers has led to a rebound in the mobile phone business segment, now constituting 30% of the business mix. The PC industry, after undergoing a prolonged destocking phase, is beginning to show signs of demand revival. In this quarter, revenue from China surpassed 80%, highlighting that the company's business is predominantly supported by domestic customers. AI Foundry Business On December 4, 2020, SMIC was added to the list of Chinese military companies by the U.S. Department of Defense. Then it came to light on September 5, 2023, three years after being put on the list, that the Huawei Mate 60 Pro, a Chinese smartphone powered by a new 5G Kirin 9000s processor developed specifically for Chinese manufacturer Huawei. According to a CNN article on September 6, 2023: “shocked industry experts who didn’t understand how the company would have the technology to make such a chip following sweeping efforts by the United States to restrict China’s access to foreign chip technology.” I guess none of these “industry experts” had been reading my articles! So how did SMIC get to the point where it makes chips and sells them to another company, also on the sanction list (Huawei) that is competitive with Samsung’s (OTCPK:SSNLF) S24 or Apple’s (AAPL) iPhone 15? One important factor is that companies are ignoring sanctions and shipping products behind the backs of U.S. Commerce. One obvious example is Applied Materials (AMAT), which is reportedly under U.S. criminal investigation for allegedly evading export restrictions on China's top chipmaker SMIC. According to a November 17, 2023 article in The Hindu:  “The company produced semiconductor equipment in Massachusetts, then repeatedly shipped the equipment from its plant in Gloucester to a subsidiary in South Korea, the people said. From there, the equipment went to China's Semiconductor Manufacturing International Corporation (SMIC), the people, familiar with the probe, said. The shipments began after the U.S. Commerce Department added SMIC to its \"Entity List\" in December 2020, which restricted exports of goods and technology to the company, two of the sources said, and took place in 2021 and 2022.”  South Korean memory company SK Hynix (HXSCL) is investigating how two of its memory chips mysteriously ended up inside the Mate 60 Pro - a 12 gigabyte LPDDR5 chip and 512 GB NAND flash memory chip, were found inside the Huawei handset. Playing With Monopoly Money SMIC has significantly invested in advancing its technology to 7nm nodes and is progressing towards 5nm and 3nm processes. Despite these advancements, the foundry's operations still heavily rely on mature nodes like the 28nm. The market for semiconductors manufactured on these older nodes is vast but offers limited growth prospects. Additionally, the profit margins on chips produced using mature technology are typically lower compared to those fabricated with cutting-edge processes. Without a significant share of high-margin orders, particularly from the smartphone sector, SMIC might face a notable decline in both revenue and profits. The economic climate in China plays a crucial role in the demand for SMIC's products. Since the outbreak of the COVID-19 pandemic, the Chinese economy has struggled with issues such as high levels of debt and deflation, which have adversely affected consumer spending. These economic challenges further compound the pressures on SMIC, affecting its operational success and financial health. But back to 7nm and 5nm, according to an article in Reuters:  “Some research firms forecast SMIC's 7 nm process has a yield rate below 50%, versus the industry norm of 90% or more, and it would limit shipments to around 2-4 million chips, not enough for Huawei to regain its former smartphone market dominance. Jefferies analysts reckon Huawei is preparing to ship ten million units of the Mate 60 Pro, though it may struggle to support that quantity with China-made 7 nm chips.”  But does it matter. If SMIC is a “Chinese Military Company” then these low yields don’t matter to the company, as (1) yields will continue to increase and (2) the military benefits of utilizing chips at the 5nm node instead of 28nm is incalculable, particularly if China's Communist Party (\"CCP\") money is used to cover production inequities. For investors, current performance and guidance of SMIC is paramount. Semiconductor Manufacturing International slumped around 8% at the close after Zhao Haijun, the company's co-chief executive officer, told analysts that the semiconductor maker is cautious about recovery expectations despite a surge of demand from smartphone and personal computer manufacturers. Chart 4 shows SMIC’s share price for a 5-year period. The price has been down since sanctions were imposed in 2020, with a particularly large drop since a peak on November 2, 2023 amide a weak consumer electronics market and a slowdown in China as mentioned above.   Yahoo Finance Chart 4 Eyes on Huawei Huawei was sanctioned by the U.S. in 2019. In Chart 5 I show revenues by business segment from 2018 to 2022, the latest available year for the private company. In 2022, Huawei generated revenue across its three main business segments: Consumer Business, Enterprise Business, and Other. The Consumer Business segment brought in approximately $31.21 billion, marking a decline from $36.07 billion in 2021, a decrease of around 13.5%. Conversely, the Enterprise Business segment experienced growth, with revenues increasing from approximately $15.17 billion in 2021 to about $19.38 billion in 2022, an increase of approximately 27.4%. The \"Other\" segment contributed roughly $1.56 billion to the company's revenue. As with SMIC, the consumer business has fared poorly in 2021 and 2022, but in prior years U.S. sanctions appear not to have had a significant impact.   HuaweiChart 5 Huawei Technologies expects to report revenue exceeding CNY 700 billion ($98.5 billion) for 2023, according to comments from the company’s rotating CEO Ken Hu in an internal new year message. The figure indicates around 9% year-over-year revenue growth from the CNY642.3 billion reported in 2022. It is, however, still below the approximate $123 billion Huawei logged in 2019. Huawei expanded market share from 10% in the first quarter to 13.9% by the fourth quarter. Huawei was once China and the world’s biggest smartphone maker. But the Chinese tech giant’s handset business was crippled by U.S. sanctions which cut it off from key technologies like leading-edge semiconductors and software. The launch of the Mate 60 significantly boosted Huawei's presence in China, resulting in a 36% year-on-year increase in shipments during the December quarter. Consequently, Huawei achieved a 13.9% market share. Kirin 9000S However, according to extensive testing at Hothardware: “The performance metrics we've gotten from this phone are decidedly unimpressive. It can't compete with the latest mobile SoCs or even many that are years old. Still, we're impressed that the Kirin 9000S exists at all. In a few years, China's domestic chip manufacturing has ramped up despite lacking access to western technology. SMIC is several generations behind the likes of TSMC, but apparently it's making progress. Domestically produced Chinese SoCs may someday go toe-to-toe with Qualcomm, but the Kirin 9000S simply isn't a viable flagship mobile processor in 2023.” Ascend 910B AI Chip A January 15, 2024 review of tender documents by Reuters reveals that Chinese military entities, state-run artificial intelligence research institutes, and universities have been purchasing small quantities of Nvidia semiconductors, despite the U.S. ban on exports to China. These sales, facilitated by relatively unknown Chinese suppliers, underscore the challenges faced by Washington in completely restricting China's access to advanced U.S. chips. Despite the bans, China continues to seek access to cutting-edge technology to fuel advancements in AI and sophisticated military computing systems. The 910B chip by Huawei, launched in late 2023, is currently seen as the most competitive AI product available in China and has gained popularity amid fears that access to Nvidia's products could be further restricted due to U.S. sanctions. In fact, specifications for the H20 in China appear to indicate it is less powerful than Huawei's (HWT.UL) Ascend 910B in some key areas. The H20 (a watered down (hence H2O to coin a phrase)) is a watered down version of Nvidia’s AI GPUs that are not allowed to be sold in China. Huawei’s partners in China so far include iFlyTek, a leading Chinese AI software company which is using the Ascend 910 to train its AI models. IFlyTek was also blacklisted by the United States in 2019. I had previously written in an October 26, 2023 Seeking Alpha article entitled Nvidia's A100 And H100 AI Chips Are Another Failure Of U.S. China Sanctions that iFlyTek was bypassing U.S. Sanctions by Renting A100 Nvidia (NVDA) Chips. Investor Takeaway Investing in SMIC has had its pitfalls because of U.S. sanctions. The company was forced to delist from the U.S. exchange and the stock was sold automatically at the time, causing some investors to take a loss. Share price performance on the Hong Kong stock exchange has also been disappointing, moving laterally as shown in Chart 4 above. Revenues have recovered in the past four quarters along with capacity although utilization rates have been flat due to the downturn in consumer electronics products. Having Huawei as a customer is monumental, and a strong tailwind for SMIC. But these sanctions have been mixed, and SMIC is keeping its internal achievements from being made public for fear of more and stricter sanctions. Its move to 7nm was only made public when I published it in Seeking Alpha in 2023. And one only knew that sanctioned Huawei was a customer was from the introduction of the Mate 60 Pro smartphone autopsy. Between 2020 when sanctions were imposed and 2023 with my article, SMIC was able to acquire a substantial number of the approximately 240 DUV systems ASML (ASML) shipped to China during these three years. In fact, the only DUV systems, the advanced 2050i and 2100i models now under stricter sanctions as of October 2023, were shipped to SMIC. Since SMIC is partially state-owned, with both China’s Big Fund and the civilian and military telecommunications equipment provider Datang Telecom Group as major shareholders, investors may not get the information they need to make valid investment decisions. This is a significant headwind.  However, assuming actual revenues are recorded with the Hong Kong and China stock regulators but just not put into the public bin, growth in the AI sector would aid Investors. This strategy has been used in the U.S. by Applied Materials, when in 2019 it moved $331 million in from 2018 revenues into 2019 to increase market share as I had been announcing that ASML would take over the #1 spot in the WFE equipment industry.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2413406563"}