China has accelerated the development of its local semiconductor industry, but as the United States wins over allies such as Japan, South Korea, and the Netherlands, SMIC is also struggling.

(Bloomberg file photo)

[Financial Channel/Comprehensive Report] The United States announced a series of semiconductor export control measures in October last year to limit China's ability to obtain advanced semiconductor chips, related technologies and manufacturing equipment.

In this context, China is trying to accelerate the development of local semiconductors. SMIC is the largest chip manufacturer in China and plays an important role in this. However, as the United States wins over allies such as Japan, South Korea, and the Netherlands, SMIC It also got into a hard fight.

U.S. chip export controls restrict the development of advanced semiconductor manufacturing processes in China.

(Photo by European News Agency)

SMIC's Beijing plant postpones mass production for 2 quarters

Due to the export control of the United States, Chinese companies are unable to produce advanced chips. Therefore, SMIC has doubled its investment in the 28nm mature process and announced that it will build near Beijing (Beijing), Shanghai (Lingang), Shenzhen (Shenzhen), and Tianjin (Xiqing). Four new 28nm fabs to meet global and local demand for mature process capacity.

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Samuel Wang, an analyst at Gartner, a market research firm, estimates that when these factories come online, SMIC's output will more than triple.

New fabs are ramping up across China, and a surge in chip supply will put downward pressure on prices.

By the end of 2022, SMIC will start production at a relatively small fab near Shenzhen, complete construction at a fab in Shanghai, and start construction at a fab near Tianjin.

Although the new plant near Beijing has started trial production, the mass production of the plant will be delayed.

SMIC recently stated that due to delays caused by equipment bottlenecks, the mass production of the Beijing plant near Beijing will have to be postponed for one or two seasons.

It remains unclear whether this is a direct result of the U.S. export ban.

According to U.S. regulations, U.S. advanced wafer equipment manufacturers must obtain an export license from the Ministry of Commerce before they can sell equipment used to manufacture 14nm/16nm processes, but foreign media believe that the direct relationship may not be significant.

One of the goals SMIC has set for its Gigafactory is to use domestic tools as much as possible, which will help the company avoid the impact of U.S. sanctions.

Analysts at China Renaissance Securities estimate that 30% to 40% of SMIC may use domestic tools, manufactured by Chinese companies such as AMEC, Kingsemi or Naura.

Advanced nodes were blocked, SMIC doubled its investment in mature manufacturing processes, and built four new 28nm wafer fabs.

(Photo by European News Agency)

China's semiconductor equipment factory can only achieve 90 nanometers

With the continuous expansion of the US ban, and the recent actions of Japan and the Netherlands to restrict the export of chip equipment, the relevant controls may be further extended to mature manufacturing processes.

Although China continues to throw money and invest in related industries, it may still be difficult to catch up with the speed of foreign blockades.

"Reuters" reported in December last year that the Chinese government had allocated US$140 billion (about NT$4.2 trillion) in funds, which may include subsidies for the purchase of domestic chip manufacturing equipment, which may make China's only semiconductor exposure machine manufacturer Suppliers such as Shanghai Microelectronics Equipment Group (SMEE) benefited.

However, people in the industry believe that spending money alone will not allow China to catch up with Western competitors that have been several generations ahead.

Industry insiders and market observers pointed out that Shanghai Microelectronics and its peers mainly sell to local chip foundries in China. The lack of contact with advanced chip manufacturers such as TSMC (2330) and Samsung Electronics (Samsung Electronics) will make it difficult for these companies to become independent Solve engineering problems and add value.

According to a former engineer of Shanghai Microelectronics, the company's most advanced products can produce 90nm chips. Although this is a big breakthrough for China, it is 20 years later than the industry leader ASML. years long.

Since then, the company has not made any significant progress, in part because of difficulties sourcing equipment from foreign countries, the engineer said, adding that even when the machines were built, engineers didn't know how to repair and maintain them.

SMIC has completed the research and development of the 7nm process, but after investigation, it almost copied TSMC's 7nm process technology.

(Bloomberg file photo)

Stealing TSMC technology and developing a 7nm process

In addition to striving to develop a mature manufacturing process, in terms of advanced manufacturing processes, SMIC has completed the research and development of a 7-nanometer process. Foreign media confirmed that there are already products using SMIC’s 7-nanometer technology, which is far behind the most advanced 3-nanometer products currently in mass production on the market. The 2nd generation, as a wafer foundry, is second to TSMC and Samsung.

The industry has repeatedly reported that SMIC has made breakthroughs in 7nm, and research institutions revealed last year that although SMIC did not disclose the progress of the 7nm process, the company began to integrate 7nm node products as early as July 2021. Shipped to Bitcoin mining company MinerVa.

According to the report of TechInsights, a Canadian industry research company, it took only two years for SMIC to achieve this key technological breakthrough without the most advanced western equipment and technology.

TechInsights also reverse-engineered the MinerVA bitcoin mining processing chip produced by SMIC. Preliminary images show that it almost replicates TSMC’s 7-nanometer process technology. There are many similarities in process technology, design and innovation.”

As the U.S.-China chip war continues to rage, SMIC's profits will fall in an avalanche in Q4 in 2022.

(Reuters file photo)

US chip ban, SMIC profit avalanche in Q4

Under the pressure of the U.S. chip ban, SMIC’s profits also fell in an avalanche. SMIC announced its 2022 results in February. As the U.S.-China chip war continued, SMIC’s Q4 revenue was US$1.621 billion (about NT$49.5 billion). , an annual increase of 2.6%, but the net profit attributable to the parent company dropped by 27.8% to US$386 million (approximately NT$11.78 billion).

In terms of full-year performance, SMIC’s revenue in 2022 will be US$7.273 billion (approximately NT$222.11 billion), an annual increase of 33.6%, and net profit will be US$1.818 billion (approximately NT$55.52 billion), an annual increase of 6.8% over the previous (2021) .

The annual capacity utilization rate is 92%, but based on the single quarter of Q4, the capacity utilization rate is only 79.5%

SMIC Co-CEO Zhao Haijun also admitted at the conference that geopolitical changes have had a profound impact on the globalization of semiconductors, and the industry is facing an unprecedented severe situation.

It is also estimated that the industry cycle is still at the bottom in the first half of this year, and the influence of external uncertain factors is complicated, and the visibility in the second half of the year is still not high.

Looking forward to 2023, SMIC's view is also quite conservative. It is expected that Q1 revenue will decrease by 10 to 12%, and the gross profit rate will drop to between 19 and 21%, which is lower than the market expectation of 26 to 27%.

Looking at the same period of Taiwanese factories, UMC (2303), a major manufacturer of mature wafer foundries, had a consolidated revenue of 67.84 billion yuan in Q4 last year, an annual increase of 14.8%. The net profit attributable to the parent company was 19.1 billion yuan, and the gross profit margin reached 42.9%.

If the gross profit margin is purely compared, UMC is twice that of SMIC.

UMC's annual revenue reached a new high of 278.7 billion yuan, an annual increase of 30.8%. Driven by favorable exchange rates, the expansion of 22/28nm product portfolio and new production capacity, the gross profit margin reached 45%, and the annual operating profit exceeded NT$ The 100 billion yuan mark reached 104.292 billion yuan, an annual increase of 1.01 times, and the net profit attributable to the parent company was 87.198 billion yuan, an annual increase of 56.3%. Both profit and revenue hit record highs.

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