China’s biggest chipmaker SMIC hit by US sanctions

The US government has imposed sanctions on China’s biggest chipmaker, dealing further damage to the country’s semiconductor industry after cutting Huawei off from its chip suppliers.

On Friday, the US Department of Commerce told companies that exports to Semiconductor Manufacturing International Corporation (SMIC) posed an “unacceptable risk” of being diverted to “military end use”, according to a copy of the letter seen by the Financial Times.

The move threatens to cut off China’s biggest chipmaker from crucial US software and chipmaking equipment. Companies now require licences to export such products to SMIC.

“It all depends on how the US implements this. In the worst-case scenario, SMIC is completely cut off, which would severely set back China’s ability to produce chips. This would be a tipping point for US-China relations,” said Paul Triolo, head of tech policy analysis at consultancy Eurasia Group.

The fresh sanctions on SMIC come after the Trump administration imposed penalties on a broad range of China’s tech companies, and threatened to shut down social media apps TikTok and WeChat in the US.

SMIC, a “national champion” that is crucial to the government’s hopes of achieving chip self-sufficiency, became the country’s biggest initial public offering for a decade when it raised $7.6bn in Shanghai earlier this year.

SMIC has already been hit by the tightening of US sanctions on Huawei. This meant that SMIC could no longer serve its largest customer, which generates a fifth of its revenues. The chipmaker had warned of the risk of a worsening of US sanctions in its IPO prospectus.

The sanctions will also affect Qualcomm, the US chip designer that uses SMIC to fabricate some of its chips. Analysts believe that Qualcomm is SMIC’s second-largest customer after Huawei.

On Saturday, SMIC said that it was continuing to engage with the US Department of Commerce. The company reiterated that it “has no relationship with the Chinese military, and does not manufacture for any military end users or end uses”.

SMIC added it had not received any formal notification of the sanctions.

An engineer at SMIC who works on their chip production line said that the US move was “predictable, but will certainly worsen our situation” as well as “frightening” the rest of the domestic industry.

The company has been developing a “self-sufficient” production line for 40nm chips, their main product, to lessen the impact of US sanctions. But the engineer said those inside the industry were “much more pessimistic” about the prospect of becoming self-sufficient than analysts, adding: “We feel very helpless.”

The new measures will also add pressure to the already tight global supply of chips. Since in 2019 SMIC had about 5 per cent of the global foundry market, but as much as 10 per cent in certain older-generation chips, according to Credit Suisse. While SMIC could face shortages within months, it will take much longer for competitors to build up substitute capacity.

Beijing’s Ministry of Foreign Affairs has previously declared its opposition to US sanctions on Chinese companies. Last weekend, China’s Ministry of Commerce announced broad powers to curb the operations of foreign companies deemed “unreliable”, such as companies that “boycott or cut off supplies” to Chinese companies.

Lawyers are concerned that Beijing’s “unreliable entities list” could be used to punish foreign companies that enforce US sanctions against Chinese companies, putting such groups in a bind between US and Chinese law.

According to US government sources, the proposal to blacklist SMIC had been made by the Pentagon because it was worried the company was enabling the technological advancement of China’s military.

US pressure has prevented SMIC buying the equipment needed to make cutting-edge chips, such as the kind that Huawei needs, but can no longer buy, for its smartphones.

Since last year, Dutch company ASML, the only maker of the advanced machines needed to make high-end logic chips, has been unable to obtain a licence to export to SMIC.

New rules aimed at preventing exports of US technologies that might support the development of military systems in countries Washington sees as hostile were announced by the Department of Commerce in April. They drastically broadened military end-user restrictions in existing export control regulations, and specifically sought to counter China’s efforts to support weapons development with civilian companies through its “military-civilian fusion” strategy.

The new regulations drastically expanded the scope of products subject to military end-user licensing, and broadened the definition of military use to include things that might not be components of the final product, such as items used to support development or production.

The US Department of Commerce said: “In general, the Bureau of Industry and Security in the Department of Commerce is constantly monitoring and assessing any potential threats to US national security and foreign policy interests. While we cannot comment on any specific matter, BIS, with its inter-agency partners, will take appropriate action as warranted.”

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