Last week, China’s largest chipmaker, Semiconductor Manufacturing International Corp (SMIC), recorded record revenue with $7.2 billion in earnings and said it’s moving forward with expansion plans despite uncertainty in the industry. For the second year in a row, SMIC’s earnings rose over 30% despite ongoing U.S. sanctions and export controls.
Contrast that with fellow Chinese chip bellwether YMTC, which has faced significant headwinds since its placement on the Entity List late last year. Several reports point to the state-owned chipmaker laying off employees, dramatically slashing equipment orders, and potentially halting expansion plans.
What gives SMIC an edge? As Nikkei Asia reports, “Capital expenditure will mainly be spent on expanding capacity for mature, or older generations, of chips and on infrastructure for new plants.” Reuters had a good analysis at the end of last year that put this focus into perspective. Here are some key points:
With U.S. export controls making it impossible to produce advanced chips, SMIC is doubling down on mature technology chips and has announced four new facilities, or fabs, since 2020. When those come online, it would more than triple the company’s output, estimates Samuel Wang, Gartner chip analyst. He said there is a huge ramp up in new chip fabs across China.
“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 put downward pressure on chip prices.
The analysis also noted that mature chips are “key to many industries’ supply chains” and “widely used in automotive, weapons and the explosive category of internet of things gadgets.”
SMIC’s strategy to double down on mature chips underscores why it’s important for policymakers to think broader than leading edge when it comes to legislation, export controls, and other actions designed to restrict China’s ability to get equipment for and manufacture chips.
Congressional leaders like Rep. Mike McCaul and Sen. Marco Rubio have rung the bell on SMIC several times – pointing to the ineffectiveness of the current restrictions. In a letter to Commerce Secretary Gina Raimondo from March 2022, they said:
Although SMIC’s designation on the Entity List is hampering its ability to make the most bleeding-edge semiconductors, it is having little to no effect on its overall production capability. On a bipartisan basis, the House Foreign Affairs Committee has released licensing data that BIS is denying less than one percent of applications to sell technology to SMIC. … We therefore ask that the Department of Commerce rewrite SMIC’s Entity List rule to close dangerous loopholes that appear to allow nearly all sales to SMIC to continue without restriction.
BIS and others needs to give SMIC another look. Of China’s chip bellwethers, it may have been first to the Entity List, but it’s clear that restrictions on it are not working. Both for SMIC, but also thinking about other threats like CXMT, the U.S. government and its allies should be careful to avoid the temptation to define restrictions with just leading edge chips in mind. As we can see here, mature chips are important too, and the CCP sees them as a viable path forward in its quest to dominate the semiconductor space. Furthermore, applications to sell to SMIC should face a presumption of denial. It’s time to close these loopholes and oversights.