SMIC, China's Rising TSMC Competitor, Makes A Strategic Business U-Turn

The country's 14th Five-Year Plan highlights the need to develop its semiconductor industry.

Digitization, Cyborg, Chip, Circuit

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Suffering from the US-initiated restrictions, Semiconductor Manufacturing International Corporation is prohibited from utilizing software and hardware tools with a certain degree of American technology. This limits the largest mainland-based semiconductor foundry's capability to go beyond 14 nm.

As of 2020, China accounted for around one-third of global semiconductor demand, but the country can only produce nearly 10% of this volume locally. The key dilemma for SMIC and the country's entire chipmaking domain now is whether to strive for building a profitable, optimized business or for catching up with the leading-edge technology.

Pouring capital into R&D – with mixed results

SMIC has been dedicated to chasing up the leading-edge technology by increasing its R&D expenses in recent years. In 2016, SMIC's R&D spending was USD 371 million, accounting for 12.72% of its revenue. By 2019 R&D expenses had risen to USD 687 million – or 22.06% of revenue. The significant increase in R&D budget and capital expenditure indicate the company was trying to catch up with the technology lag and the increasing demand for foundry capacity in China. Its gross margin, however, plunged from 29.2% in 2016 to 23.6% in 2020. The company's revenue grew by 25.39% in 2020, hitting USD 3.91 billion. Specifically, SMIC launched its 14 nm in 2019 but the proportion of 28/14 nm in 2020 only reached 9% of its total outputs.

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Chips shortage across all nodes

The increasing penetration of new technologies across industries and the growing popularity of gadgets among global users are driving demand for semiconductor devices. According to World Semiconductor Trade Statistics (WSTS), global semiconductor sales are expected to reach USD 551 billion by the end of 2021. In the midst of an industry boom cycle, the leading and trailing-edge nodes are both facing a shortage. The PCs and smartphones are the two main products requiring the most cutting-edge technology since the high demand can offset the increase in costs resulting from different manufacturing structures. The trailing-edge chips are widely used across consumer goods, automotive, and industrial equipment, offering better value for money by striking the balance between performance and cost. Therefore, the mature nodes are still at the core of the industry. Take TSMC (TSM), the global foundry market leader, as a proxy. Although its sales structure has shown a gradual decrease in mature nodes, those still took up nearly 40% of its revenue in Q2 2021. TSMC further plans to develop new production facilities for the mature nodes, which may lead to fiercer competition in SMIC's traditional business space.

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William K. 1 month ago Member's comment

The problem in the semiconductor industry is that each new reduction in freature size renders the production equipment for the previous size obsolete. So new everything is required and that equipment is obscenely expensive, plus the initial production yields are not profitable. So each one of those advances in technology demands a restart in the production side. And the producers were not going to spring for huge production capabilities when the future market did not look so big. Thus there was inadequate capacity when the demand exploded.

IF those designing the systems that use these chips had been smart, they would not have selected the bleeding edge technology, but instead used the totally adequate lines of the many devices that were currently available in huge quantities. POOR PLANNING, in short, because of wanting to embrace the bleeding edge.