China has been making strides to decrease its dependence on foreign companies who make semiconductors. According to our report entitled “Mainland China’s Semiconductor and Equipment Markets: Analysis and Manufacturing Trends,” China imported 445.13 billion integrated circuits in 2019, an increase of 6.6% year-on-year. The amount of imports was $305.55 billion, down 2.1% YoY. The export of integrated circuits was 218.7 billion units, an increase of 0.7% YoY. The export value was $101.58 billion, an increase of 20% year-on-year.
Semiconductor Manufacturing International (SMIC) (OTCQX:SMICY) is the fifth largest pure play foundry (a foundry that makes chips for customers only and doesn’t make chips for its own use). The company’s revenues grew 26.8% YoY in Q1 2020. With a 5.0% share of total Q1 revenues, the company is significantly smaller than Taiwan Semiconductor Manufacturing Corp. (TSMC) (TSM), which will be the focal point of this article.
Today, SMIC operates seven fabs: Three 200-mm fabs and four 300-mm fabs. Total 8-inch monthly production capacity is 233,000 pieces, an increase of 2.2% from the previous month, mainly due to the expansion of the Tianjin 8-inch line. Total 12-inch monthly production capacity reached 243,000, an increase of 10.2% month-on-month, mainly due to the expansion of the 12-inch 40-28nm Beijing and Shanghai SN1 advanced process lines.
SMIC Capabilities Compared to TSMC
In mid May, 2020, the U.S. Department of Commerce imposed more restrictions on China’s Huawei, preventing any technology company from doing business with Huawei without an approved license from the U.S. The sanctions block these vendors from supplying chips directly to Huawei, and eliminate Huawei’s ability to circumvent previous restrictions by having their chips manufactured by TSMC. At issue are Huawei’s 5G modem chip named Kirin.
I discussed production of 5G modem chips from not only Huawei but competitors in a Jan 10, 2020 Seeking Alpha article entitled “Taiwan Semiconductor: My Top Semiconductor Pick For 2020.”
Because of the U.S. sanctions against Huawei (and its chip subsidiary HiSilicon), TSMC will no longer be manufacturing Huawei’s Kirin modems, which has been historically manufacturing Huawei’s HiSilicon chips, ranging anywhere from its 14nm, 12nm or even 7 or 5nm chipsets.
Unable to circumvent U.S. Government sanctions, Huawei is shifting its 14nm chipset orders from TSMC to SMIC. Huawei’s new chipset, the HiSilicon Kirin 710A is based on the 14nm process and has entered the mass-production stage. I believe that Huawei is re-releasing the Kirin 710 processor branded as the Kirin 710A, but this time with a 14nm FinFET process. The original Kirin 710 SoC is made using the 12nm node by TSMC.
Table 1 shows SMIC revenues for Q1 2020 segmented by technology process. The 14nm or more advanced processes represented only 1.3% of its production, which is far behind leading foundry companies. With the introduction of the Kirin 710A, the proportion of 14nm processing will increase.
By way of comparison, 36% of TSMC’s revenues came from 7nm processing at Q2 2020. In fact, TSMC expects to see 5nm process technology account for about 8% its total wafer revenue in 2020, compared with the about 10% estimated previously.
Table 2 shows a comparison of the technology process nodes between TSMC and SMIC based on the timeline of initial volume production and the lag in years and quarters. Of interest is that SMIC has been able to maintain its four-year lag behind TSMC from the 65nm node in 2010 to the 14nm/16nm node in 2019.
There are two important questions that are considerations for SMIC and Huawei in light of the recent escalation in trade restrictions. The first question is if SMIC is able to move to 7nm, how much will it cost?
If we follow the four-year timeline in Table 2, then SMIC could get to 7nm in 2021. And if SMIC does develop a 7nm process and builds a 7nm wafer factory, how much would it cost? Table 3 presents my analysis of the chip production cost as it moves to increasingly smaller nodes. This table incorporates the charge by SMIC to customers of $329 per chip at 14nm decreasing 30% to $232, which I’ve highlighted in bold. The design cost is what Huawei would incur, and the assembly test/packaging would be incurred by the packaging house chosen by Huawei.
The second important question is how does SMIC get to 7nm. As a backgrounder, EUV lithography technology from ASML (ASML) is cost effective at 7nm and below, and readers can refer to several of my most recent Jan. 27 Seeking Alpha article on ASML and EUV entitled “ASML: My Top Semiconductor Processing Equipment Company Pick.”
In essence, although there are cost benefits of using EUV at 7nm, DUV can readily replicate 7nm patterns. In fact, the first-generation 7nm process of TSMC is realized by DUV in combination with multiple exposure technology.
This is an important consideration, because although SMIC ordered an EUV system from ASML, there have been repeated delays and excuses as to why it has not yet been delivered. With the escalation of the technology embargo, the question is a major overhang for SMIC and its EUV roadmap.
Finally, SMIC has been able to move beyond 14nm without the quantum step to move directly to 7nm. SMIC’s N+1 process has entered the stage of customer introduction and product certification. Compared with the 14nm performance, the N+1 process has a 20% improvement in power consumption, a 57% reduction in power consumption, a 63% reduction in logic area, and a 55% reduction in SoC area, which is close to TSMC’s 7nm process.
The U.S. government’s new export control rules on May 15 designed to block Huawei’s own chip development efforts via HiSilicon and TSMC, which makes all Huawei’s 7nm smartphone modems.
However, under the tighter restrictions, non-US companies must apply for a license to use American technology or software to produce Huawei-designed chips.
So far, the U.S government blocked China’s technology advancements for violations determined by the U.S. Justice department. For example, it blocked activity with China’s chip manufacturer Fujian for IP theft, and readers can learn more about if in my November 6, 2018 Seeking Alpha article entitled “U.S. Restricts Exports Of Some Chip Production Equipment To China – Impact On Memory And Equipment Suppliers.”
Also, sanctions were imposed on ZTE three years ago violating U.S. sanctions against Iran and North Korea. Further, ZTE was the subject of a new and separate bribery investigation by the Justice Department, centering on possible bribes ZTE paid to foreign officials to gain advantages in its worldwide operations.
The current sanctions are a knee-jerk reaction following COVID-19 allegations. But this is an election year, Trump is being impacted by a wobbly economy, and these sanctions will negatively impact the U.S. economy. Numerous U.S. companies have manufacturing facilities, and these sanctions will impact them. For example, in 2019, Intel (NASDAQ:INTC) pulled in 28% of its total revenue from Chinese customers, along with Nvidia (NASDAQ:NVDA) at 25% and Qualcomm at 67%. In addition, the Chinese government has threatened its own sanctions against American companies Apple (NASDAQ:AAPL), Boeing (NYSE:BA), Cisco (NASDAQ:CSCO) and Qualcomm (NASDAQ:QCOM).
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