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ANALYSIS-Proposed U.S. curbs on Chinese chipmaker SMIC could rattle supply chains

Tue 8th September, 2020 1:44pm
By Josh Horwitz
    SHANGHAI, Sept 8 (Reuters) - Proposed U.S. export curbs on
SMIC  0981.HK  threaten to derail China's nascent but growing
domestic semiconductor supply chain, and also hit American and
Japanese companies who count the Chinese chipmaker as an
important customer. 
    Reuters reported on Friday that the Trump Administration was
considering barring U.S. companies from supplying goods and
services to SMIC (Semiconductor Manufacturing International
Corp), China's biggest chipmaker.*:nL1N2G203A
    SMIC shares plunged more than 22% on Monday before
recovering only slightly, by 3%, on Tuesday.
    The planned curbs come at a time when SMIC had been expected
to more than double its spending this year to make higher-end
chips, helped by $6.6 billion in funds from a secondary share
listing in July and support from state firms.
    But analysts said the proposed restrictions would prevent
American suppliers, such as Applied Materials  AMAT.O , Lam
Research Co  LRCX.O  and KLA Corp  KLAC.O , from selling
manufacturing machinery to SMIC and thereby prevent it from
making advanced chips. 
    Companies like Netherlands-based ASML, and Japan's Tokyo
Electron  8035.T  and Advantest  6857.T , might also restrict
sales to SMIC if their governments follow a U.S. move.    
    The planned curbs could hit China's chip industry across the
    SMIC filings say 65% of its revenue comes from Hong Kong and
mainland China. Along with Huawei, it produces comparatively
low-tech chips for a bevy of little-known Chinese firms.
    Analysts said only one Chinese-owed chipmaker, Hua Hong
Semiconductor Ltd  1347.HK , had the requisite know-how to
absorb lost capacity from SMIC. As a result, most Chinese chip
vendors would be forced to turn to the local factories of
foreign manufacturers, most notably Taiwan's TSMC and UMC.
    "If SMIC can't get access to U.S. technology, China will
face an even harder, and maybe an impossible, climb to the
cutting edge in semiconductors," Kevin Allison, director of
research firm Eurasia Group, wrote in a note.
    The proposed SMIC restrictions also raised the possibility
that Washington might target China's other chipmakers, which
include Hua Hong, Yangtze Memory Technologies Co Ltd, Changxin
Memory Technologies Co Ltd.
    President Donald Trump spoke of a "decoupling" of the U.S.
and Chinese economies on Monday.*:nL1N2G40I5

    The proposed U.S. curbs on SMIC could deal a blow to
manufacturing machinery providers, like American firms Applied
Materials, Lam Research and KLA, and Japan's Tokyo Electron. 
    Aside from denting their current sales and service business,
they could rob them of the opportunities presented by SMIC's
expansion plans.
    However this is unlikely to benefit rival chip equipment
suppliers in China as none can fill the shoes of the more
advanced foreign players, analysts say. 
    However some Chinese suppliers were making advances. The
likes of Naura Technology Group Co Ltd  002371.SZ  and Advanced
Micro-Fabrication Equipment Inc  688012.SS  (AMEC), for example,
were expected to become big equipment providers to SMIC in the
years to come, but that future could now be under threat.
    "One may think Chinese equipment and material suppliers
would be further boosted due to de-Americanisation, which may be
true in the long-term, but if SMIC's production lines are
paralyzed, these Chinese equipment/materials would be of no
use," wrote CLSA analyst Bin a research note.     
    Naura and AMEC saw their share prices fall 9% and 10.1%,
respectively, on Monday.    
    Paul Cheng, general manager at Taipei-based brokerage
Masterlink Securities, said Taiwan's Winbond Electronics Corp
 2344.TW  and Macronix International Co Ltd  2337.TW  might now
be in a position to acquire SMIC's NOR flash memory business.
Both companies' share prices rose on Monday.
    However that would run counter to Beijing's desire to boost
homegrown chip production. It would also force Chinese chip
companies to devote resources to switching foundries - a costly,
time-consuming endeavor.
    "It's doable, sure, but not without at least 12 months of
work," said one executive at a Chinese chip vendor.     

 (Reporting by Josh Horwitz in Shanghai, Makiko Yamazaki in
Tokyo, Heekyong Yang in Seoul, Yimou Lee in Taipei, and Douglas
Busvine in Berlin; Additional reporting by Samuel Shen in
Shanghai; Editing by Brenda Goh, Jonathan Weber and Pravin Char)
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