SMIC: China’s Leading Hope for Chip Hegemony
SMIC: China’s Leading Hope for Chip Hegemony
Estimated Reading Time: 8 minutes
TL;DR
The Semiconductor Manufacturing International Corporation (SMIC) is China’s leading domestic semiconductor foundry. Founded in 2000 by Richard Chang, a long time Texas Instruments employee, SMIC has grown through joint partnerships with Chinese regional governments, foreign investors, and the Chinese central government. Perhaps due to stolen IP, SMIC has grown rapidly and established itself as a major semiconductor foundry. (SMIC has a history of IP theft, with multiple court rulings requiring it to pay damages to TSMC.) Over the last decade, SMIC has come to be increasingly owned by the Chinese government, with nearly 50% of the company currently owned by the state. The Trump administration recently declared SMIC as a military supplier and banned US companies and individuals from investing in the company, but leading American companies are still customers of SMIC. The Chinese state is committed to growing SMIC and other domestic foundries, highlighting the necessity of strengthening the American foundry ecosystem to compete.
History and Growth
SMIC was founded in 2000 by Richard Chang (no relation to Morris Chang of TSMC). Chang was born in China, went to university in Taiwan, and then emigrated to the US to earn his PhD in electrical engineering (source). Chang found a job at Texas Instruments after graduating, and spent more than 20 years working for the company. Chang returned to China and founded SMIC with money from the Chinese government.
SMIC got to a rapid start, moving from equipment installation in August 2001 to qualified production in December 2001 (source). SMIC’s progress was unusually fast given the complexities of foundry construction (see our previous issue); SMIC had hired more than 100 employees from TSMC that had access to sensitive process information. TSMC consequently filed suit in December 2003 in California claiming IP theft against SMIC. The evidence for the suit was damning, with the smoking gun being an email exchange from SMIC’s COO to a TSMC employee asking the employee to transfer process documents and training manuals to SMIC. SMIC settled the case in 2005, agreeing to pay $175 million to TSMC.
SMIC however continued stealing IP from TSMC for the 130nm and 90nm processes, leading TSMC to file suit again in 2006 in California courts. The jury ruled against SMIC again in 2009 (source), requiring SMIC to pay $200 million in damages and transfer 10% equity in SMIC to TSMC (this stake has been considerably diluted by subsequent investment). Founder Richard Chang resigned from his role at SMIC in 2009 (source), following the conclusion of these lawsuits. Chang is currently working on a new foundry company in China (source).
SMIC first went public in 2004, at which time the Chinese government owned 14.75% of its shares. By mid 2012, the Chinese government owned 36.9% of the company, and by the end of 2018, the Chinese government held over 46.36% of the company (source). Other investors have been diluted by government stakes and no longer maintain significant ownership.
SMIC was listed on the Nasdaq, but delisted itself in 2019 possibly as a result of the China-US trade wars (source). SMIC recently listed itself on the Shanghai stock exchange in a mega-IPO, raising nearly $7.6 billion (source). SMIC is using the funds raised to double down on research, with the goal of catching up to TSMC. In September 2020, the Trump administration declared that US companies dealing with SMIC must obtain an export control license. In December 2020, the United States Department of Defense named SMIC as a company owned and controlled by the People’s Liberation Army, and prohibited any American company or individual from investing in SMIC. US controls pose a major threat to SMIC, but the company is working to ramp up investment in China’s domestic semiconductor ecosystem to circumvent them.
Technical Status
SMIC recently became capable of producing 14nm FinFET nodes, a major technical milestone (source). Building a modern foundry is extremely expensive, so SMIC pursued a unique strategy of heavily partnering with local governments, state-owned enterprises, and joint ventures with multinationals. While most foundry companies seek subsidies or support from local governments, SMIC took it one step further with its reversed-build-operate-transfer (Reversed-BOT) program, where a local government would build and own a fab and SMIC would simply operate it (source). Reversed-BOT allowed SMIC to build out foundries at very low cost early in its life. SMIC has continued to follow this strategy in part for its most recent 14nm and 12nm nodes, receiving a $2 billion investment in return for ceding majority ownership of the subsidiary that operates these latest generation fabs (source). As the diagram below shows, SMIC currently operates at least 8 fabs, and is capable of producing over 300,000 wafers per month.
At present, SMIC’s manufacturing capabilities are inferior to those of TSMC or Samsung Foundries, but the company and its management plan to spend major capital to catch up (see the first diagram below). SMIC has consistently lagged behind TSMC by only a few years with the gap starting to shrink recently (see second diagram below). SMIC has now achieved a 7 nanometer node (source), giving China considerable domestic manufacturing capability. Arguably, SMIC’s manufacturing capability is now close to that of Intel! SMIC is still using deep ultraviolet (DUV) lithography and not EUV lithography due to American export controls. SMIC is scaling up its R&D expenditures as the first diagram below shows, seeking to invent its way past the EUV chokepoint.
SMIC could be a big winner from the on-going car-chip shortage (source). Car chips often run at older 28nm nodes, a process SMIC has mastered. Another trend is that the number of Chinese semiconductor firms has skyrocketed in recent years, with over 1780 firms as of 2017 (source). SMIC serves as the foundation for the Chinese semiconductor ecosystem, providing domestic manufacturing capabilities for Chinese fabless design companies. China’s powerful Ministry of Industry and Information Technology has emphasized its commitment to grooming domestic foundries (source). SMIC has strong capital and state advantages that may allow it to achieve global leadership in chip manufacturing in the next decade.
Discussion and Current Prospects
SMIC got its start as a company through blatant IP theft from TSMC and has continued to follow a hard-charging model. SMIC continues to poach top TSMC talent to its leadership (source). Given the rift between the US and China, it will no longer be possible for TSMC to use California courts to bring verdicts against SMIC as it did in 2005 and 2009. The removal of court-mandated restraint will likely embolden SMIC to be even more aggressive in industrial espionage, especially since SMIC has taken on a critical national security role in China.
The biggest current blocker to SMIC’s growth is that ASML will not sell EUV lithography tools to SMIC. SMIC will be forced to direct large amounts of its capital to finding ways around these export controls, likely by funding domestic lithography companies such as SMEE (source). Chinese academia has also built expertise in lithography and may prove a powerful ally to SMIC needs (source). SMEE has recently announced progress on its DUV lithography tool and is likely working on an EUV lithography machine.
The US has moved tactically to slow down the rise of SMIC, but given the amount of capital being invested, these chokeholds will not hold forever. I would wager that within 5 years, the Chinese ecosystem will have found workarounds to American export controls. America must innovate faster in order to maintain a lead by continued investment in US and allies’ manufacturing technologies, and sustained use of export controls to limit Chinese technology acquisition. Cybersecurity will become critical for American semiconductor companies, as Chinese state hackers have shown their ability to penetrate even sophisticated networks (source). The government should work with American SMIC customers such as Texas Instruments and Qualcomm to wean them off SMIC as soon as possible.
China’s focus on SMIC highlights the importance for the US of having domestic foundries. TSMC’s and Samsung’s recent decisions to build foundries in the US is a good step forward, but neither company is American. The US needs a world class American foundry company to guarantee semiconductor security. The American venture capital and private equity ecosystem may be able to partner with the government to raise the funds necessary to construct such a world-class foundry. Restarting American semiconductor manufacturing will be a complex but necessary endeavor as semiconductors become an increasingly crucial part of modern geopolitics.
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Credits
Author: Bharath Ramsundar, Ph.D.
Editor: Sandya Subramanian