On the evening of March 17, SMIC announced that it has reached an agreement with the Shenzhen authorities to build a US$2.35 billion government-funded facility, which will focus on the production of 28nm and above integrated circuits.
According to SMIC’s announcement, through the cooperation framework agreement, SMIC and the Shenzhen government (through Shenzhen Heavy Investment Group) are proposing to fund the development and operation of the project through SMIC Shenzhen.
SMIC and the Shenzhen government expect to attract third party investment with the goal of eventually achieving a capacity of approximately 40,000 12-inch wafers per month and starting production in 2022. Subject to the signing of the definitive agreement, the new investment in the project is estimated at $2.35 billion (approximately RMB 15.275 billion).
According to the announcement, the actual amount of contribution by each party will be based on an evaluation of SMIC Shenzhen by a third party professional firm. It is expected that upon completion of the proposed capital contribution, SMIC and Shenzhen Heavy Investment Group will have approximately 55% and no more than 23% interest in SMIC Shenzhen, respectively. Based on this calculation, Shenzhen’s state-owned capital will invest at least $540 million in the project.
According to Bloomberg’s March 18 report, the Chinese government’s latest five-year plan indicates that it will increase spending on cutting-edge chips and promote R&D, with a top priority on building a technology-first policy vision to build a technology giant that can compete with Intel and TSMC for global influence. The Shenzhen government’s funding of SMIC’s partnership will be the first major project under China’s master plan to rival the U.S. in cutting-edge chip manufacturing.
The Wall Street Journal reported on Feb. 8 that SMIC, China’s largest chipmaker, reported a 9.4 percent drop in revenue in the quarter ended last December from the previous quarter, with its most advanced technology applications accounting for just 5 percent of revenue in the previous quarter, compared with 14.6 percent in the previous quarter.
SMIC has budgeted $4.3 billion in capital expenditures this year primarily for expanding capacity in more mature technologies, which is down from $5.7 billion in spending in 2020, the report said. SMIC was forced to cut its spending target from $6.7 billion to $5.9 billion last November after the Trump administration imposed export restrictions on SMIC last September, making it difficult to procure chip production tools, especially for more advanced technology applications.
The U.S. Department of Commerce announced on the evening of December 18, 2020, that it had placed SMIC and some of its subsidiaries and participations on a list of entities that restrict trade, and that all applications for export of equipment and materials needed by SMIC to develop advanced processes below 10nm would be rejected outright.
The Wall Street Journal reports that even in the best-case scenario, SMIC’s aspirations to catch up with market leaders like TSMC and Samsung Electronics remain elusive, at least for now.
In addition, Richard Windsor, founder of market research firm Radio Free Mobile, said the U.S. sanctions against SMIC are not only a blow to SMIC, but also to Beijing‘s plans to develop China’s semiconductor industry.
China’s chip demand is strong, but its foreign dependence is very high. for the whole of 2019, China spent 300 billion yuan on chip imports, more than the dollars spent on oil and Food imports combined.
Beijing had hoped to raise the self-sufficiency rate to 70 percent by 2025 for all computer chips used in China, a rate that is currently only about 16 percent.
Mark Li, a senior semiconductor analyst at Bernstein Research, said that because the United States has dominated some essential components of manufacturing equipment for many years, the possibility of China relying solely on domestic technology to build a production line is slim.
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