BEIJING/TAIPEI -- China's Semiconductor Manufacturing International Corp. will receive a $2.25 billion infusion from state investment funds to underwrite the development and production of chips intended to counter new sanctions levied by the U.S.
Funds run by the Chinese government and the city of Shanghai will inject the capital into an SMIC group company that operates a plant in the city. The transaction, which will occur before the end of the year, will cut SMIC's stake to 38.5% from 50.1%.
This move comes as Taiwan Semiconductor Manufacturing Co. has stopped taking new orders from Huawei Technologies due to tougher U.S. restrictions against the telecommunications equipment leader. TSMC had served as Huawei's go-to chipmaker after the mainland company lost access to American suppliers.
SMIC caused a stir throughout the industry in April when it gave employees Huawei's new Honor Play 4T phone to mark the company's 20th anniversary. Inscribed on the case were the words "Powered by SMIC."
The words signaled that SMIC manufactured the Kirin 710A chipset designed by Huawei subsidiary HiSilicon Technologies. Huawei's original plan was to produce the chips via TSMC's 12-nanometer process, but the frictions between the U.S. and China reportedly prompted the switch to SMIC's 14-nm tech.
SMIC's Shanghai plant will scale up 14-nm node production to 35,000 wafer equivalents monthly, from 6,000. The company said it also will invest in developing the more advanced 12-nm process.
Separately, SMIC plans to raise 25 billion yuan ($3.52 billion) by listing on Shanghai's Science and Technology Innovation Board, also known as the STAR Market. The company said earlier in May that it will boost this year's capital spending by 30% to $4.3 billion.
Government funds currently hold stakes in SMIC. The extra capital will lift monthly production capacity by about 20% by the end of the year from 448,500 units in terms of 8-inch wafers as of the close of 2019, an industry insider said.
Ties between the two chipmakers date far back. Richard Chang, who started the Chinese company, worked under TSMC founder Morris Chang at Texas Instruments. In 2000, TSMC took over the first company Richard Chang launched in Taiwan. SMIC was established on the mainland later that year. The two men are unrelated.
Many SMIC staffers trace their roots to the Taiwanese company. TSMC once sued the mainland rival, alleging it stole company secrets from former engineers.
But TSMC is the top contract chipmaker globally, while SMIC ranks fifth. The technology gap is formidable as well: TSMC makes top-of-the-line products using 5-nm tech, while many critics say SMIC runs two generations behind.
SMIC, whose chipsets reportedly cannot be used in the newest flagship devices, earned nearly $905 million in revenue for the first quarter of this year, a far cry from TSMC's top-line figure of $10.31 billion.
The U.S. Commerce Department said Friday that all foreign chipmakers using American-derived equipment, intellectual property or design software will need to apply for a license before supplying products to Huawei. This prompted TSMC to stop taking new orders from the beleaguered Chinese tech group, Nikkei reported this week.
This requirement should spell an opportunity for SMIC. But even if TSMC were to halt all shipments of semiconductors to Huawei, it is believed that the Chinese chipmaker could replace only a portion of them. SMIC Co-CEO Zhao Haijun, moreover, has said the chipmaker remains fully committed to complying with all U.S. regulations and that the company has been in constant communication with its equipment and material suppliers and the U.S. Department of Commerce. Like TSMC, SMIC still relies heavily on U.S. chipmaking equipment and design tools, which are essential for its plans for advanced 14-nm chip production.
The "Made in China 2025" initiative unfurled by Beijing in 2015 includes a plan to expand the domestic semiconductor industry. The goal was to raise the rate of self-sufficiency to 40% this year, followed by 70% in 2025.
While state-backed funds support SMIC, China's government helped establish at least three memory chip companies. One was in collaboration with Tsinghua Unigroup, an outgrowth of President Xi Jinping's alma mater Tsinghua University.
Yet the country apparently attained less than 20% self-sufficiency in semiconductor supplies as of last year. Seemingly aware of the situation, the White House has granted a 120-day grace period for the latest Huawei crackdown. This appears to be a bargaining chip to use in the trade negotiations.