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China's top chipmaker downplays threat to supply chain from trade war

Beijing-backed SMIC races to close gap with Taiwanese and South Korean leaders

TAIPEI -- China's state-sponsored Semiconductor Manufacturing International Co., the country's top contract chipmaker, on Friday brushed aside concerns that the battle over trade between Beijing and Washington could limit its access to vital foreign equipment and materials.

"We see the impacts" of the trade war on demand, "but they are very limited," Zhao Haijun, co-chief executive of SMIC, said in an earnings briefing.

Zhao declined to comment on specific materials or equipment purchases, but said the chipmaker has encountered no trade-related barriers to procurement and anticipates "no problem" in the near term.

Semiconductor industry analysts have raised concerns that U.S. President Donald Trump's administration could impose further export controls on chip production equipment from key American suppliers such as Applied Materials, Lam Research and KLA-Tencor.

Zhao's remarks came as the homegrown Chinese chipmaker pledges to accelerate investment in technology to close gaps in ability compared with global market leaders. This chimes with Beijing's call to build a competitive local chip industry, which has deep national security implications. For now, China relies heavily on foreign-made chips crucial for advances in artificial intelligence, self-driving cars and other technology.

Beijing and local governments are pouring funds into the semiconductor industry, the top priority in the country's "Made in China 2025" plan for industrial self-sufficiency -- a goal that U.S. officials have warned threatens America's lead in vital technologies. SMIC also receives Chinese subsidies.

SMIC is the world's No. 5 contract chipmaker, trailing Taiwan Semiconductor Manufacturing Co., GlobalFoundries, United Microelectronics Corp. and Samsung Electronics' foundry unit in making chips for others. The company's clients include Qualcomm, UNISOC, Huawei chip arm Hisilicon Technologies and many local chip designers.

"Our R & D expenses account for roughly 20% of our revenue in the second quarter, as we keep accelerating our technology development," said Gao Yonggang, the company's chief financial officer.

SMIC received $19 million in government grants for the April-June period, Gao said, with total subsidies expected to reach $100 million for all 2018.

The Chinese company also brought in Liang Mong-song, a chip industry veteran and a former senior executive at Samsung and TSMC, late last year to bolster its production technology. But SMIC lags far behind Taiwanese and South Korean rivals in miniaturization, which makes chips more powerful.

Liang said on Friday that the company has made progress in its 14-nanometer process technology, around three years after TSMC and Samsung rolled out similar technology. The smaller the nanometer size, the more advanced and powerful the chips, but the more challenging and costly they are to develop. Apple plans to adopt TSMC's 7-nm process technology for core processors to go into upcoming iPhones later this year.

SMIC expects to produce 14-nm chips in small quantities in the first half of next year and sees such products beginning to contribute to revenue by the end of 2019.

SMIC plans about $2.3 billion in capital expenditures for wafer production operations this year, of which about $1.3 billion will go toward expanding capacity at fabrication facilities in Beijing, Tianjin and Shanghai. The company will devote about $400 million for research and development equipment. Last year's capex spending totaled $1.9 billion.

Revenue climbed 18.6% on the year to $890.71 million in the April-June quarter,while net profit jumped 42.3% to $51.59 million.

The Beijing-backed company said it forecasts July-September sales to decline 6% at most to $838 million from the last quarter, hurt by the slowing mobile demand and the pricing competition. But the revenue estimate still represents an on-year expansion from $770 million in July-September 2017. The company forecast a gross margin between 19% and 21%, which could likely lead to an operating loss in the current quarter, according to analysts.

"Clearly SMIC is keen to pursue the development of finer but very expensive chip production technologies, but we are concerned that the high cost of such pursuit may be not in investors' best interest," Mark Li, an analyst at Bernstein Research, said in a research report.

Shares of SMIC rose 4.34% to close at 9.86 Hong Kong dollars after the earnings announcement. Market watchers said the company's share movement often correlates less with its financial performance than the hope to invest in China's next big thing that is backed by the Beijing government.

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