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SMIC shares plunge 23% in Hong Kong on US blacklist fears

Market cap of Chinese chipmaker down $3.6bn in escalation of trade war

The Trump administration is considering whether to add China's top chipmaker to a trade blacklist, as the U.S. clamps down on Chinese companies that it considers a security threat.   © AP

HONG KONG (Reuters) -- China's biggest chipmaker SMIC plunged a fifth on Monday in response to news of potential U.S. sanctions against the company, wiping about HK$28 billion ($3.61 billion) off its market value and prompting analysts to predict doom if a ban is implemented.

On Friday, Reuters reported that the U.S. Department of Defense might block American companies from providing goods and services to the company, Semiconductor Manufacturing International Corp (SMIC).

That could dash what some view as China's best hope to develop a self-sufficient semiconductor industry via SMIC and further escalate the Sino-U.S. spat that involves trade and technology, analysts said.

"The company could go under within a few years," says Mark Li, who tracks China's chip industry at Bernstein Research.

SMIC did not immediately reply to a request for comment.

SMIC trails rival Taiwan Semiconductor Manufacturing Co Ltd (TSMC) in production volume, technology, and efficiency despite state support since it was founded two decades ago.

It only recently introduced capacity for chips at the 14 nanometre process node, making it about two generations behind that of TSMC.

Like TSMC and other fabs, SMIC relies on a number of U.S.-based companies, such as Applied Materials, to obtain key production equipment. Research firm Jefferies estimates that roughly half of SMIC's suppliers are American.

Sources have told Reuters that the United States is investigating alleged ties between SMIC and the People's Liberation Army in China. SMIC says it has no relationship with the Chinese military.

SMIC shares in Hong Kong fell more than 23% to HK$18.10 on Monday, their lowest since June 12.

Its shares in Shanghai, where it raised $6.6 billion in a secondary listing in July, fell as much as 11%.

The potential sanctions echo those placed by the United States on Huawei Technologies that bar U.S. companies from selling products and technology to the Chinese smartphone maker. The restrictions have muzzled Huawei's once-promising chip division and is squeezing its overseas phone sales.

U.S. sanctions could also impact supplies from non-American vendors, analysts said, as chip equipment vendors from countries such as Japan and the Netherlands, which have friendly ties with the United States, could "shadow follow" the U.S. order.

A precedent for such a possibility exists.

In 2018, the Trump administration prevented Dutch machinery maker ASML from shipping to SMIC a $150 million chip-lithography machine that is needed to manufacture advanced microprocessors.

Analysts said that while SMIC could potentially continue to use its existing line of equipment in the face of a supplier ban, its business would suffer because equipment providers would no longer be able to service its production lines.

Losing this official support service would put SMIC in "serious trouble", said Doug Fuller, who researches China's chip industry at the City University of Hong Kong. "The machines need to be tended to by suppliers every two to three months."

SMIC could potentially look to local companies, unaffiliated with their official suppliers, to service their production lines, he said. "But that will just compound SMIC's well-known operational inefficiency." 

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