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China's top chipmaker SMIC says US restrictions hampering growth

Company unable to reap full benefits of pandemic-fueled demand, says co-CEO

China's top chipmaker Semiconductor Manufacturing International Co. says U.S. export restrictions have deprived it of lucrative growth opportunities and will continue to affect its performance and expansion plans this year.

TAIPEI -- China's top chipmaker Semiconductor Manufacturing International Co. on Friday said that U.S. export restrictions have cost the company valuable growth opportunities and will continue to impact its financial performance and expansion plans for 2021.

SMIC co-CEO Zhao Haijun said demand is booming for all kinds of chips thanks to the stay-at-home economy that has emerged amid the coronavirus pandemic, but "geopolitical factors" mean the company has been unable to fully capitalize on the trend.

"We could have seized the massive opportunities of 2020. However, due to external factors, we were forced to adjust customers and production capacity. These adjustments increases costs," Zhao said.

SMIC plans to expand chip production capacity this year to address the increasing demand, Zhao said. Such expansion, however, requires new equipment -- including from the U.S. Most of these new tools will not be delivered and installed until the second half of the year, Zhao said, due to the longer waiting time for export licenses, a hurdle that his company and its suppliers are "still working hard to get through."

SMIC was placed on multiple U.S. trade blacklists last year, including the so-called Entity List in December, after Washington accused the chipmaker of having links with the Chinese military. SMIC denies any such ties. The curbs block U.S. exporters from shipping to SMIC unless licensed to do so and also require American investors to sell the Chinese chipmaker's shares.

SMIC suppliers must also receive export licenses for U.S.-origin chemicals and other materials and parts that the company needs to keep its existing production lines up and running, according to Zhao.

The executive said the export control regulations have also dragged down the utilization rate for SMIC's most advanced production technologies last quarter, affecting the company's revenue and planning.

"We still have a long way to go to achieve an economic scale for our advanced technology production... while the depreciation of our capital investment will hit our financial performance," he said.

Zhao added that the company will be very cautious when it comes to expanding its most-advanced technologies this year.

SMIC's shares dropped nearly 7% in afternoon trading in Hong Kong following the company's warning of uncertainties to its operations and expansion plans. Its Shanghai-listed shares were down nearly 3%.

SMIC said it plans to spend $4.3 billion for 2021, mainly to expand production capacity for existing technology rather than to develop advanced chips. Its capital expenditure last year was slightly more than $5.7 billion. The company had planned a record $6.7 billion but lowered the amount due to "uncertainty of certain equipment deliveries from U.S. suppliers due to export restrictions."

SMIC is investing heavily to be China's most cutting-edge chipmaker, offering 14-nanometer process technologies -- which it said went into small scale production in 2020 -- and looking to advance beyond that. That places it only one to two technology generations behind the world's biggest contract chipmaker, Taiwan Semiconductor Manufacturing Co., which is now producing 5 nm chips, which are used in the latest processor chips for the iPhone 12 range. The smaller the nanometer size, the more advanced and thus more challenging it is to develop those chips.

The company said it expects revenues to grow between 5% and 7% for 2021, assuming that "operational continuity is not significantly adversely affected."

Gross margin for this year, however, will be around 15%, significantly lower than the 18% in the fourth quarter of last year, the company forecast.

Like most of its peers, including rival TSMC, SMIC generated record earnings last year thanks to demand for tech gadgets amid the pandemic and China's push to produce more locally.

SMIC also benefited from stockpiling by Huawei Technologies, the Chinese tech company that tried to pile up supplies of components as it also grappled with tightening U.S. curbs. Huawei used to be SMIC's biggest customer.

For the full year 2020, SMIC's revenue went up more than 25% to $3.91 billion, while net profit tripled to $716 million from $235 million a year ago. For the last quarter of 2020, revenues rose 16.9% year on year to $981 million while net profit increased more than 189% to $257 million.

Zhao said that if it were not for the export controls, the company would be able to repeat its rapid revenue growth of last year.

SMIC said it received $125 million in government funding in the last quarter of 2020, following $237.5 million in the first nine months of the year.

China has long been hoping to build a competitive semiconductor industry, a crucial area that is linked directly to national security and is at the center of the U.S.-China tech war.

Gina Raimondo, the U.S. Commerce Department secretary nominee, has said she currently sees no reason to remove blacklisted companies from the department's Entity List, because most were included on it for national security or foreign policy reasons.

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