TAIPEI -- Shares in Semiconductor Manufacturing International Co. fell sharply on Monday after the U.S. tightened controls for suppliers to the Chinese chipmaker, exposing the company as the latest target of Washington's attempt to rein in China's tech ambitions.
SMIC shares dropped nearly 7% in Hong Kong, while its Shanghai-listed shares slumped more than 6%, taking their decline to 40% since early August.
Monday's falls come after a letter sent from the U.S. Department of Commerce to Beijing-backed SMIC's U.S. suppliers was revealed over the weekend. The letter, seen by the Nikkei Asian Review, cited "unprecedented risks" that SMIC's products could end up being used by the Chinese military and requires suppliers to apply for licenses to ship controlled items to the Chinese chipmaker.
SMIC has denied any military links.
Uncertainty over the company's operations benefited a number of its industry rivals on Monday. Taiwan's United Microelectronics Corp. and Vanguard International Semiconductor, which compete head-to-head with SMIC in more mature chip production technologies, surged 10% and 9%, respectively. In South Korea, shares in DB HiTek, a local foundry chipmaker, rose 5.74% in the morning.
"Despite [the fact that it is] still not clear the scope of the new U.S. export control regulations, we expect many of SMIC's current clients would want to seek alternatives for chip manufacturing due to confidence issues ... so some of SMIC's peers may benefit," a research note by Sinopac Securities Investment Service said.
The move by the U.S. against SMIC could deal a blow to Beijing's ambition to build a competitive chip industry and cut reliance on foreign suppliers.
It is also likely to increase U.S.-China geopolitical tension, as the popular China-owned short video app TikTok seeks Beijing's approval to partner with Oracle and Walmart in its U.S. operations.
The U.S. Department of Commerce has not yet officially placed SMIC on any formal trade blacklist such as the Entity List, which Washington used to restrict the use of American technologies by Huawei Technologies, the largest Chinese tech company, and its numerous affiliates.
It is not immediately clear whether the U.S. government would easily approve licenses to allow crucial chip production tools to be delivered to Beijing-backed SMIC.
Harry Clark, a Washington-based lawyer with law firm Orrick, said it was not uncommon for the U.S. government to notify exporters about a need for extra licenses in addition to the existing requirements.
"I would not expect the government to provide licenses for such exports absent special favorable circumstances," said Clark.
SMIC's key American purchases include chip production and testing equipment and key chemical materials from suppliers such as Applied Materials, Lam Research, KLA, Teradyne, Dow Dupont, Entegris and others.
Applied Materials, Lam Research and KLA still control more than 40% of world's chip fabrication and metrology machine market share, while these U.S. vendors have more than 80% of the market in many specialized segments of high-end chip manufacturing, analysts said.
"SMIC is vulnerable to trade restrictions.... If [strict export control restrictions are] implemented, this will severely undermine SMIC's ability to advance technologies," said Mark Li, a veteran semiconductor analyst with Bernstein Research. "As U.S. equipment is indispensable for advanced semiconductor R&D and production, such a restriction, once implemented, effectively allows the U.S. government to decide how fast, or slow, SMIC's technology progress would be."
Founded in 2000, SMIC has long been China's hope to challenge market leaders such as Taiwan Semiconductor Manufacturing Co., the world's biggest contract chipmaker, and help local chip designers to put their integrated circuit designs into production. SMIC's $6.6 billion share offering in Shanghai in July was the largest in China in 10 years.
SMIC has stepped up efforts to build non-U.S. production lines for less advanced products. However, it still relies heavily on foreign suppliers from Japan and Europe.
China has aggressively cultivated its own chipmaking equipment providers, and many of these little-known domestic players have grown significantly. However, Chinese chip equipment makers' overall global market share is still only around 2%, Bernstein Research estimates, while in general China's self-sufficiency in semiconductor equipment is still at most 10%.
SMIC's market share in foundry chip production -- that is, making chips for others -- was roughly 4.8% for the April-June period of 2020, according to research company Trendforce. SMIC was ranked fifth by market share behind TSMC, Samsung Electronics, Globalfoundries and United Microelectronics.
SMIC enjoyed good earnings in the first half of 2020, as Huawei, its biggest customer, built more inventories to counter the U.S. clampdown and shifted some mid- to low-end chip orders to the Chinese chip producer.
However, like most suppliers, SMIC has not been allowed to ship to Huawei after Sept. 15 without a license as its production processes also involve American technologies.
SMIC also builds mid- to low-end chips for Qualcomm and Broadcom, as well as many key local Chinese chip designers such as Goodix, Gigadevice and Unisoc.
The U.S. Commerce Department has not yet publicly specified the scope of the new export control regulation on SMIC but told the Nikkei Asian Review that it was "constantly monitoring and assessing any potential threats to U.S. national security and foreign policy interests."
SMIC said on Sunday it has not yet received any official notice from the U.S. government about the latest restriction, while the company reiterated it has no relationship with the Chinese military and does not manufacture for any military end-users or end-uses.
Additional reporting by Lauly Li in Taipei and Kim Jaewon in Seoul