SMIC: The Chinese company at the centre of US-China chip war

In the early 2000s, Stanford scientist Yoshio Nishi visited the newly-built factory of the Semiconductor Manufacturing International Corporation (SMIC) in Shanghai, China.

He came across dozens of Chinese engineers, including cleanroom technicians, who had returned home after studying and working in western countries to join SMIC, an integrated circuit (IC) foundry established by Richard Chang, a Taiwanese-American industry veteran. 

“I was impressed by their enthusiasm,” Nishi tells TRT World about his encounter. “However, I was not particularly surprised by them. Simply because I saw a similar highly dense number of people in Korea during their rapid growth period of the IC industry.” 

The expat Chinese workers driven by Mao Zedong’s patriotic slogan of zili gengsheng (self-reliance), and foreign engineers lured by better economic incentives have been key to SMIC’s success. 

The latest US export curbs aimed at restricting China’s semiconductor advancement seek to discourage the flow of these same foreign engineers to Chinese tech firms. 

Under the new rules made public in October, Washington has barred US citizens, green card holders or residents from working with Chinese firms engaged in developing or producing advanced chips. 

“This is a huge blow to China’s semiconductor industry,” says Dr Monique Chu, a lecturer of Chinese politics at the University of Southampton. 

Does SMIC threaten US chip dominance?

SMIC is what industry people call a pure-play foundry or a fab, which manufactures integrated circuits designed and developed by other companies such as AMD and NVIDIA. 

Like Apple designs its iPhones but outsources production to China’s Foxconn, IC makers rely on fabs for producing logic and memory chips. 

But the process is not simply a matter of installing machines on which workers can pull some levers, acquire skills over time and carve out a market share. 

A foundry costs anywhere between $10 billion and $15 billion. And it can be years before a company actually books any profit. 

Despite government subsidies, SMIC had always trailed a few generations behind competitors such as the Taiwan Semiconductor Manufacturing Company (TSMC) and the US-based GlobalFoundries. 

For instance, if TSMC is producing advanced chips for iPhone 13 models that are made on 5 nm (nm stands from nanometers) nodes then most of SMIC’s business is centred around 28nm or older chips. 

A nm - smaller than even bacteria - denotes the distance between transistors on a chip. A smaller distance means more transistors can be put on a silicon wafer, increasing performance while reducing cost at the same time. 

In August, news came that SMIC had started producing chips on 7 nm nodes and that a company was using them in its servers.  

Industry analysts weren’t expecting SMIC to achieve this capability, especially as the US had blocked China’s access to cutting-edge EUV (extreme ultraviolet) lithography machines, essential to producing advanced chips. 

Under its latest measures, the Biden administration has put a limit on how far Chinese semiconductor companies can go in upgrading their capacity. For instance, any equipment or service which enables SMIC to produce chips more advanced than 14 nm has been prohibited.  

But if SMIC had always been at least four years behind other foundries in the technology catch-up race then what was the need for such harsh measures?

“SMIC can make more advanced chips than just those for use in TV sets,” says Clyde Prestowitz, President of the Economic Strategy Institute. 

“It is certainly behind TSMC and Intel, but not as far behind as you may think. It is getting an enormous amount of Chinese government money to help it catch up,” he tells TRT World. 

Advanced chips, especially those behind artificial intelligence applications, can also be deployed in sophisticated weapons such as drones and missiles. 

SMIC’s secret weapon 

SMIC wasn’t always on America’s bad books. Richard Chang, the company founder, had spent 20 years working at the famed semiconductor giant Texas Instruments alongside Jack Kilby, the integrated circuit pioneer and Nobel Prize winner. 

The terms semiconductors, ICs and chips are used interchangeably in the industry lingo.

In 2003, Goldman Sachs and other private equities invested in SMIC, which was emerging as a reliable low-cost chip manufacturer. 

“The US government even eventually granted it expedited access to capital equipment compared to other Chinese firms because it was a trusted vendor,” says Douglas Fuller, a professor at Copenhagen Business School and author of Paper Tigers, Hidden Dragons: Firms and the Political Economy of China's Technological Development. 

“Foreign vendors were willingly cooperating with SMIC until at least SMIC's placement on the US Department of Commerce's Entity List in 2020,” he tells TRT World. 

Over the years, SMIC continued to register breakthroughs, acquiring the techniques to make chips on ever-advanced nodes - 90 nm in 2006, 65 nm in 2009 and 40 nm in 2011. 

By 2014, SMIC counted Qualcomm as one of its clients and the company was spending heavily on R&D to compete with TSMC, GlobalFoundries and Samsung. 

In recent years, a major driving force behind SMIC’s bid to make advanced chips is Liang Mong Song, a highly respected semiconductor industry veteran who is the company co-CEO. 

Song, a PhD holder from UC Berkeley, worked for many years at TSMC and Samsung where he was among the two scientists credited for South Korean company’s 14 nm breakthrough. 

But SMIC has struggled to make money. Analysts say that least of the worries for Beijing, which now holds a majority stake in the company. 

“Chinese companies define success as part of greater China (policy),” says Matt Bryson, Managing Director, Equity Research at Wedbush Securities, a Los Angeles-based investment firm. 

While TSMC and Intel give considerable weight to churning out profits for shareholders, SMIC has focussed on making technological advances, he tells TRT World. 

“Yes, SMIC has given up something financially. But in terms of what they have been producing for China, that’s a tradeoff that Beijing is ready to make.”

A major stumbling block for SMIC has been its inability to acquire the EUV photolithography machines, which only the Dutch company ASML manufactures. 

Without EUV equipment it becomes increasingly difficult for a foundry to produce advanced chips at the right price. 

“SMIC is somewhat unique in producing 7 nm chips. At this point you have got four companies in the world that can produce chips at those nodes regardless of if that’s profitable or not.

“And SMIC is one of those four.”