China invests billions in chip manufacturing to close gap with global rivals

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Semiconductor Manufacturing International Corporation (SMIC), which is already trading in Hong Kong, said last week in a stock market report that it wanted to raise at least $ 6.6 billion. The greatest number would be affected if the company exercises an “over-allotment option” and issues additional shares in response to strong demand from investors.

A $ 7.5 billion increase would make SMIC the offer of the third-largest stock sale in the world this year, according to Dealogic. It would also be China’s biggest offer on the mainland since Agricultural Bank (ACGBF) went public in 2010, according to data provider Refinitiv.

The company is the largest chip maker in China, generating revenue of 22 billion yuan ($ 3.1 billion) in 2019. SMIC was the fourth largest stand-alone chipmaker worldwide in terms of sales in 2018, behind Taiwan Semiconductor Manufacturing Co. (TSM), GlobalFoundries and United Microelectronics Corporation, according to IC Insights. But ranked among all semiconductor suppliers – including the big players like Intel (INTC) and Samsung (SSNLF) – the Chinese firm is not even in the top 10 worldwide.

SMIC, whose main shareholders are state-owned companies, said in its prospectus that it wanted to use the money to invest in technology and catch up with its global competitors.

List in Shanghai suggests SMIC thinks it can better grow by relying on Chinese investors. The company was listed on the New York Stock Exchange, but was delisted just over a year ago, citing a low volume of transactions. And in the weeks following the announcement of his intention to register in mainland China, he raised more than $ 2 billion in state-supported development funds.The SMIC has not yet specified when it will start trading, but it plans to list stocks on the Chinese Star Market – a Nasdaq-style stock market that launched a year ago.

A persistent gap

Much of China’s chipset supply comes from foreign companies, which power everything from Chinese smartphones and computers to telecommunications equipment. Last year, the country imported $ 306 billion in crisps, or 15% of the value of the country’s total imports, according to government statistics.

Beijing is committed to improving its chip manufacturing technology and matching the most advanced industry leaders by 2030. Through its Made in China 2025 initiative, the country is trying to compete with the United States. in the development of future technologies.

Analysts say SMIC still has a long way to go to be a global competitor.

“SMIC is currently about five years behind TSMC in technology, and we believe this gap will persist over the next five years,” Citi analysts wrote in a research report last month.

TSMC and Samsung, for example, have the capacity to produce tiny chipsets capable of integrating more technology into a smaller space, wrote analysts from Jefferies in a recent research note.

In its prospectus, the SMIC admitted that it had to close the gap with world leaders, adding that it had to spend more on research and development to do this.

Huawei sanctions risks

The Chinese chipmaker also faces risks as US-Chinese tensions escalate, spanning everything from national security to trade to technology.

SMIC uses US-made software and hardware to create its chips, which it then supplies to other companies – including the besieged Chinese tech company Huawei. But in May, the U.S. Department of Commerce announced a rule banning companies from exporting computer chipsets and other key components to Huawei if those companies use U.S. equipment to make them.

US pushes for further crackdown on Huawei, raising fears of retaliation against U.S. companies

“The minimum wage will certainly be obliged by the new American rule to obtain an export license from the United States before being able to manufacture … chipsets for Huawei,” according to analysts at Jefferies. “It would be, in our opinion, unimaginable for SMIC not to comply with the new rule, as this would risk being cut off from any new supply of American semi-equipment and access to American software. ”

The chipmaker warned in its prospectus that US technology restrictions could create barriers preventing it from providing products and services to its customers, although it did not mention names. Trade friction and diplomatic disputes between China and other countries could also affect the company’s overseas supply of raw materials and equipment, the SMIC added.

– Julia Horowitz contributed to this article.

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