Caixin
Jul 15, 2020 07:45 PM
BUSINESS & TECH

In Depth: China’s Chip Dreams Power SMIC’s Mega IPO

SMIC's Shanghai headquarters on May 20.
SMIC's Shanghai headquarters on May 20.

A new “technology cold war” between the U.S. and China has added fuel to a drive by Beijing for self-reliance in high-tech microchips that power many of today’s gadgets. Against that backdrop, a previously unknown player has suddenly become the talk of town as a key component for achieving Beijing’s semiconductor dreams.

Shares of Semiconductor Manufacturing International Corp. (SMIC) are set to make their trading debut on Shanghai’s Nasdaq-style STAR Market on Thursday, in what’s likely to become the country’s biggest IPO in a decade. Regulators approved the listing with lightning speed, giving it the go-ahead within just 18 days of receiving the application — a record for a process that usually takes months.

SMIC, which manufactures chips for other companies, will sell up to 1.9 billion shares at 27.46 yuan ($3.92) each, raising as much as 53.2 billion yuan. That would make the IPO the mainland’s biggest since Agricultural Bank of China raised 68.8 billion yuan in 2010.

SMIC’s profile has rapidly risen amid intensifying acrimony toward China by the U.S., which increasingly sees the Asian nation as a high-tech competitor and has tightened technology export restrictions to companies like Huawei Technologies Co. Ltd. SMIC, which has lived in relative obscurity since its founding in 2000 and a Hong Kong IPO four years later, has been one of the biggest beneficiaries of calls within China to shore up its domestic industry.

The company’s long-languishing Hong Kong-listed shares started to rise late last year as China-U.S. tensions grew, and have nearly quadrupled since last November on hopes it will receive strong government support in China’s self-sufficiency drive.

The massive new funding will help SMIC build up its war chest to compete with rival Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), the global leader in advanced chip-making. However, analysts cautioned SMIC still faces many challenges, most notably from uncertainty surrounding U.S. tech policies towards China.

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Homecoming

Shanghai-based SMIC was founded two decades ago by Richard Chang, an engineer from Taiwan who previously worked 20 years for U.S. semiconductor giant Texas Instruments.

In 2004, the company listed in Hong Kong and New York, though it would later delist from the U.S. due to sluggish demand for its shares. But SMIC quickly drew ire from TSMC, which sued the company twice — once in 2003 and again in 2006 — accusing it of intellectual property theft.

The two companies settled their dispute in 2009, with SMIC agreeing to pay $200 million to TMSC as part of the settlement. Chang resigned from the company the same year, a move widely speculated to be part of the resolution deal.

The company’s next major development came in 2015, when the state-led China Integrated Circuit Industry Investment Fund, created a year earlier to help boost China’s chip sector, became its second largest shareholder. That and subsequent support from state-backed funds have given SMIC resources to plow into development of more advanced manufacturing technologies.

China’s quest to become self-reliant in chipmaking gained more urgency in 2018 when the U.S. government levied sanctions against Huawei rival ZTE Corp. for selling American-made products to Iran in violation of U.S. rules. Tensions entered a new stage last year after Washington took similar action against Huawei.

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While all that was happening, SMIC had been eyeing a chance to do a second listing on a mainland bourse. The company considered spinning off some of its business for a mainland listing as early as 2017, according to Jiang Chengjun, a manager for the investment business at Haitong Securities, an underwriter of SMIC’s Shanghai listing.

But its chance finally came after regulators in April relaxed the rules for overseas-listed Chinese companies to list on the Nasdaq-style, year-old STAR Market in Shanghai. According to the new policy, overseas-listed companies wanting to make a second listing on the mainland needed a market cap of at least 20 billion yuan, down from 200 billion yuan previously.

What’s next?

Investors are betting current trends will favor SMIC’s future development despite the fact that it still lags far behind TSMC in both scale and technology. The company’s final 53.2 billion yuan fundraising target was more than double its original target of 20 billion yuan.

TSMC is now the world’s biggest foundry with more than 60% of the market. By comparison, SMIC is less than one-tenth the size of its rival. Last year, SMIC reported a profit of 1.8 billion yuan on revenues of 22 billion yuan, compared with an 80 billion yuan profit on revenues of 256 billion yuan for TSMC.

SMIC is also well behind TSMC technologically. Its most advanced technology is now capable of making 14-nanometer chips, compared with TSMC’s 5-nanometer chip capability. The smaller the size, the more computing power can fit into a given space.

For it to climb the chip-making ladder, SMIC would need to rely on a special type of manufacturing technology — extreme ultraviolet lithography (EUV) — using equipment from the Netherlands’ ASML Holding, now the world’s only producer.

Media reports last year said the U.S. had lobbied heavily to stop the sale of cutting-edge ASML equipment to an unspecified Chinese buyer, prompting China’s ambassador to the Netherlands to say he hoped the stalled sale wasn’t due to political reasons.

“Money is not the silver bullet, should U.S. government strip the company’s access to the EUV machines, it may never be able to make chips smaller than 5 nanometers,” said Roger Sheng, a semiconductor analyst at Gartner.

Contact reporter Mo Yelin (yelinmo@caixin.com) and editor Yang Ge (geyang@caixin.com)

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