The US government has decided to add China’s largest chipmaker, Semiconductor Manufacturing International Corporation (SMIC) to its list of "Chinese military companies".
The decision of the US to include SMIC in the Chinese military companies list places further pressure on the chipmaker as its inclusion means US investors are no longer permitted to hold or trade shares in SMIC.
Adding SMIC to the list
According to the US Department of Defense, the Chinese government was using the expertise of "civilian entities", such as companies and universities, to modernize its military capabilities but SMIC denied any links to the Chinese military.
In October, SMIC issued a warning about the possible impact of new US restrictions on key technology on its operations.
In a filing with the Hong Kong Stock Exchange on Sunday, SMIC warned that the US Commerce Department has issued letters to its American suppliers regarding restrictions on dealing with the Chinese firm.
According to the SMIC, US export regulations state that "accessories and raw materials to SMIC will be subject to further restrictions" and suppliers will need to apply for an export license prior to selling to SMIC.
Prior to this, the US government has prohibited the chipmaker from supplying troubled tech company Huawei as part of its campaign against the Chinese tech giant’s global business.
Similar to other global chipmakers, SMIC is dependent on US software, machinery and technology in its semiconductor design and manufacturing process. According to analysts at brokerage firm Jefferies, an estimated 40% to 50% of SMIC’s equipment comes from the US.
Reuters report and share price fall
In September, SMIC shares fell by almost 23% in Hong Kong following news that the US Department of Defense and other agencies are considering a sanction on exports to the Chinese chipmaker. The decline resulted to a loss of 31 billion Hong Kong dollars from its market value.
A Reuters report that months said SMIC was being scrutinized for its relationship with the Chinese military.
In response to the report, SMIC said it was "in complete shock" and emphasized that it "manufactures semiconductors and provides services solely for civilian and commercial end-users and end-uses."
"We have no relationship with the Chinese military," the firm argued.
SMIC also mentioned that it is "open to sincere and transparent communication" with US government agencies "in hope of resolving potential misunderstandings."
Outlook for SMIC
Richard Windsor, founder of research firm Radio Free Mobile, pointed out: "Seeing as SMIC is dependent on sourcing from US companies in order to be able to manufacture silicon chips, this puts SMIC's business in the hands of the Department of Commerce, which can decide whether to issue licenses on a case-by-case basis."
"The added designation of SMIC as being owned or controlled by the Chinese military does not change the situation, other than to make it harder to get a license, make it more likely to be added to the entity list and result in diminished demand for its shares as US investors will no longer be able to buy them," Windsor explained.
In order for SMIC to continue manufacturing the most advanced logic chips despite the US restrictions, the Chinese firm will have to use equipment made by Dutch company ASML.
In 2018, SMIC ordered a $150 million lithography machine from ASML, an equipment that uses lasers focused by giant mirrors to print minuscule patterns on silicon. However, there are reports that the US government has convinced the Dutch government to block the transaction on grounds of national security.
