SMIC Cut Off = Worst case scenario
SMIC is on US gov “no fly” list for US Equipment Companies
Will likely lead to loss of all of China- 25% to 50% of revenues
Retaliation by China will worsen situation
SMIC cut off from US technology (Chip Equip)
It has been reported in the Wall St Journal and many news outlets that the US government sent out a “Dear John ” letter to US chip and equipment companies on Friday saying that SMIC is now on the “naughty list” and will need export licenses, which will be denied, to get US equipment.
This essentially puts SMIC out of business…..
If Jinhua is any example, where all the US equipment companies got on the next plane out of Dodge leaving half installed equipment and open boxes, service, spare parts and all support is gone too.
The details of timing and impact are not yet out. Will equipment in the air get turned around? When does it take effect? What about foreign firms? Do US firms having manufacturing outside the US get a “loophole”? etc; etc; etc;
We told you so…
We have been talking about this issue for years , longer than anyone else. We have also been much more vocal about the risk.
Over two weeks ago we put out an article predicting exactly what has happened:
While companies and analysts have played down or ignored this worst case scenario it is now reality that can’t be ignored.
It will likely extend to all of China…Not just SMIC
US Chip Equip Co’s will be placed on “Unreliable Entities ” list by Bejing
China has been threatening retaliation for the US cutting off Huawei. Before China even got the chance to respond the US government slapped them in the face with the SMIC cut off.
Bejing will likely put a lot of US companies on its “naughty list” but it may be more symbolic as it is “cutting off your nose to spite your face” type of behavior as China desperately needs that equipment to become free of the US.
There is a high likelihood that China’s response will up the game by a large measure and not just include the offending US chip equipment companies who won’t be allowed to ship chip equip to China but will also up the ante by adding giants that are big targets, such as Apple, intot he ever widening trade war.
ASML gets company
We had previously pointed out many times that it was greatly hypocritical for the US to ask the Dutch to stop ASML from exporting an EUV scanner without asking the same sacrifice of its own companies. Well ASML now has company in the “can’t ship to China ” club.
Our next question is what about Japanese companies especially Tokyo Electron? We can’t imagine the US will standby and watch them pick up all the lost US market share. The same goes for Korea and others. This will obviously escalate into a world trade war
Politics plays a big role
As we have previously pointed out politics plays a very big role as we are counting down to an election where being tough on China is a big talking point and most all US equipment companies are in blue states that effectively don’t exist and already are on a political “naughty list” as being part of the silicon valley opposition. This means that the potential financial ruin for chip equipment companies doesn’t much matter and certainly matters a lot less than soy bean farmers.
Other Chinese fabs will get on the list
SMIC was the obvious first and biggest target but its quite clear that what can be said about SMIC can be said about every other Chinese fab including the memory fabs.
To suggest that military applications don’t need memory is obviously a joke.
One of the big questions is foreign owned fabs located in China, such as Intel and Samsung etc? They will likely still get equipment but they are not leading edge nor critical to China getting technology.
Expansion plans in China will likely go on hold and expansion will slow or stop.
Semiconductors are a zero sum game-so who wins?
As demand for chips is a relative constant, they have to come from somewhere. If not SMIC and China then from who? Global Foundries is too far behind the leading edge to be real competition but could pick up some trailing edge business as they are not as far behind SMIC as they are behind TSMC.
TSMC will likely get the lions share of SMIC’s lost business and its trailing edge fabs may need expanding.
Even smaller companies like Tower-Jazz could see a pick up in business. Micron and Samsung could pick up memory business if China’s memory fabs get cut off but will likely also lose business after being placed on the unreliable entities list.
At the end of the day, chip equipment will get sold to someone else but clearly not as much as China was buying as China was on a catch up buying spree and spending more than needed for its current capacity.
Are the channels already stuffed?
We have been hearing for some time now that the Chinese are not stupid and have been on a buying spree for not just chips but also equipment in front of this embargo.
This clearly has played a part in some of the higher levels of business we have seen coming out of China.
This makes the fall in revenue even more precipitous as it is from an artificially high level to a near zero.
SMIC had been raising a lot of money to go on a spending spree, as we pointed out in our last note, and now much of that is going to go unspent.
Cold Turkey or an “organized wind down”?
One key issue which will determine the financial impact and wether equipment companies have actual losses (which hasn’t happened in a long time) will be if the impact is cold turkey or will take time to give them a chance to react.
The details are not out yet but we would vote that given the current political situation that the SMIC embargo will be more cold turkey, like Jinhua, than a slow wind down.
Obviously the September quarter is already in the bag but the December quarter could be very ugly. I think that most companies won’t be in the mood to give guidance in a few weeks as all bets may be off.
Much worse than Covid
The reality is that Covid while bad for the industry, was more of a temporary logistics problem that could easily be worked around. An embargo is much harder to get around. Much more important is the long term damage of trust between the US and China as China will avoid like the plague, any equipment made in the US.
Given that China was the fastest growing geography for every US equipment company and has grown to be everyone’s biggest revenue source, the impact will be huuugge.
We have warned investors to stay out of the stocks as they had gotten way over priced and even with the recent pull back still had way to much risk.
All the equipment stocks will get whacked….there will not be much of any place to hide.
SMIC will get trashed. TSMC continues to win even more. Tower Jazz may be a good buy. Micron may be a neutral to a negative. Intel may get put on the naughty list but does have a facility n China.
Tokyo Electron may be a temporary bump up.
KLA and AMAT are most exposed while Lam is not far behind even though it is the memory “poster child”.
As always, the subsuppliers, ICHR, AEIS, MKSI, UCTT will get whacked more than their customers.
Materials suppliers remain a somewhat defensive play such as FORM, Cabot and Entegris. Photronics is a harder call given its large expansion into China which could be both a benefit and a risk.
Nova, being Israeli based, could see benefit by picking up share. VECO is less impacted as it has already lost virtually all of its China business.
Buckle up!….its going to get very, very ugly!