-US Administration to “blacklist” SMIC- Cutting off ALL US help
-A slow death versus a quick death (unlike Jinhua)
-There is enough time on way out door to leave scorched earth
-Reports in the Media about SMIC being “Blacklisted”
It has been widely reported that SMIC will be added to the US “Blacklist” of Chinese companies that you can’t do any business with, not even invest in their stock. The investment part has little impact as investors will have more than enough time to get out of the stock but the blacklist on equipment sales will be the equivalent of a death sentence for SMICs future Moore’s Law progress.
Trump to add China’s SMIC and CNOOC to defense blacklist “No license for You”
For a while it sounded like there was a small loophole big enough to fit a lot of equipment through…a “license”. Well, a blacklist “Trumps” a license. We were very dubious of companies abilities to get a license even though companies acted like a license was no big deal. Licenses for SMIC are obviously moot now. The bigger question is when the blacklist will go into effect.
If it goes into effect immediately, which it should, then the result is clear. If the implementation of the blacklist is delayed for several months (like the stock sale) then the blacklist is toothless as SMIC would have a chance to stock up.
A slow death versus a quick execution
Unlike Jinhua, which was executed virtually overnight and before it was even born as a working fab, SMIC would be essentially starved to death by denial of new technology.
SMIC could stay somewhat “frozen in time” at roughly 14NM technology at best. Some might suggest that they could try multipatterning or other methods to get past but that requires more dep and etch which they won’t have enough access to except from AMEC ( a local Chinese equipment maker) or perhaps for a short while from Japanese competitors such as TEL and Hitachi or ASMI which can’t supply a complete solution.
Its slow starvation.
US equipment companies will have to pack up and get out of Dodge
Like Jinhua, SMIC will also blacklisted from services, spares and upgrades that keep a fab running. Sooner or later tools will eventually go down and need spare parts which will no longer be forthcoming from the US.
In Jinhua we saw US company reps get on a plane out of town the next day. Perhaps it may not be as bad at SMIC which may try to hire local service people, now unemployed, but without parts and support its just a matter of time before things stop working altogether.
The reality is that relatively quickly the fab will become non functional, yields will go down and progress will reverse itself.
Collateral impact at other Chinese fabs- two ways
We remain concerned that business with other Chinese fabs is at grave risk.
First, they could be next in line for the blacklist, embargo/license as the US works its way down from Chinas leading fabs.
We think the US would likely strike at leading edge memory fabs in China as they are also potentially “dual use” and also are a similar threat to US companies like Micron (which itself has been a target of China).
The second way we think US companies will be impacted is that Chinese companies will triple down on looking for any other source of equipment, European, Japanese, Korean and domestic Chinese other than US supplied, thinking that they are next on the blacklist.
Older, 8 inch Chinese fabs less impacted
It is curious that its a little known fact that most equipment companies are currently selling more 8 inch equipment today than when 8 inch equipment was the only game in town and state of the art. 8 inch has become very popular.
Chinese 8 inch fabs, which represent the majority, likely will be able to get equipment and spares through the secondary market, although prices have skyrocketed and supplies have dried up.
If you are sitting on an old fab somewhere, its likely worth gold on the secondary market. Not every chip needs to be bleeding edge. In fact given the high percentage of consumer goods, TVs, appliances, IOT etc, 8 inch will service that market very nicely. Selling 8 inch tools is probably pretty good right now
Boxing in Biden
If its one thing the current administration always has time for and makes a priority, its being spiteful and revengeful. In our recent notes we have talked at length about scorched earth on the way out the door. Its clear that the main motivation for the SMIC blacklist is less focused on hurting China and more focused on “Boxing in” the Biden administration and handing off a mess to deal with.
There is strong Bi-partisan support against China in congress so that the incoming Biden administration will not make undoing the SMIC blacklist a priority and in fact the blacklisting may become permanent by default, so as not to be seen as weak on China for the 2024 race.
In addition, the current administration doesn’t have to deal with any of the fallout from the blacklist as that will be the next administrations problem.
Its unclear that this is the final gasp. There is still a lot of time left on the clock to do more damage. We would not be surprised to see more last minute moves focused on keeping promises made or leaving behind more landmines and damage.
We think much of the negative news is likely already in the semiconductor equipment stocks and they have been like teflon anyway.
We don’t see the SMIC “blacklist” as significantly incremental nor negative enough to seriously negatively impact the stocks that have had such strong upward momentum.
Much of SMICs numbers have likely already been taken out of most companies business plans as well so we will not see a significant impact on revenues or earnings.
The only thing we see that could have impact is a larger/wider move against China in trade that could result in a broader reprisal or broader impact on Chinese customers of US equipment companies.
While we expect further moves by the outgoing administration we don’t expect them to rise to the level of igniting a full blown trade war as that would reflect negatively on them rather than the incoming administration.