CHIPS: SMIC Taps Beijing’s Chip Ambitions with New $10 Bln Plant

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Bottom line: SMIC’s new plan for a $10 billion cutting-edge chip plant shows it could be well positioned to find a place on the global stage by tapping strong government support after an overhaul of its own operations.

SMIC announces $10 bln chip plant

I rarely write these days about SMIC (HKEx: 981; NYSE: SMI), since the company once billed as China’s best hope to challenge global chip giants like Intel (Nasdaq: INTC) and TSMC (Taipei: 2330) has been a major disappointment since its Hong Kong listing a decade ago. But the company’s newly announced plan for a $10 billion cutting-edge plant was enough to catch my attention, and shows SMIC could become a company to watch due to Beijing’s sudden determination to build  up a globally competitive chip sector at any cost.

Investors also seem to be betting big on SMIC to rise from the ashes. After years of stagnation, the company’s Hong Kong-listed shares have risen 50 percent since late July, hinting that stock buyers believe it could become a centerpiece in Beijing’s campaign to create a world-class sector for the chips  that power everything from PCs and smartphones to a new generation of smart cars and home appliances.

According to the latest headlines, SMIC has just announced plans to spend a whopping 67.5 billion yuan, or about $10 billion, on a new plant making chips using leading-edge 12-inch wafer technology. (English article; Chinese article) The plant will be  based in SMIC’s hometown of Shanghai, with a monthly capacity of 70,000 units.

Significantly, an event to announce the new investment was attended by officials from both the Shanghai city government and also the Ministry of Industry and Information Technology (MIIT), which oversees many of China’s high-tech industries. That shows this particular project is getting strong government support, which should come as no surprise to anyone following the local chip sector these days.

China  has recently earmarked $100 billion to develop its chip sector, which is a global laggard despite years of investment in companies like SMIC. China is currently the world’s largest chip buyer, since it manufactures many of the devices that are powered by such high-tech components. But that manufacturing work has far lower margins than actual chip production, and Beijing wants to capture more of the latter market as part of a broader bid to move its manufacturing up the value chain.

A number of Chinese companies have been tapping Beijing’s recent largess, most notably a group based at Tsinghua University, China’s leading sciences university. That group, led by names like Unigroup and Unisplendour, has formed tie-ups with the likes of Hewlett-Packard and Intel, and has also attempted to buy or purchase stakes in big US memory chip names like Micron (Nasdaq: MU) and Western Digital (Nasdaq: WDC).

Building a Solid Foundation

But to date, SMIC’s name has largely been absent from the group taking advantage of Beijing’s largess, as management worked to put the company on more stable footing after a turbulent period about 5 years ago. After years of losses, the company is now squarely profitable, reporting its net earnings rose 50 percent to $97.6 million in this year’s second quarter as revenue reached a record high. (company announcement)

With a relatively solid foundation in place, SMIC now appears to be embarking on a new phase aimed at taking another attempt to challenge Taiwanese peers TSMC and UMC (Taipei: 2303), who do the actual manufacturing  of chips for the likes of Apple (Nasdaq: AAPL) and Qualcomm (Nasdaq: QCOM). And now we’re seeing the company fully intends to take advantage of Beijing’s largess as part of that strategy.

I admitted at the outset of this post that I haven’t followed SMIC too closely for a while, since it has been in a rebuilding mode for much of the last 5 years. It’s still far from clear if it can succeed with this new plant, since more than money is needed to do well in the highly competitive space. But some excitement is clearly returning  to the company and its laggard stock, and its improving financial situation and strong government support could boost SMIC’s chances of finally finding a place in the global chip-manufacturing sector.

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