Deutsche Bank-US export restrictions on semis SMIC to pay the penalty-103908346

14 September 2023If current US export restrictions are deemed to be failing, what is next?Huawei recently soft launched the Mate 60 series of smartphones, its first competitive smartphone since 2020. Huawei features an internal chip, the Kirin 9000S, offering 5G support unlike the Mate 50 series, which used a 4G chip from Qualcomm given export restrictions. According to Techinsights, Huawei's 9000S SoC is produced on SMIC's 7nm (N+2) process and is a revised version of the Kirin 9000 series that was produced on TSMC 7nm. The evidence that SMIC has a working, if likely low-yielding, 7nm process that can support large-scale manufacturing to a restricted entity is not likely to be ignored by US authorities, even if it is still two generations behind TSMC's 3nm process (featured for the first time in the iPhone 15 Pro/Pro Max launched this week). Notably, the chip's specs are more comparable to those produced in 2020 (eg. Snapdragon 888). However, it is not clear what information SMIC has provided to equipment companies or whether SMIC is using an installed base of equipment prior to Huawei being added to the entity list in May 2019. In any event, there are still concerns that equipment companies may not know exactly what equipment is being bought for which process. Certainly Huawei's plan to ramp the Mate 60 series fast adds to these concerns.SMIC remains an important foundry supplier to Western companiesWhile policymakers may be inclined to see SMIC subject to further restrictions on equipment purchases or even an outright ban, it is however hard to see how these will be easily implemented. As a reminder, SMIC was already added to the entity list in Dec 2020, meaning that exporters had to apply for a license to sell to the company. However, SMIC remains an important foundry supplier to Western companies like Qualcomm and Broadcom, while SMIC's major capacity expansion at 28-90nm could be part of the relief that the industry needs to avoid another chip shortage. More broadly, Chinese foundries on 200mm wafers remain very important at lagging nodes as suppliers to Western semicos (non-Chinese companies currently buy $1.9bn of wafers in total from SMIC every year). Restricting tool sales and service visits to SMIC could then create shortages. It is no wonder that press reports suggest that new restrictions may apply to specific fabs (as a reminder SMIC has four 300mm fabs and three under construction).Alternative measures: litho-related, materials, packaging, EDA, IPIn terms of other alternative restrictions that may be applied on SMIC/China via Robert SandersResearch Analyst+44-20-754-58394Sidney HoResearch Analyst+1-415-262-2061Ross SeymoreResearch Analyst+1-415-617-3268Deutsche Bank AGIMPORTANT RESEARCH DISCLOSURES AND ANALYST CERTIFICATIONS LOCATED IN APPENDIX 1. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect