US trade restrictions on SMIC may set back China's efforts to develop a domestic alternative to Samsung and TSMC

  • The US Commerce Department issued export restrictions against SMIC.
  • These restrictions will set back China's search for domestic alternatives to Samsung and TSMC and limit Chinese tech companies' ability to compete in foreign markets.
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The US Commerce Department issued an order requiring US companies to obtain a license to export products to SMIC, according to Reuters. The Department alleges that SMIC could be supplying components to China's military; however, representatives of SMIC deny this, claiming that the company only manufactures semiconductors for civilian and commercial end-users. 

The export restrictions will make it particularly difficult for SMIC to obtain foundry equipment, setting back China's efforts to develop a domestic alternative to Samsung and TSMC. Samsung and TSMC currently operate the only foundries in the world capable of manufacturing 7nm chips. The 7nm measurement refers to manufacturing precision, and moving from the 10nm standard to the 7nm standard unlocks considerable computing power across several hardware segments including smartphones, cloud computing components, and telecom equipment.

Since the US imposed restrictions on Chinese firms such as Huawei, China's government has poured resources into SMIC such that it becomes a domestic alternative to Samsung and TSMC. Even with the resultant funding and tax incentives, however, SMIC will struggle to develop 7nm capabilities under the new round of trade restrictions, which will limit its ability to purchase the necessary highly specialized manufacturing equipment, for which there aren't readily available alternatives in China. 

Without access to an advanced semiconductor foundry, China-based tech companies could have a harder time competing in foreign markets. With the slowing growth of China's domestic market, Chinese tech companies will need to expand overseas to maintain their growth trajectories. For instance, Huawei still competes head-to-head against Nokia and Ericsson in markets such as Spain, Brazil, and Indonesia.

Especially if SMIC isn't able to develop 7nm capabilities for several years, Huawei will find it increasingly difficult to compete in these markets against competitors that have access to more advanced components. The restrictions would also amplify the consequences of the US expanding its trade restrictions to other firms. For instance, if the US were to extend trade restrictions to apply to Alibaba, then it would be hard for Alibaba to secure the cloud components necessary to compete against US providers in markets like Indonesia, the UK, Australia, and Japan.

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