Semiconductor Manufacturing International Corporation (SMIC) (HK: 0981) shares are down 5.6% in Hong Kong today. The problem here is that if you're viewed as something of a national champion then foreign governments are likely to treat you as something like a national champion. That is, national champions tend to get caught up in politics. This can be beneficial, of course it can, as it has been for SMIC. As we reported earlier the shares rose on the news that China was going to support the industry in order to reduce reliance on foreign manufacturers for high end chips. But, as we say, the problem with this sort of thing is that foreign governments will also project their own politics onto that same national company.
The semiconductor world does seem to be being divided up into national areas. Part of this is sensible enough security controls. No one's very interested in seeing radiation hardened chips generally available on the international markets for example. Too many military applications for that to happen. However, varied economic interests - like the large American semiconductor manufacturers - are also using this political move to protect their own economic positions. The banning of certain producers from being able to supply US telecoms networks for example. Or the absurdity over the ownership of TikTok, to widen the story a little.
The effect though is that fragmentation of the global industry into those national spheres. This then produces a large problem - or potentially does - for those Chinese manufacturers.
SMIC share price from Hong Kong Stock Exchange
The problem is that at the very top end of chipmaking there really are only a very few people capable of making the equipment. The equipment to kit out the factories to make the chips that is. It's here that sanctions based upon national origin are really having the biggest effect. If you cannot buy the latest gear to make chips with then you cannot make the latest chips. Or, alternatively, you've got to develop that entire industry nationally and all over again. Something in which you're really only going to able to play catch up.
This is what is hitting SMIC shares today. Japan has announced that its chip fab equipment makers will be falling in line with the US and EU restrictions on what may be sold into China. That will limit the ability of SMIC to fit out its fabrication plants. SMIC shares then fall as it becomes clear that it's going to have a significant struggle on its hands as it tries to maintain technological leadership. In fact, Japan may limit older equipment technologies too.
Think on it. If you can't buy the equipment to make computer chips then how can you make computer chips?