China's SMIC Massive Older Chip Build Up Raises U.S. Concern

China's largest chip maker SMIC is ramping up production of a decade-old chip technology, key to many industries' supply chains, setting off alarm bells in the United States and prompting some lawmakers to try to stop them.

The United States and allied nations could further step up restrictions if China announces a trillion yuan ($144 billion) support package for its chip industry, as Reuters exclusively reported on Tuesday, said TechInsights' chip economist Dan Hutcheson.

Starting with the Trump administration, the United States has been tightening the noose around China's high-tech ambitions. It cut off the world's largest telecommunications firm Huawei Technologies from the U.S. market and technologies, as well as cut off air supply to China's advanced chip making through a series of rules this year.

But why worry about older chip technology?

China, which in 2020 had 9% of the global chip market, has a track record of dominating key technologies by flooding the market with cheaper products and wiping out global competition, say China watchers.

They did it with solar panels and 5G telecom equipment, and could do it with older technology chips, said Matt Pottinger, former Deputy National Security Advisor of the United States during the Trump administration who has been studying chip policy at the Hoover Institution.

"It would give Beijing coercive leverage over every country and industry - military or civilian - that depend on 28 nanometer chips, and that's a big, big chunk of the chip universe," he said.

"28 nanometer" refers to a chip technology commercially used since 2011. It is still widely used in automotive, weapons and the explosive category of internet of things gadgets, said Hutcheson.

Hutcheson, who has been monitoring chip production capacity for four decades, said the concern is that Semiconductor Manufacturing International Corp and other chipmakers in China could use government subsidies to sell chips at a low price. And a possible new round of financial support from Beijing would increase chip production even further.

"The Chinese could just flood the market with these technologies," he said. "Normal companies can't compete, because they can't make money at those levels."

U.S. LAWMAKERS PUSHING AGAINST SMIC

Those concerns have pushed some lawmakers to use legislation for setting the defense budget hold back SMIC.

While the measure is weaker than what was initially proposed, this week U.S. Senators are expected to pass the annual National Defense Authorization Act 2023 that includes a section barring the U.S. government from using chips from SMIC and two other Chinese memory chip makers. It is not clear what impact the restriction, which kicks in five years after it becomes law, will have on SMIC.

Founded in 2000 with backing from Beijing, SMIC has long struggled to break into the ranks of the world's leading chip manufacturers.

But it is a giant in older technology, including chips that regulate power flows in electronics. And its revenue was close to $2 billion in the third quarter this year, roughly double the same period last year on the back of the global chip shortage.

SMIC FILLING SUPPLY GAP

With U.S. export controls making it impossible to produce advanced chips, SMIC is doubling down on mature technology chips and has announced four new facilities, or fabs, since 2020. When those come online, it would more than triple the company's output, estimates Samuel Wang, Gartner chip analyst. He said there is a huge ramp up in new chip fabs across China.

"All this will start to have an impact from early 2024 and will be full blown by 2027," said Wang, adding the chip supply increase will put downward pressure on chip prices.

The importance of older chip technology hit the industry in the face in 2021 as a shortage of those chips prevented manufacturing of millions of cars and consumer electronics.

Mark Li, Bernstein Research's chip analyst in Asia, said the company is becoming a formidable competitor to Taiwan's UMC Microelectronics Corp and U.S.-headquartered GlobalFoundries Inc.

"SMIC has been much more willing to add capacity than other fabs at the low-end, and especially in this shortage we've seen in the past two years," he says. "It's not an issue now...but who knows, maybe in a few years there will be another shortage and capacity will be a big problem."Seafront hotels in Diani Beach are bracing for the peak tourism season as holidaymakers flock back to the sandy beaches while bed occupancy increases.

Hotels, lodges and other accommodation facilities are reporting heavy bookings for the upcoming Christmas and New Year holiday weeks.

In some cases, this year's occupancy rates are a stark contrast with the last two years' numbers, when the travel industry was suffering losses due to the effects of the coronavirus pandemic.

The Beach has been voted the best beach destination in Africa six years in a row by the World Travel Awards.

Stakeholders in the hospitality industry say beach hotels and other tourist establishments are reporting brisk reservations and bookings, ahead of the Christmas and New Year festivities.

Kenya Association of Hotelkeepers and Caterers (KAHC) Coast branch Executive Officer Sam Ikwaye says the festive season looks promising for those in the tourism, travel and hospitality industry.

Ikwaye says industry players are expecting hotels to be fully booked 'and it looks like it will be a bumper December and New Year holiday season'.

Speaking during a consultative tourism stakeholders' forum at Neptune Paradise Beach Resort and Spa, the KAHC Executive Officer attributed the rise in bed occupancy to the improved levels of consumer confidence within the tourism and hotels sector.

Ikwaye says the return of international tourists shows that they have confidence in the country's political stability after the hotly contested August General Election.

He says the transport crisis in the past at the crucial crossing channel had dealt a major blow to the tourism industry in Diani Resort town.

Baobab Beach Resort and Spa General Manager Jeff Mukolwe says as the peak tourist season swings into high gear high occupancy rates are expected in the coming days and weeks.

"Hotels are receiving advance bookings and we feel that it's going to be a pretty good season for the tourism industry players," said Mkolwe, adding that his hotel is already hosting 700 guests.

"We are actually expecting an increase in foreign and domestic visitors this holiday season if the enhanced bookings and reservations we have had in the past few days are anything to go by," he said.

The veteran hotelier said there were many domestic tourists from Nairobi, Nakuru, Kisumu, Eldoret, Nyeri and other upcountry towns flocking the region.

"But we also have a modest rise in international tourists from Germany, Poland, Bulgaria, USA, Britain and other European source markets," he said.

Mkolwe says most beach hotels are expecting 100 percent bed occupancy in the coming days, adding that hoteliers were making 'efforts to improve safety and security of their guests'.

December 14, 2022