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  • Jack Lau

Why is it so hard to win the Semiconductor Fabrication War?


SMIC, which stands for Semiconductor Manufacturing International Corporation, was established in 2000 ---just 19 years ago. It was then positioned as the answer to counter the dominance of TSMC, and was the sign of China taking semiconductor manufacturing seriously.

Since then, SMIC has listed on both the Hong Kong Stock Exchange, under the stock code 981, and the New York Stock Exchange, under the stock code of SMI.

Currently, it has a 8% world market share in semiconductor manufacturing. Q42018 revenue hit US$778M. Marvelous.

Actually, with the exceptions of Intel and a small handful of chip companies, most chip companies are called "fabless" design house. They rely on realizing their design into physical chips by foundries such SMIC.

Some of the big names consumers are familiar with would like Qualcomm, which dominates the wireless communication market, and Huawei (sometimes through it subsidiary called Hi-Silicon)....

The logic of liking SMIC is fairly obvious, right? China is one of the largest consumers of chips. We can count on brands such as Lenovo (computer), Huawei (communication), TCL (TV), Geely (car) in a wide array of companies to gobble up the capacity of a local Chinese fabrication foundry such as SMIC.

Yet, despite an impressive 8% market share, SMIC is only a fraction of the market leader. TSMC owns more than 50% of the market. Here is quick comparison:

TSMC: 2018 Revenue: US$33.7 Billion; Gross Margin: 48%

SMIC: 2017 Revenue: US$3 Billion (2018 result should be out soon); Gross Margin: 23%

https://www.tsmc.com/download/ir/secFillings/20F-2018.pdf

https://www.smics.com/uploads/pdf_en/pdfs/2018042717470100033127430_en.pdf

More interestingly if one take a look at the 5 year historical stock price of SMIC vs TSMC, you will see that TSMC (NYSE: TSM) has steadily gone from 20 USD to 45 dollars today, with a fairly steady trend. On the other hand, SMIC performance is more roller coaster like. SMIC is now at 5 dollars. Five years ago, it was about 4 USD. (SMIC is also listed on the Hong Kong Stock Exchange as 981.hk. It is now trading at around 8 HKD. It went IPO in Hong Kong at HK$2.7 in 2004 but did a 10-1 merger in 2016).

We used Google Finance to compare the two companies as listed in New York. (Note: We did not go into the details and see whether there was any stock split or other financial arrangements.)

We decide to look at the gross margin so it is easier to gauge how competitive the products are.

From a glass half full/empty point of view, a newcomer such as SMIC obviously should go for a leaner margin to gain market share. On the other hand, with a margin spread this wide, there must be a reason why the market leader such as TSMC can maintain its lead.

A closer look at the technology offering may reveal a bit about the differences. According to the investor presentation by SMIC, nearly 40% of the chips SMIC is making is using 0.15 um (or 150 nm) technology. Another 20% and 23% on 45 nm and 55 nm technologies. (1 um is 1 millionth of a meter, while 1 nm is 1 billionth of a meter).

A closer look at some of the state of the art product such as the Huawei P30 which uses an AI chip called Kirin 980 from Hi-Silicon (Huawei's subsidiary) requires a 7 nm technology. That means even if Huawei wants to, their flagship Kirin chip cannot be made at SMIC.

For TSMC in 2018, only 9% of the revenue is on the 0.15 um (150 nm) technology.

We can do a quick table comparing the technology vs revenue of both SMIC and TSMC.

The technology vs percentage of revenue table allows us to take a quick peek under the hood. Surely, smaller the technology (7 nm) can command a higher premium than the more mature technology.

The catch up in semiconductor technology unfortunately is gradual and extremely costly.

P.S. A lot of people have shown us their new Huawei P30 phones and the impressive camera. In fact the P30 has 4 cameras. News in the industry is that it uses image sensors from Sony. And the impressive periscope camera (the one that allows a 10X zoom without loss of quality) is done by Sunny Optical (Hong Kong Stock Exchange: 2382) which uses some IP from Isarel. (source: https://www.eetasia.com/news/article/A-Teardown-Of-Huaweis-P30-Pro)


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