Easing Export Restrictions Won't Deter China's Domestic Chip Surge, Says SMIC CEO

Nvidia and AMD have had export restrictions lifted, but Chinese chipmaker SMIC says its domestic demand has substituted foreign rivals. SMIC's production capacity is constrained through October, with domestic clients accounting for over 50% of its 8-inch wafer orders. Despite ongoing trade tensions, SMIC expects the financial impact to be minimal, projecting it to be less than 1.3% of its total revenue.

In a significant development, the U.S. has recently eased export restrictions on advanced semiconductors, allowing companies like Nvidia Corp. and Advanced Micro Devices Inc. (AMD) to regain access to the Chinese market. This move comes as China's leading chipmaker, Semiconductor Manufacturing International Corp. (SMIC), reports that domestic demand has substituted foreign rivals, further cementing the country's push for self-sufficiency in the semiconductor industry.

Impact on the Industry

The dual-sided development in the global tech war presents a complex picture. On one hand, American firms like Nvidia and AMD are regaining access to a crucial market. On the other hand, China's push for self-sufficiency is yielding results, potentially diminishing the long-term impact of the policy reversal. The U.S. government’s decision to permit the sale of Nvidia’s H20 and AMD’s MI308 chips to China marks a significant change after a ban that cost American companies billions in revenue [1].

SMIC's Domestic Substitution Strategy

SMIC, China's largest contract chipmaker, has been at the forefront of this domestic substitution strategy. According to SMIC co-CEO Zhao Haijun, a growing number of Chinese clients can “perfectly” replace foreign rivals with domestically-produced chips. This trend is evident in the power-related semiconductor sector, where some of SMIC's clients have increased their monthly wafer orders tenfold within just two years [1].

The surge in demand has led to SMIC’s production capacity being constrained through at least October, with domestic clients now accounting for over 50% of its 8-inch wafer orders. This rapid domestic substitution strategy also extends to the automotive sector, where China has a stated goal of using 100% homemade chips.

Financial Implications

Despite ongoing trade tensions and the new U.S. tariffs, SMIC expects the financial impact to be minimal, projecting it to be less than 1.3% of its total revenue. This confidence is rooted in the company’s strong domestic demand, which appears to be insulating it from external pressures. However, the company's second-quarter revenue of $2,209.1 million, a decline of 19.5% year-over-year, underscores the ongoing challenges posed by US export curbs and increased competition in the global semiconductor market [2].

Geopolitical Dynamics

The ongoing U.S. tariffs and the potential security vulnerabilities in the H20 chip, as raised by China's top internet watchdog, the Cyberspace Administration of China (CAC), could complicate the chipmaker's expansion plans in the world's second-largest economy. The CAC summoned Nvidia officials in July for a closed-door meeting, demanding clarity on whether the H20 chip includes backdoor security risks that could threaten national data privacy [1].

Price Action

The recent developments have had varying impacts on semiconductor stocks and exchange-traded funds (ETFs). Advanced Micro Devices Inc. (AMD) and Nvidia Corp. (NVDA) have seen significant year-to-date (YTD) and one-year performance, with AMD up 42.92% YTD and 26.47% over the past year, and NVDA up 30.70% YTD and 72.21% over the past year [1].

References

[1] https://www.benzinga.com/markets/tech/25/08/46996543/nvidia-amd-export-restrictions-ease-but-chinese-chipmaker-smic-says-that-growing-domestic-demand-perfectly-replaces-foreign-rivals
[2] https://www.ainvest.com/news/smic-posts-q2-revenue-2-21-billion-19-5-yoy-2508/