SMIC's Strategic Acquisition of SMNC and Its Implications for China's Semiconductor Self-Reliance

In September 2025, Semiconductor Manufacturing International Corporation (SMIC) announced its intent to acquire the remaining 49% stake in Semiconductor Manufacturing North China (Beijing) Corporation (SMNC), a subsidiary it already owns 51% of, marking a pivotal step toward full ownership [1]. This move, driven by state-backed investors such as the China Integrated Circuit Industry Investment Fund, underscores a broader strategy to consolidate domestic semiconductor capabilities amid U.S. sanctions and geopolitical tensions. For investors, the acquisition raises critical questions about long-term value creation, technological self-reliance, and SMIC’s competitive positioning in a global market increasingly defined by fragmentation and protectionism.

Strategic Rationale: Consolidation and Self-Reliance

SMNC, established in 2013, specializes in 45nm and smaller technologies, with a target monthly capacity of 35,000 wafers [1]. Its 2021 financials—$1.51 billion in revenue and $314 million in net profit—highlight its role as a profitable asset within SMIC’s portfolio [1]. By acquiring the remaining stake, SMIC aims to eliminate governance complexities and streamline operations, a critical step as China accelerates its push for semiconductor self-reliance. According to a report by Verdict, this consolidation aligns with national goals to reduce dependency on foreign technology, particularly in light of U.S. export controls that have restricted access to advanced manufacturing equipment [1].

The acquisition is also a response to the U.S. sanctions regime, which has crippled SMIC’s ability to access cutting-edge tools like EUV lithography machines from ASML [2]. By centralizing control over SMNC, SMIC can better allocate resources to develop indigenous technologies, such as 7nm and 3nm nodes, while mitigating risks from external supply chain disruptions. This strategic shift is further evidenced by SMIC’s recent divestiture of its stake in SMIC Ningbo to Goke Microelectronics, a move to focus capital on advanced nodes [4].

Navigating Sanctions: Financial Trade-offs and Market Confidence

Despite profitability challenges—SMIC reported a 55% Q2 profit drop in 2025—the acquisition is being funded through equity dilution rather than debt [2]. This approach preserves liquidity for capital expenditures, a necessity given the high costs of advancing to 5nm and 3nm processes using DUV machines [3]. While equity issuance may dilute existing shareholders, it signals market confidence in SMIC’s long-term vision. As stated in a Trendforce analysis, the transaction reflects a calculated bet on China’s domestic demand, which accounts for 35% of global fabrication equipment consumption [4].

However, the financial risks are significant. SMIC’s AI chip production, for instance, faces a major setback due to projected yield rates of just 30% by year-end 2025 [2]. This highlights the technical hurdles of operating under sanctions, where access to advanced tools and materials is restricted. Yet, SMIC’s commitment to capex—despite these challenges—demonstrates its resolve to maintain a competitive edge in a market where the high-performance computing (HPC) hardware sector is projected to grow to $581 billion by 2035 [2].

Competitive Positioning: A Nation-State-Backed Play

The acquisition of SMNC is not an isolated event but part of a larger trend of state-driven consolidation in China’s semiconductor sector. According to a CSIS report, U.S. export controls have paradoxically accelerated China’s indigenization efforts, with firms like SMIC and ChangXin Memory Technologies making strides in legacy technologies and packaging [5]. While China still lags in EUV lithography, its market share in i-line lithography tools increased from 3% in 2023 to 4% in 2024 [4]. This progress, though incremental, underscores the potential for long-term value creation as China scales its domestic supply chain.

Globally, SMIC’s competitive positioning remains constrained by sanctions, but its focus on 14nm and 7nm nodes—where it has achieved some breakthroughs—positions it to capture markets outside the U.S. sphere of influence. As noted in a TechHQ analysis, SMIC’s collaboration with Huawei to produce 5G-capable chips using HiSilicon designs illustrates its ability to innovate within restricted parameters [5]. This adaptability, combined with state-backed funding, could enable SMIC to outperform peers in regions where U.S. export controls are less enforceable.

Conclusion: A Calculated Bet on Geopolitical Realities

SMIC’s acquisition of SMNC is a calculated move to strengthen China’s semiconductor ecosystem under duress. While U.S. sanctions have imposed significant operational and financial constraints, they have also catalyzed a domestic push for self-reliance that SMIC is well-positioned to exploit. For investors, the key risks lie in yield rates, technological bottlenecks, and the pace of indigenization. However, the potential rewards—driven by state support, a growing HPC market, and a fragmented global semiconductor landscape—justify a long-term, strategic outlook.

As the chip war between the U.S. and China intensifies, SMIC’s ability to navigate sanctions while consolidating its domestic footprint will be a critical determinant of its success. The SMNC acquisition, though just one piece of a larger puzzle, exemplifies the resilience and ambition required to thrive in an era defined by geopolitical rivalry.

Source:
[1] [China's SMIC to acquire full ownership of subsidiary – report],
https://www.verdict.co.uk/news/smic-acquire-full-ownership-subsidiary/
[2] [SMIC AI Chip Production Faces Major Setback Morgan ...],
https://www.technetbooks.com/2025/09/smic-ai-chip-production-faces-major.html
[3] [SMIC and Huawei Defy US Sanctions with 5nm Technology],
https://techhq.com/news/smic-and-huawei-defy-us-sanctions-with-5nm-technology/
[4] [News] SMIC Offloads Ningbo Stake to Local Chipmaker Goke Micro in Strategic Move,
https://www.trendforce.com/news/2025/06/06/news-smic-offloads-ningbo-stake-to-local-chipmaker-goke-micro-in-strategic-move/
[5] [The Limits of Chip Export Controls in Meeting the China Challenge],
https://www.csis.org/analysis/limits-chip-export-controls-meeting-china-challenge