China’s largest contract chip manufacturer is years behind its rivals when it comes to the latest technology, analysts said.

That assessment comes as the world’s second-largest economy faces a tough task in closing the gap with the U.S., South Korea and Taiwan and increasing its self-sufficiency in semiconductors as its trade war with Washington continues.

Hong Kong-listed Semiconductor Manufacturing International Corporation (SMIC) is a chip foundry. It makes chips that are designed by other companies and rivals the likes of Samsung and Taiwan Semiconductor Manufacturing Company (TSMC).

The Chinese government has made semiconductors a key pillar of its so-called Made In China 2025 plan, an initiative to boost the production of higher value products. China aims to produce 70% of the semiconductors it uses by 2025, and that drive is backed by billions of dollars of investment by the government.

On top of that, the U.S. has recently threatened key Chinese technology firms like Huawei with being cut off from American products, so that’s sharpened Beijing’s focus on cultivating its domestic chip industry, analysts have told CNBC.

But as SMIC gears up to release second-quarter results later this week, it’s notable that China’s biggest contract chipmaker is far behind rivals.

“SMIC is still several years behind the industry leader with limited profitability improvement,” Taiwan-based analyst firm Fubon Research said in a note from May.

The reason for that view has to do with the type of chip that SMIC is only just beginning to manufacture. That is a so-called 14 nanometer (14nm) chip. That designation refers to the size of the chip and it’s something both Samsung and TSMC have been making for a number of years. Both firms are now manufacturing 7nm chips, which are essentially smaller and more powerful.

Analyst firm China Renaissance estimates that SMIC is about 17 quarters behind TSMC when it comes to 14nm and 16nm chips.

If Chinese foundries are not able to manufacture the latest chip sizes, that means companies like Huawei, which design their own chips, have to go to rivals. For example, Huawei’s “Kirin” series of processors for its smartphones have a 7nm design and are manufactured by TSCM.

SMIC has yet to respond to CNBC’s request for comment.

Semiconductors require a large amount of investment, the right talent and expertise to make. Chinese companies will need to overcome some of those hurdles in order to challenge rivals in other countries.

Narrowing the gap

But some analysts say SMIC can catch up with its competitors thanks to a number of factors. One reason, according to China Renaissance, is that the pace at which chips are shrinking is slowing, which will allow SMIC to narrow the gap. The research firm also said Liang Mong Song, one of SMIC’s co-CEOs and a former research and development chief at TSMC, has enhanced the company’s “technology execution” since coming on board in late 2017.

And SMIC’s biggest rival TSMC has had recent troubles that could help the Chinese firm. In January, a line of some TSMC chips were contaminated with a chemical that disrupted production.

The China-U.S. trade war and Beijing’s desire to make more chips domestically could also help SMIC.

“TSMC’s recent photo-resist contamination, and Chinese clients’ genuine interest in developing the local chip manufacturing ecosystem amidst Sino-US trade frictions, also serve as tailwinds for SMIC’s advanced foundry journey, in our view,” China Renaissance said in a note from July.

Currently, only 16% of the semiconductors used in China are produced in the country, and only half of those are made by Chinese firms, according to a report by the Center for Strategic and International Studies. There are signs, however, that the ratio could change.

China’s semiconductor production capacity is growing at the fastest in the world, according to industry body SEMI.

Still, experts have told CNBC that China won’t close the gap with other countries for at least a decade.

By: DocMemory
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