February 4, 2023

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Hua Hong gives China new hope with old chip technology

Contract chipmaker Hua Hong Semiconductor has long played second fiddle to China’s national champion Semiconductor Manufacturing International Corp in its hometown of Shanghai, but US restrictions on advanced technology and Beijing’s yearning for chip self-sufficiency have pushed it into the limelight.

China’s second-largest chipmaker, already listed in Hong Kong, received regulatory approval last month for a $2.5 billion secondary listing in Shanghai on the tech-focused Star Market. The majority of the funds to be raised are intended for the modernization and expansion of the production facilities.

Hua Hong’s lack of cutting-edge technology has proven to be more of a blessing than a disadvantage of late. During its third-quarter conference call in November, the company said it was little affected by the US measures because the chips it manufactures are several generations older than the latest microprocessors.

Industry experts said China must reassess its domestic semiconductor supply chain after Washington restricted development of high-performance chips. Hua Hong’s focus on older chips could make it Beijing’s new favorite, with the benefits of political support and funding to follow.

“Our year-long push to localize advanced chip production has almost reached an impasse,” said a Shanghai-based government official who asked not to be identified. “The vulnerability of the localized semiconductor supply chain has been exposed by the recent restrictions on our access to critical US equipment.”

Washington in October introduced a series of sweeping restrictions that have prevented US companies from exporting technology to make chips with features smaller than 14 nanometers, or in some cases 16 nm. This made it much more difficult for leading manufacturer SMIC to compete with the advanced factories or “fabs” of competitors such as Taiwan Semiconductor Manufacturing Co.

Hua Hong told the Financial Times that it has “always fully complied with the rules and regulations related to export control” and will continue to try to attract investors at home and abroad as capacity expansion requires heavy investment.

Compared to SMIC, Hua Hong has adopted a different strategy to optimize its manufacturing techniques for the mature “nodes” or generations of its less-miniaturized chips to maximize the performance and reliability of its products. They have found wide application in the Internet of Things, 5G telecom equipment and electric vehicle markets.

“Just try to squeeze as much juice as possible out of the mature knots,” said Douglas Fuller, an expert on China’s semiconductor industry at Copenhagen Business School. “This is now a sustainable path if we count all the subsidies and the return to society.”

Hua Hong’s older processes also offer less advanced Chinese chip equipment manufacturers the opportunity to test and improve their products by supplying their production lines and replacing foreign tooling that may become restricted.

“It’s easier for Chinese equipment makers to replace imported equipment in Hua Hong’s mature process lines,” said William Li, a Taiwan-based analyst at research firm Counterpoint.

According to three people familiar with the matter, Hua Hong has also taken steps to locate its suppliers in areas such as equipment and materials. It also gives domestic customers higher priority.

Earlier this year, the chipmaker repeatedly cut orders from overseas customers to give priority to domestic companies because its production capacity was stretched, according to four Hua Hong employees who asked not to be named.

Hua Hong’s OEM products are increasingly competing with Infineon of Germany and Texas Instruments of the United States.

“Many Chinese customers have replaced imported modules with domestic ones since geopolitical tensions escalated,” said an executive at a power module company in south-central Shenzhen. “That’s why we’re working with Hua Hong to pick up as many orders as possible.”

The executive, who preferred to remain anonymous, said Chinese makers like Hua Hong and SMIC are more cooperative and “more willing to lower the price for the ailing chip market.”

According to the Shanghai government official, one way to encourage core industry players to focus on simple chips was to speed up the process for Hua Hong’s secondary listing. Nearly 70 percent of the funds raised will be invested in its only 12-inch (300mm) wafer fab in the eastern city of Wuxi, according to the prospectus.

A government adviser who works with factories across China and asked not to be named, said Hua Hong has historically been underestimated by industry policymakers. A less proactive role in research and development was seen.

When the state-backed China Integrated Circuit Industry Investment Fund restructured its investment portfolio last year, it decided to sell Hua Hong shares. However, it returned in June with a $232 million investment.

Hua Hong’s third-quarter results stood out among foundry peers due to strong domestic demand. Quarterly revenue increased 40 percent year-over-year to $630 million, while net income doubled to $104 million compared to the same period last year.

Analysts at investment bank Jefferies said capacity growth at the Wuxi factory would boost Hua Hong’s momentum and bring it more orders from local chip design houses.

“Hua Hong will be a powerful force driving the growth of the domestic chip supply chain,” the government adviser said.