The risks associated with the United States’ suppression of China’s semiconductor industry and the ongoing tension in China-US relations continue to permeate the supply chain. However, most customers of foundries are adopting a cautious approach, either maintaining a wait-and-see attitude or gradually introducing second sources to mitigate risks.

The operational conditions and challenges faced by China’s two major foundries, SMIC and HuaHong, differ to some extent. In the case of SMIC, despite being added to the U.S. Entity List as early as 2020, most of its customers continue to place orders with SMIC due to concerns about the time-consuming and costly nature of verification.

According to a survey by TrendForce, only one U.S.-based brand is actively pursuing a decoupling strategy in response to U.S. government bids, while other brands are mostly conducting risk assessments of their supply chains without fully implementing a complete decoupling strategy.

In particular, SMIC still maintains a competitive edge in terms of lower prices and the advantage of the domestic Chinese market, which keeps most of its customers placing orders and prevents a significant drop in overall capacity utilization rate compared to other foundries. Its utilization rate in 1Q23 was approximately 65-70%, and it is expected to slightly increase to nearly 70% in 2Q23.

HuaHong, on the other hand, is taking a cautious approach to address the risks arising from the China-US tension. HuaHong’s subsidiary, ICRD, primarily focuses on process technology R&D, with a particular emphasis on the 28/14nm process nodes.

It is currently setting up a specialized 28nm production line, which uses photolithography equipment from two major international manufacturers, ASML and Nikon. For all other equipment, Chinese domestically manufactured machines are being used as substitutes.

The planned total production capacity for this production line is 40Kwspm ( wafer starts per month). Considering the possibility of both Japan and the Netherlands potentially joining trade sanctions later this year, the future expansion plans for HuaHong’s production capacity are uncertain.

(Photo Credit: SMIC)