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As Huawei announced the return of its flagship 5G smartphone, rumors about Huawei partnering with China’s largest semiconductor foundry SMIC to bypass US export sanctions have resurfaced. SMIC is expected to be the most likely source of Huawei’s 5G chips, which require advanced semiconductor processing technologies. Despite facing challenges from new export controls imposed by the US, Japan, and the Netherlands on semiconductor equipment, SMIC’s latest financial report for Q2 2023 showed growth in revenue contributed by smartphones. This growth is in contrast to the double-digit declines reported by others in the industry.

The reasons for SMIC’s growth in the smartphone market during a period of overall decline are unclear. China’s smartphone market witnessed a year-on-year decrease of 2.1% in Q2 2023 and a decrease of 7.4% in the first half of the year. Therefore, it is unlikely that the growth can be attributed to a recovery in the overall market. Instead, the reshuffling of China’s supply chain under US sanctions seems to have benefited SMIC. The import substitution policy has allowed Chinese chip makers to increase their market share, leading to increased demand for foundry services provided by SMIC. In particular, the shipment of high-end smartphones in China (0+ per unit) increased by 3.1% in Q2 2023.

SMIC’s sudden growth in the premium smartphone market can be attributed to the company’s development of advanced semiconductor manufacturing technologies. However, details regarding SMIC’s progress in this area have been scarce since 2021. Rather, recent press conferences have focused on the expansion of SMIC’s “mature process” capacity. It has been speculated that SMIC has been pushing for the mass production of 7nm chips and collaborating with Huawei on the production of 5G and AI chips.

SMIC’s new chairman, Liu Xunfeng, assumed office in mid-July. It is believed that SMIC’s major shareholders, such as the Big Fund, have influenced the company’s direction under Liu’s leadership. SMIC has also been aggressively investing in 12-inch fabs, with plans to build four major fabs in Tianjin, Lingang, Beijing, and Shenzhen. This expansion aims to reach an economic 12-inch capacity at a rapid pace.

Additionally, SMIC has seen increased revenue from Chinese customers as Chinese suppliers gain a larger market share in the supply chain of smartphones, consumer electronics, and electric vehicles. In Q2 2023, the contribution from the Chinese market reached 80%. However, it remains uncertain if the rush orders in recent quarters reflect a true recovery of the overall terminal market.

Considering SMIC’s recent growth and developments, its position in the semiconductor industry and its ability to compete in the face of export controls and market challenges remains to be seen.

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