China’s Largest Chipmaker to Delist From NYSE Amid Heightened US-China Trade Tensions

China’s biggest chipmaker announced it would delist from the New York Stock Exchange (NYSE), amid intensifying tensions between the United States and China following recent U.S. sanctions against Huawei.

Semiconductor Manufacturing International Corp. (SMIC), in a statement on its website on May 24, said it notified the NYSE of its intention to delist its American depositary receipts on June 3, meaning the last day of trading will fall on or about June 13.

The move would mark the end of a 15-year run as a public company in the United States. The company will continue to be traded on the Hong Kong stock exchange.

In the announcement, SMIC said “a number of considerations” led to its decision, including “limited trading volume of its ADSs [American depositary shares] relative to the worldwide trading volume.” Another reason was the “significant administrative burden and costs” of being able to list on the NYSE.

Following the delisting, SMIC said trading of its ADSs will move to the over-the-counter market.

On May 24, SMIC’s ADSs tumbled to more than 6 percent to about $5.15 a share before closing at $5.24. In Hong Kong, the SMIC’s shares dipped more than 4 percent and closed at HK$8.42 ($1.07).

The timing of the SMIC’s decision has since drawn much speculation about whether it was made in response to escalating trade tensions between the United States and China, which recently spilled into the technology sector.

On May 15, U.S. administration effectively blacklisted Chinese telecom giant Huawei on national security grounds, barring the company from acquiring components and technology from U.S. firms without government approval. Since then, a number of key Huawei suppliers, including UK-based chip designer ARM and Google, have suspended business with the company.

SMIC denied that its decision is related to the U.S. action against Huawei. An unidentified spokesperson from SMIC told CNBC: “SMIC has been considering this migration for a long time and it has nothing to do with the trade war and the Huawei incident.”

However, Qin Peng, Chinese political and economic analyst, said SMIC’s decision was an act of self-protection. In a Twitter post on May 24, Qin said SMIC’s delisting is to insulate itself from the effects of possible U.S. sanctions against the company, thus ensuring it remains a viable chipmaker for the Chinese regime.

SMIC

SMIC is a state-backed semiconductor foundry headquartered in Shanghai. The company creates semiconductor chips, which are used to power virtually all computers and electronic devices.

China, which is heavily reliant on foreign imports for semiconductors, has aimed to domestically produce 70 percent of its semiconductor needs by 2025, under its ambitious industrial policy “Made in China 2025.”

According to its website, two of SMIC biggest shareholders as of April 2018 were China’s state-run Datang Telecom Technology and state-backed China Integrated Circuit Industry Investment Fund, the former having about a 16 percent stake and the latter roughly a 15 percent stake.

Beijing set up the investment fund in 2014 to boost the local semiconductor industry. A 2018 report by the Office of the United States Trade Representative (USTR), citing SMIC’s own website, said the company received $400 million from the fund in 2015.

Regional governments have also provided financial support. According to the USTR report, SMIC received $111 million from Beijing’s municipal government in 2015 to finance a fabrication plant in China’s capital in 2015, and obtained at least $750 million from the Shanghai municipal government’s semiconductor fund in 2016.

There have also been previous U.S. warnings about Datang Telecom Technology. Washington-based think tank The Jamestown Foundation, in a 2008 briefing on Beijing’s espionage efforts against the United States, referred to a 2001 U.S. court case indicting two Chinese nationals and one Chinese-American for stealing software trade secrets from U.S. telecommunications equipment company Lucent Technologies, and then conspiring with Datang to form a joint venture. Two of the Chinese were former employees of Lucent.

Jamestown, citing court documents, said that Datang’s board of directors approved the joint venture by providing $1.2 million in funding. A superseding indictment filed by the U.S. Department of Justice in April 2002, showed that Lucent wasn’t the only victim of the espionage since the stolen trade secrets contained proprietary technologies from four other companies that had license agreements with Lucent.

Charges against two of the accused were eventually dropped after the technology firm the trio founded agreed to pay a $250,000 fine. The other defendant fled prosecution.

Larry M. Wortzel, a commissioner of U.S.-China Economic and Security Review Commission (USCC), also warned about Datang, as well as Huawei and Chinese tech giant ZTE, in a congressional hearing in 2012.

“They benefit from a background network of state research institutes and government funding in programs that have affiliation or sponsorship of the [China’s] People’s Liberation Army,” Wortzel said, citing a report by U.S. defense company Northrop Grumman.

Last April, ZTE was brought to the brink of collapse after the United States banned it from doing business with U.S. suppliers. The sanctions were imposed in response to the company breaking a previous court agreement it made after pleading guilty to violating U.S. sanctions against Iran. In July, President Donald Trump lifted the ban after the company agreed to pay a $1 billion fine and submit to U.S. compliance oversight.

Chip Technology

Despite state-backing, SMIC lags behind competitors in developing advanced chip technology.

“SMIC lags approximately two generations behind in process technology and wafer size, a huge disadvantage in this rapidly evolving industry,” the USCC in an August 2015 report.

Since then, SMIC has been playing catch-up. In the first quarter of this year, the company’s revenue from 28 nanometer (nm) process technology, the company’s most advanced chip technology, accounted for only 3 percent of quarterly earnings of $669 million, according to a May 11 article by Taiwan’s Liberty Times. The 3 percent was a reduction from 5.4 percent in the final quarter last year.

As chips become smaller in size, they deliver more performance-per-watt, meaning that they run at faster speeds while consuming less power.

In contrast, the 28 nm technology chips made up 20 percent of total first-quarter earnings for Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chipmaker, according to the Liberty Times.

TSMC also has advanced its chip processing technologies to 16 nm, 10 nm, and 7 nm, all of which combined to account for 42 percent of quarterly earnings which totaled $7.1 billion.

In 2017, China imported about $260 billion worth of semiconductors—more than the value of crude oil imported by the country.