Top China Chipmaker Warns of Growing Shortfall as U.S. Decouples

(Bloomberg) — Manufacturers in China are increasingly looking to source chips locally because they fear the U.S. and other governments may prioritize domestic users of the semiconductors vital to national security, a senior executive at the country’s top chipmaker said Friday.

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Customers are telling Semiconductor Manufacturing International Corp. they need to secure a certain amount of capacity within China itself because of concerns the industry could become more fragmented, disrupting inflows from abroad, co-Chief Executive Officer Zhao Haijun said. Companies in China, the world’s factory floor for everything from Apple Inc. iPhones to Volkswagen AG cars, have turned more and more to local component suppliers and assemblers.

“What we can make here is less than 10% of what they need. They are worried,” Zhao told analysts on an earnings call. “In the future, we may see that there is an oversupply of chips of certain nodes in some markets, but there will still be a shortage in some other markets.”

Governments from Tokyo to Washington and Brussels are racing to bolster chip ecosystems at home, wary of a heavy reliance on manufacturing in Taiwan and South Korea after a global component shortage walloped the auto and electronics industries. The U.S. has also sought to limit flows of technology to China, which it considers a geopolitical rival, especially if it ends up for military use.

Read more: Secretive Chinese Committee Draws Up List to Replace U.S. Tech

The global shortages have been particularly acute in more mature but traditionally under-invested 28nm to 40nm technologies, common in cars and machinery, spurring an aggressive buildup in those areas including in China. That in turn has spurred fears of a glut. SMIC intends to spend $5 billion on upgrades and expansion this year, much of which will go toward three giant new plants in Shanghai, Beijing and Shenzhen.

SMIC itself has been hit with U.S. sanctions, which the company said has a major impact on its advanced technology development. Zhao did not identify the customers he was referring to, though the company’s main clients include Datang Telecom Technology Co. and Qualcomm Inc., according to data compiled by Bloomberg.

Shares of China’s biggest contract chip manufacturer jumped as much as 4.3% in Hong Kong after the company reported net income of $534 million, ahead of analysts’ estimates.