A global scramble for AI hardware and tightening US export controls are creating an unexpected windfall for China's top chipmaker, SMIC, which now faces a shortage of its own power management chip capacity.
Semiconductor Manufacturing International Corp. (00981.HK) has raised its operational outlook for the year, citing a surge in domestic orders for its power management chips that are essential for AI systems. The demand is so strong that the company's capacity is now in short supply, a direct consequence of the global AI buildout and the "siphoning effect" of US sanctions restricting access to foreign-made silicon. This is leading to a wave of "order repatriation" as Chinese electronics firms seek out domestic suppliers.
"The company noted that strong demand for supporting chips driven by AI has directly pushed its power management chip capacity into short supply," according to a company statement. This contrasts with the cautious tone from other parts of the industry. TSMC, which manufactures chips for Nvidia, has warned that the situation in the Middle East could impact its profitability, with prices for certain chemicals and gases likely to increase.
The surge in demand for SMIC's mature-node chips comes as customers in consumer electronics and IoT, squeezed by global supply chain disruptions, are increasingly turning to mainland China for their semiconductor needs. While global chipmakers like Infineon worry about rising costs for energy and freight, SMIC is capitalizing on a protected and growing domestic market, even as it faces its own limitations.
This dynamic strengthens China's domestic semiconductor industry, a key government goal. While SMIC cannot produce the most advanced AI accelerators to compete with Nvidia's A100 or H100 GPUs, it is capturing a booming market for foundational components. As Chinese tech giants build out their AI infrastructure, often using smuggled high-end Nvidia chips, they still require a vast ecosystem of supporting hardware, including the power management integrated circuits (PMICs) that SMIC provides.
A Tale of Two Supply Chains
The global semiconductor supply chain is showing increasing signs of fragility. A spiraling conflict in the Middle East has driven up energy costs and disrupted access to key materials like helium, a crucial element in chip manufacturing. "We can expect further negative impact this year...the price of gas, energy and freight are at an all-time high and are likely to remain high for a few more quarters," Francisco Jeronimo, an analyst at IDC, told CNBC.
In contrast, a parallel, more resilient domestic supply chain is solidifying within China. This is driven by two forces: a government-backed push for self-sufficiency and the circumvention of Western sanctions. Despite a US crackdown, banned Nvidia AI chips continue to flow into China through black-market channels, using shell companies and third-country intermediaries, as detailed in recent court filings. This creates a persistent demand for the less-advanced, domestically-produced components needed to build and power the servers that house these restricted chips.
US Export Controls Create Domestic Champions
Washington's export controls, aimed at slowing China's technological and military advancement, have had the unintended consequence of creating a captive market for domestic champions. By restricting access to the world's most advanced chips, the US has forced Chinese companies to design systems around what is available locally. This has funneled orders to companies like SMIC, which may not be on the cutting edge but offer a reliable supply of essential components.
The strategy for many Chinese firms now involves securing high-performance chips like Nvidia's A100 through illicit channels while filling out the rest of their bill-of-materials from local suppliers. This insulates parts of their supply chain from geopolitical shocks and supports the national agenda of building a self-reliant tech sector.
For investors, SMIC presents a complex picture. The company's stock has attracted significant bearish bets, with short-selling volume recently hitting $1.01 billion, representing a ratio of 12.660%. This suggests that many investors are wary of the geopolitical risks and the company's significant technological gap with global leaders like TSMC. However, the bullish case is rooted in the powerful domestic tailwinds of forced import substitution and the unabated demand for all types of chips to support the AI boom. As Jeronimo noted, companies "all understand they need to diversify to be less dependent on a specific region." For Chinese firms, that diversification now increasingly means looking inward.
This article is for informational purposes only and does not constitute investment advice.
