Current status of SMIC's 14nm process: monthly production capacity is about 3,000 wafers

Latest update time：2020-06-11

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SMIC has comprehensively sorted out the contents of "Important Matters" in accordance with the requirements of the Audit Center's Implementation Letter, and supplemented and improved its prospectus. In the information disclosed this time, we can get a glimpse of more information about SMIC's 14nm construction.

In the inquiry by the Shanghai Stock Exchange, the questions about the 14nm construction mainly focused on the following: Please further explain: (1) The balance of the construction in progress of SMIC Shanghai 14nm production line and SMIC South 14nm production line as of the end of 2019, the amount of the construction in progress of SMIC Shanghai 14nm production line in each period of the reporting period, and whether the specific time of the transfer to fixed assets matches the use status of the production line; (2) The rationality of positioning SMIC Shanghai 14nm production line as a research and development platform to achieve mass production of 14nm products, the monthly production capacity, whether the depreciation of related equipment is included in the research and development expenses or product costs, the specific basis for the division of costs and expenses, and whether the cost accounting is complete and accurate; (3) For production lines used for both research and development and production, how to divide the depreciation of related machinery and equipment between costs and expenses, and whether there is a situation where production costs are included in research and development expenses.

In response, SMIC responded as follows:

(I) The balance of construction in progress of SMIC Shanghai 14nm production line and SMIC South 14nm production line as of the end of 2019, the amount of capital transfer of SMIC Shanghai 14nm production line construction in progress in each period of the reporting period, and whether the specific time of capital transfer matches the use status of the production line

1. The balance of the 14nm production line construction projects of SMIC South and SMIC Shanghai at the end of 2019

Among the issuer's production lines, the ones with 14nm process production capacity are SMIC South's 12-inch production line (under construction) and SMIC Shanghai's 12-inch production line. Among them, SMIC South's 14nm production line will mainly undertake the production function of the issuer's 14nm products in the future. As of the end of 2019, SMIC South's 14nm production line is still in the trial production stage, and none of its projects under construction have been converted into fixed assets. SMIC Shanghai's 14nm production line is mainly responsible for the research and development of 14nm process technology and undertakes some early small-scale production functions. SMIC Shanghai began to ship 14nm products to customers on a small scale in the second half of 2019. The issuer's 14nm products that were put into mass production in the fourth quarter of 2019 were mainly produced by SMIC Shanghai's 12-inch production line. As of the end of 2019, SMIC Shanghai's 14nm production line has been fully converted into fixed assets.

As of the end of 2019, the balance of construction in progress and the accumulated amount transferred to fixed assets of the issuer's 14nm process-related production lines (including SMIC South 14nm production line and SMIC Shanghai 14nm production line) are listed as follows:

2. The amount of capital transfer of SMIC Shanghai's 14nm production line construction in progress during each period of the reporting period, as well as the timing of capital transfer of SMIC Shanghai's construction in progress during the reporting period and whether it matches the usage

According to Article 8 of the Accounting Standards for Enterprises No. 4 - Fixed Assets, the cost of purchased fixed assets includes the purchase price, relevant taxes, and the transportation, loading and unloading, installation and professional service fees attributable to the asset before the fixed asset reaches the intended usable state. According to the provisions of Chapter 5 of the Explanation of Accounting Standards for Enterprises on Fixed Assets, whether the purchased fixed assets have reached the intended usable state needs to be analyzed and judged based on the specific circumstances. If a fixed asset that does not require installation is purchased, it can be put into use immediately after purchase, so it can reach the intended usable state immediately after purchase. If a fixed asset that requires installation is purchased, it can only be put into use and reach the intended usable state after installation and commissioning and meets the design requirements or the standards specified in the contract.

For production lines that have already left the start-up period, the standard for whether the machinery and equipment in the construction project have reached the expected usable state is whether the installation and commissioning have been completed and the basic functions of the machine have been realized. During the reporting period, the timing of the transfer of machinery and equipment of SMIC Shanghai 14nm production line and their usage are as follows:

As of the end of 2019, the issuer's mass-produced 14nm products were mainly produced by SMIC Shanghai. The machinery and equipment in the projects under construction related to SMIC Shanghai's 14nm production line have been installed and debugged and have realized the basic functions of the machines. The projects under construction have all been converted to fixed assets. During the reporting period, the machinery and equipment in the projects under construction related to SMIC Shanghai's 14nm production line were converted to fixed assets at the time when the basic functions of the machines were realized. The time of conversion of SMIC Shanghai's 14nm projects under construction during the reporting period matched the usage.

(II) The rationality of positioning SMIC Shanghai's 14nm production line as a research and development platform to achieve mass production of 14nm products, monthly production capacity, whether the depreciation of related equipment is included in the research and development expenses or product costs, the specific basis for the division of costs and expenses, and whether the cost accounting is complete and accurate

1. The rationality of SMIC Shanghai's 14nm production line positioning and monthly production capacity

SMIC Shanghai has a small-scale R&D and production line, which is mainly positioned to support the company's 14nm and next-generation advanced process R&D tape-outs, while providing small-scale production of 14nm products. The positioning of SMIC Shanghai's 14nm production line is reasonable, with a monthly production capacity of about 3,000 pieces.

2. Should the depreciation of related equipment be included in R&D expenses or product costs? What is the basis for the specific division of costs and expenses?

During the reporting period, the company set up a cost and expense center for SMIC Shanghai 14nm production line to manage the cost and expense of the production line, and established a special account to collect R&D expenses. SMIC Shanghai 14nm production line machinery and equipment include two categories:

For machinery and equipment specifically used for research and development (i.e., R&D-specific equipment), the R&D department is responsible for its management and use in actual management, and all related depreciation expenses are attributed to R&D expenses;
For machinery and equipment used both for R&D and production (i.e. equipment shared by R&D and production), the depreciation expenses are allocated between the R&D and production links through wafer transfer and are included in the R&D expenses and production costs respectively. The basis for allocation is the machine usage time occupied by the production and R&D wafer transfer respectively.

As of the end of each reporting period, the fixed asset balances of SMIC Shanghai's 14nm production line R&D dedicated equipment and R&D and production shared equipment are as follows:

3. Is the cost accounting complete and accurate?

The Issuer ensures the completeness and accuracy of cost accounting by establishing a sound cost accounting process and related internal controls.

The issuer's production costs mainly include direct materials, direct labor, manufacturing expenses, etc. The standard cost method is used to calculate production costs (including 14nm products), and the cost differences are aggregated and allocated at the end of each month. Standard cost is a reasonable expectation of product costs and is the cost of manufacturing products under normal operating conditions. The issuer regularly evaluates the appropriateness of standard costs, and after approval by management, the standard costs maintained in the SAP system are updated by designated authorized personnel.

The issuer has established a complete information system. By embedding the standard cost accounting logic into the SAP cost accounting module, the cost accounting is replaced by information technology to ensure the integrity and accuracy of cost accounting. The SAP system records the direct materials, direct labor and manufacturing expenses involved in the production process of finished products and work-in-progress according to the built-in standard cost accounting logic. Direct materials include the main materials consumed in the production process, directly used in the production of products, and the main materials that constitute the product entity, purchased semi-finished products, auxiliary materials that contribute to the formation of products, and other direct materials. Direct labor includes the wages of workers who directly participate in the production of products during the production process, as well as employee welfare expenses, bonuses, allowances, social security and other salary expenses calculated based on the total wages of production workers and the corresponding proportion. Manufacturing expenses include various indirect expenses in the production process, mainly including depreciation, fuel and power costs, and repair and maintenance costs.

The issuer will include the actual expenses incurred in the production process in the actual manufacturing cost, including the actual material consumption, employee salary, depreciation, fuel and power, and repair and maintenance costs. When the product is actually sold, the SAP system will automatically transfer the inventory to the sales cost according to the built-in standard cost accounting logic. At the end of each period, the issuer will allocate the difference between the current standard manufacturing cost and the actual manufacturing cost between the cost and inventory.

(III) For production lines used for both R&D and production, how is the depreciation of related machinery and equipment divided between costs and expenses? Is there a situation where production costs are included in R&D expenses?

The company only has one small-scale production line in SMIC Shanghai, which is used for both R&D and production. This production line is mainly positioned to support the company's 14nm and next-generation advanced process R&D tape-out, while providing small-scale production of 14nm products.

During the reporting period, the company set up a special account for SMIC Shanghai 14nm production line to collect costs and expenses, and set up an independent cost and expense center to manage the costs and expenses of the production line. The equipment of SMIC Shanghai 14nm production line includes two categories:

For machinery and equipment specifically used for research and development, the research and development department is responsible for their management and use in actual management, and all related depreciation expenses are attributed to research and development expenses;
For machinery and equipment used both for research and development and production, their depreciation expenses are allocated in the research and development and production links through the carry-over of wafer production and are included in the research and development expenses and production costs respectively. The basis for allocation is the machine usage time occupied by the production and research and development wafer production respectively.

Based on the above process, the allocation of relevant depreciation expenses between R&D expenses and production costs during the reporting period is accurate.

The allocation of relevant depreciation expenses between R&D expenses and production costs during the reporting period is as follows:

The above depreciation expenses allocated to R&D expenses and production costs match the fixed asset balances of R&D-specific equipment and R&D and production-common equipment as of the end of each reporting period.

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