Semiconductor Manufacturing International Corp. (SMIC), China’s top contract chip maker, is navigating a challenging period marked by both the impact of the US – China tech war and the country’s economic slowdown. As global semiconductor restrictions and China’s own growth concerns converge, SMIC finds itself facing a complex and uncertain landscape.
In the wake of the pandemic-era chip shortage, SMIC reported an 18% year-over-year decline in revenue for the quarter ending in June, alongside an 85% decrease in operating profit compared to the previous year. Despite a slight improvement from the first quarter of 2023, sales remained below the peaks of 2022. The normalisation of profit margins after benefiting from the chip shortage has further impacted SMIC’s financial performance.
SMIC’s utilisation rate at its manufacturing plants has also been affected, standing at 78% in the last quarter. While this marked an increase from the previous quarter, it remains significantly lower than the levels recorded a year earlier, highlighting the changing dynamics in chip demand. The company’s proficiency in manufacturing chips using mature technology has historically been a key strength.
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The company’s commitment to expanding and upgrading its operations through significant capital expenditure has led to rising depreciation costs. Over the past four quarters, SMIC invested $6.8 billion in capital expenditure, a substantial increase compared to around $2 billion in 2019. This heightened investment has resulted in depreciation and amortisation costs more than doubling compared to four years ago.
Export curbs imposed by the Biden administration, in conjunction with Japan and the Netherlands, have added further challenges for SMIC’s technological advancement. These restrictions hinder the company’s ability to acquire advanced chip equipment. However, the situation has encouraged China to accelerate efforts to localise its chip supply, particularly for applications that do not demand cutting-edge technology.
Amidst the challenges, SMIC is eyeing the electric vehicle (EV) sector as a potential opportunity. EVs, which require significant semiconductor content, particularly in areas like power management and control systems, could provide a silver lining for the company. China’s position as the world’s largest EV market presents an avenue for growth, especially since EVs do not mandate the use of the most advanced chips.
China’s economic slowdown and weakened demand for consumer electronics, such as smartphones, pose additional hurdles for SMIC. The decline in smartphone sales, which fell 4% year-on-year in the last quarter, indicates a broader trend affecting the technology sector in the country.
SMIC finds itself navigating a complex landscape, grappling with challenges stemming from both global tech tensions and domestic economic conditions. The company’s strategic focus on EVs and efforts to localise chip supply demonstrate its resilience and adaptability. However, the days of robust growth experienced in 2021 and early 2022 may take time to return as SMIC addresses the evolving dynamics of the chip industry and the broader economic environment.
