SMIC Hikes Capex to US$7.5 Billion Despite 80% Profit Drop

"Geopolitical factors have brought about a grey rhino effect to the mid- to long-term development of the industry,"  ~ Co-CEO Zhao Haijun, SMIC

Introduction:

In a strategic move reflecting the complex geopolitical landscape, China’s leading foundry, Semiconductor Manufacturing International Corp (SMIC), has announced a significant increase in its capital expenditure for 2023 despite a huge profit drop.

The surge in spending, now set at US$7.5 billion, comes as a response to the heightened tech export controls imposed by the United States, exacerbating the challenges faced by Chinese firms in accessing advanced chip-making equipment.

This blog post delves into the implications of SMIC’s increased capital expenditure, the geopolitical factors at play, and the evolving landscape of the semiconductor industry.

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SMIC Accelerated Spending despite profit loss:

SMIC’s decision to raise its annual budget by 18% to US$7.5 billion for 2023 underscores the urgency to procure chip-making tools amid escalating sanctions from the United States.

The company had initially estimated a flat spending trajectory for the year but altered its course in response to the recent tightening of tech export controls.

This move signifies a proactive approach by SMIC to navigate the challenges posed by geopolitical tensions, particularly with Washington’s restrictions on China’s access to critical semiconductor fabrication equipment.

Read More: NVIDIA to Launch New Data-Center GPU for China in Response to US Restrictions

Geopolitical Risks and “Grey Rhino” Effects:

Co-CEO Zhao Haijun highlighted the “grey rhino” risks that geopolitical factors pose to the semiconductor industry during an earnings conference call.

“Geopolitical factors have brought about a grey rhino effect to the mid- to long-term development of the industry,” 

~ Co-CEO Zhao Haijun, SMIC

The term “grey rhino” refers to obvious dangers that are often overlooked. Zhao emphasized the industry-wide need for exploration of strategies to mitigate these risks and adapt to the evolving geopolitical landscape.

SMIC aims to expedite equipment purchasing and installation to counter the impact of geopolitical uncertainties on shipment times.

Read More: RISC-V Restrictions Will Slow Chip Development, Chief Warns

Strategic Moves Amid Export Controls:

The United States Bureau of Industry and Security’s updated rules last month intensified export restrictions on essential gear for semiconductor wafer fabrication processes.

Notably, restrictions on Dutch firm ASML’s deep ultraviolet (DUV) lithography systems, crucial for chip manufacturing, are set to affect SMIC.

Despite these challenges, SMIC remains focused on facilitating earlier deliveries from tool suppliers to ensure the efficient ramp-up of production at its facilities.

SMIC involvement in Huawei’s P60

Reports suggesting SMIC’s involvement in manufacturing a 7-nanometre system-on-a-chip for Huawei’s latest 5G handset, the Mate 60 Pro, have raised questions about the company’s capabilities.

Zhao refrained from addressing the speculation surrounding SMIC’s production of a 7-nanometre system-on-a-chip for Huawei’s latest 5G handset, the Mate 60 Pro. This has prompted inquiries into SMIC’s manufacturing capabilities and its potential to produce such chips on a large scale. US Commerce Secretary Gina Raimondo asserted that there is currently no evidence supporting these claims.

Nevertheless, Zhao highlighted that SMIC’s clients have experienced a boost in market shares due to the reconfiguration of supply chains amid geopolitical uncertainties. The Mate 60’s contribution played a pivotal role in driving up Huawei’s sales by an impressive 37% in the last quarter.

SMIC Profit loss

During the third quarter, SMIC witnessed a notable shift in revenue distribution, with 84% of its earnings originating from China, a marked increase from 80% in the preceding quarter and 75% during the same period a year earlier. Contributions from the US and Eurasia reached five-quarter lows, primarily attributed to a sluggish destocking of inventory for smartphones and other consumer-related integrated circuits in international markets.

Despite relying on strong support from Chinese customers, SMIC faced a third consecutive quarter of declining revenue. CEO Zhao noted the absence of the anticipated V-shaped rebound at the year’s outset, attributing the subdued performance to economic challenges in the world’s second-largest economy.

In the September quarter, SMIC reported a 15% decline in revenue to US$1.62 billion, falling short of the expected US$1.64 billion. Net profits for the company’s shareholders plummeted by 80% to US$94 million, compared to estimates of US$178.1 million.

Zhao acknowledged a positive development as high inventory levels started to normalize among smartphone and industrial customers in the last quarter. However, he cautioned that SMIC’s clients are exercising increased caution in placing orders this year.

SMIC experienced a decline in capacity utilization, a metric measuring production activity intensity, dropping to 77% in the third quarter from 78.3% in the previous quarter and 92.1% year-on-year. Wafer shipments also saw a 14.5% year-on-year decline to 1.5 million.

Looking ahead, Zhao expressed a lack of new drivers or momentum in major markets, except for high-performance computing chips related to data centers, wafer backside processing, copper bonding of dual wafers and three wafers, and advanced packaging of chiplets. SMIC anticipates modest revenue growth ranging from 1% to 3% in the current quarter.

Conclusion:

SMIC decision to significantly boost its capital expenditure reflects the semiconductor industry’s ongoing struggle with geopolitical challenges despite profit drop, especially in light of heightened export controls.

The company’s proactive stance and strategic moves underscore the need for resilience and adaptability in a rapidly changing environment.

As the semiconductor landscape continues to evolve, industry players like SMIC navigate the delicate balance between technological advancements, geopolitical tensions, and market dynamics, shaping the future of chip manufacturing on a global scale.

Editorial Team
Editorial Team
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