Introduction
Semiconductor Manufacturing International Corporation (SMIC), China’s leading semiconductor foundry, has reported impressive financial revenue results for the Q3 of 2024.
The company reached a record-breaking revenue of $2.17 billion, marking a 14% sequential growth, driven by robust wafer production and strong sales. However, while SMIC’s financial performance shows significant growth, the company has issued a cautious outlook for the fourth quarter due to ongoing overcapacity concerns in the semiconductor industry.
Additionally, SMIC continues to advance its capabilities in advanced chip manufacturing, including the production of 7nm chips for Huawei’s latest smartphones.
Overview: Key Highlights
- Record Q3 Revenue: SMIC achieved $2.17 billion in revenue, a 14% increase from the previous quarter, signaling strong performance in wafer production.
- Modest Q4 Forecast: The company is projecting only a 2% year-over-year growth in revenue for Q4 2024, reflecting market challenges.
- Gross Margin Improvement: SMIC’s gross margin rose to 20.5% in Q3, up from 13.9% in Q2, indicating improved profitability.
- Overcapacity Warnings: CEO Zhao Haijun pointed out industry-wide overcapacity, with utilization rates around 70%, well below the optimal 85%.
- Advancing Manufacturing Capabilities: SMIC is expanding its advanced chip production, including 7nm chips for Huawei without the use of EUV technology.
SMIC’s Record Revenue in Q3 2024
In its Q3 earnings report, SMIC announced a record-breaking revenue of $2.17 billion, a 14% increase compared to the previous quarter.
This marked a significant milestone for the company, as it reached the $2 billion revenue threshold for the first time. SMIC’s strong performance can be attributed to its increased wafer production capacity, which helped drive sales.
The company also benefited from higher average selling prices (ASPs), thanks to an optimized product mix.
The 14% growth in revenue was fueled by a solid 38% year-over-year increase in wafer sales, totaling 2.122 million units for the third quarter.
Additionally, SMIC added 21,000 12-inch wafer production capacity per month, which contributed to increased efficiency and output. This expansion in production capacity allowed SMIC to meet rising demand while strengthening its position in the competitive semiconductor market.
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Cautious Outlook for Q4 2024
Despite its impressive performance in Q3 revenue, SMIC has taken a cautious approach regarding its fourth-quarter outlook. The company has forecast a modest 2% increase in revenue compared to the same period in 2023. This subdued projection reflects ongoing challenges in the global semiconductor market, including an oversupply of certain chip types.
SMIC’s cautious stance is also influenced by the company’s concerns about overcapacity in the industry. CEO Zhao Haijun noted that semiconductor industry utilization rates remain below the optimal threshold, and the situation could persist well into 2025. This has led SMIC to exercise restraint in its expansion efforts, particularly in mature node chips, where demand has been weaker than anticipated.
Gross Margin Improves Amid Increased Production
One of the standout achievements for SMIC in Q3 2024 revenue was its improvement in profitability. The company reported a gross profit of $444.2 million, resulting in a gross margin of 20.5%.
This marks a significant improvement compared to Q2 2024, when the company’s gross margin stood at just 13.9%. Year-over-year, the gross margin was also higher than the 19.8% reported in Q3 2023.
The improved gross margin can be attributed to the company’s focus on optimizing its product structure, which includes a higher proportion of 12-inch wafer sales.
The shift toward more advanced and higher-margin chips has allowed SMIC to maintain better profitability despite the challenges posed by overcapacity in the market.
By increasing the share of its 12-inch wafer sales, SMIC has been able to improve both its output efficiency and overall margins.
Industry Overcapacity and SMIC’s Cautious Expansion
SMIC’s CEO, Zhao Haijun, raised concerns about the semiconductor industry’s oversupply issues during the company’s third-quarter earnings call. Zhao highlighted that the global utilization rate in the semiconductor industry is currently around 70%, which is significantly below the optimal utilization rate of 85%.
This suggests that many semiconductor manufacturers are operating below full capacity, leading to excess inventory and price pressures.
The overcapacity issue is particularly pronounced in the production of mature node chips, which make up a large portion of SMIC’s output.
Zhao warned that this overcapacity would likely persist through 2025, with the potential for it to worsen before it improves.
As a result, SMIC has opted to take a more conservative approach to capacity expansion, particularly in the production of older chips. The company’s focus is on streamlining its operations and managing its current capacity to maintain efficiency in the face of market volatility.
SMIC’s Progress in Advanced Chip Manufacturing
On a more positive note, SMIC has made significant strides in advancing its chip manufacturing capabilities.
The company, which is best known for producing mature node chips, has been gradually expanding its production of more advanced chips. SMIC has been able to manufacture 7nm chips for Huawei’s latest smartphones, including the Mate 60 series, despite not having access to extreme ultraviolet (EUV) lithography machines.
This achievement is noteworthy as it allows SMIC to produce advanced chips without the cutting-edge equipment that competitors like TSMC and Samsung rely on for similar processes.
While rumors suggested that SMIC might be able to produce 5nm chips for Huawei, the company has yet to achieve this milestone.
The next-generation Kirin SoC, which powers Huawei’s upcoming Mate 70 series, will still rely on a 7nm process, though it will utilize a more refined “N+3” node. This refinement in the 7nm node represents SMIC’s continued efforts to improve its process technologies and offer more competitive products in the high-end smartphone market.
Conclusion
SMIC’s third-quarter earnings report reflects both the company’s achievements and the challenges it faces in the global semiconductor market.
The company has posted record revenue and improved profitability, driven by strong wafer sales and an optimized product mix. However, SMIC is taking a cautious approach to its Q4 outlook due to industry-wide overcapacity issues, which have impacted demand for certain types of chips.
Despite these concerns, SMIC continues to make significant progress in advancing its chip manufacturing capabilities. The company’s ability to produce 7nm chips for Huawei without EUV technology highlights its growing technical prowess and potential to compete in the high-end semiconductor market.
As the semiconductor industry navigates a period of overcapacity, SMIC will need to balance cautious expansion with continued innovation to maintain its competitive edge.
