In a critical evaluation of its first-quarter performance, Semiconductor Manufacturing International Corporation (SMIC), China’s largest contract chip manufacturer, disclosed a significant shortfall in profits, underlining the intensifying competition within the global semiconductor industry. During its earnings call on Friday, SMIC’s executives highlighted the tough market conditions and aggressive pricing battles that are currently shaping the sector.
“Competition in the industry has been increasingly fierce, and the pricing for commodity products basically follows the market trends,” SMIC noted. Despite these challenges, the company is advancing its technological capabilities, aiming to leapfrog its operations in mainland China by one to two generations.
Financial Performance Snapshot
| Metric | Q1 Figures | Year-on-Year Change | Analysts’ Expectations |
|---|---|---|---|
| Net Income | $71.79 million | -68.9% | $80.49 million |
| Gross Margin | 13.7% | Lowest in 12 years | — |
| Revenue | $1.75 billion | +19.7% | $1.69 billion |
SMIC is positioned at a strategic juncture, deemed vital to Beijing’s ambitions to reduce foreign dependencies in its domestic semiconductor sector. This is especially poignant as the U.S. imposes stringent controls to curtail China’s technological advancements. Although SMIC trails behind industry leaders like Taiwan’s TSMC and South Korea’s Samsung Electronics, the company is making decisive moves to bolster its market stance.
In the recently concluded quarter, SMIC reported that its first-quarter net income took a sharp dive of 68.9% from the previous year, amounting to $71.79 million, which was below the expectations set by London Stock Exchange Group (LSEG) analysts who projected a figure of $80.49 million. In terms of revenue, the company fared better than anticipated, with figures reaching $1.75 billion—a 19.7% increase from last year and surpassing the LSEG’s forecast of $1.69 billion.
The company’s gross margin plummeted to a 12-year low of 13.7%, according to data from LSEG. Despite these financial setbacks, SMIC is observing a recovery phase within the integrated circuits (IC) industry, with improved customer inventory levels compared to three months prior.
- Capacity and Inventory Management: With most production lines operating at near maximum capacity, SMIC has struggled to fulfill some rush orders. However, the increased willingness among global customers to build up inventories is a positive sign, indicating a proactive approach to anticipate market demand and brace for ongoing competition.
- Strategic Investments: In response to the fierce market dynamics, SMIC is prioritizing significant areas for investment, including capacity construction and research and development (R&D) activities. These are seen as crucial for maintaining a competitive edge and safeguarding investor interests.
- Dividend Policy: Reflecting a strategic financial decision, SMIC announced that it would not distribute dividends for 2023, opting instead to reinvest into core business areas to strengthen its market position.
For the upcoming second quarter, SMIC projects a revenue increase of 5% to 7% from the first quarter, driven by strong demand. However, the gross margin is expected to face further pressure, potentially dipping to between 9% and 11%. “As we increase our capacity, depreciation costs are anticipated to rise quarter by quarter, which will likely impact our gross margins negatively,” explained a spokesperson from SMIC.
SMIC’s operational challenges are compounded by geopolitical tensions, particularly the 2020 U.S. trade blacklist designation which requires businesses to obtain a license before selling to SMIC. This restriction has limited the company’s ability to access certain U.S. technologies. Despite these hurdles, SMIC achieved a technological milestone by producing a 7-nanometer chip used in Huawei’s Mate 60 Pro smartphone, which also supports 5G connectivity. This development stands in stark contrast to U.S. efforts to restrict Chinese access to advanced technologies, including 5G.
As the global semiconductor landscape evolves, SMIC remains a pivotal player. The company’s ongoing efforts to enhance its technological capabilities and strategic focus on core competencies illustrate its determination to navigate through a complex market environment, aiming for a more robust and competitive future.
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