Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
SMIC, China’s top chipmaker, has warned of an increasingly fierce price war in the domestic market for less advanced semiconductors as well as global oversupply, as new plants begin production in the coming months.
Chipmakers in China have been increasing production to help Huawei and other companies withstand tightening US export controls, while other countries are boosting domestic output over economic and national security.
Against this backdrop, SMIC said its profit margin had dropped to its lowest level since 2009 and would continue to fall this quarter. Co-chief executive Zhao Haijun said the company had come under significant price pressure from domestic rivals expanding capacity.
“Sometimes orders worth tens of millions suddenly went to competitors,” Zhao said. “We do see our peers’ new capacity for similar products going online. Therefore it is likely we will see further price dips for some standardised chips,” he added, singling out display driver chips and image processing sensors.
Many analysts and industry executives are concerned about the oversupply of less advanced chips. According to SEMI, a US-based chip industry association, 42 plants globally will start operation in 2024. Of these, 18 will be in China, mainly for less advanced chips.
Price pressures aside, Zhao said SMIC saw signs of a recovery in global demand, especially in China’s smartphone market. “All the Chinese smartphone makers have aggressive plans this year,” he said. “They are either trying to secure their own shares or expanding shares.”
But new production capacity could outstrip that demand, at least in the near term.
Zhao said there was a “fashionable global trend” of having local chip production and this also applied to China. “We foresee that this year and next year will be the peak for the chip industry to keep expanding capacity,” he said.
“If we are saying the industry will grow by 8 per cent this year and there will be 20 per cent new capacity, then that means there will be 12 per cent new capacity that won’t get any orders,” he said.
Zhao said the company had been working closely with customers on its expansion plans. SMIC forecast revenue in the first half of this year to grow 20 per cent from the same time last year due to higher than expected orders from clients.
SMIC is still “cautiously and closely” observing whether and how the rush of orders in the first half of the year will affect demand in the second half. “We don’t have clear visibility in the second half of the year,” Zhao said.
SMIC’s revenue grew 19.7 per cent year on year to $1.75bn in the first quarter of 2024. However, its profit plunged 68.9 per cent from a year ago to $71.7mn. Its gross margin was 13.7 per cent, the lowest since the last quarter of 2009, when the global financial crisis hit.
Gross margin will fall further to 9-11 per cent for the April-June quarter as it will have to book depreciation of more equipment due to expanding production capacity, the company said.
But SMIC’s main task now is not to make profits, industry executives said. Rather, it is to help supply key semiconductors as Washington steps up export controls aimed at curbing Beijing’s tech advancement.
Huawei has been working with SMIC to churn out 5G mobile chipsets to revive its consumer devices business. SMIC’s Chinese customers contributed 81.6 per cent of the company’s quarterly revenue, compared with 75.5 per cent the same time a year earlier.
The US recently revoked export licences for Intel and Qualcomm to ship to Huawei, a move that will probably make SMIC’s role even more critical.
Huawei, meanwhile, is teaming up with partners to build multiple chipmaking plants in China, Nikkei Asia reported earlier.
A version of this article was first published by Nikkei Asia on May 10. ©2024 Nikkei Inc. All rights reserved.
Related stories
Read the full article here