China's chipmaking champion struggles —SMIC fab warns that it could see declined profits due to increasingly tense economy and geopolitics

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The future isn't so bright.

SMIC
(Image credit: SMIC)

China's leading semiconductor foundry, SMIC, says this year will prove to be challenging for the company, which will see reduced margins and profits (via DigiTimes and TrendForce). These warnings come just after SMIC posted better-than-expected financial results for the fourth quarter of 2023, but the semiconductor firm apparently expects economic and political developments to impact its business. SMIC's stock price has dropped roughly 20% over the last month, showing that the market is, at best, tepid about SMIC in 2024.

It might seem surprising that SMIC itself is so negative about its future prospects, especially since it outperformed analyst expectations for the fourth quarter of last year, seeing a small uptick in revenue but an even greater increase in net revenue compared to predictions. SMIC was likely able to beat expectations thanks to Huawei's orders for 7nm smartphone chips, perhaps the most cutting-edge processors that SMIC makes.

However, the company's fourth-quarter earnings are only good compared to its third-quarter earnings, which were very poor, and the rest of the year in general. The fourth quarter was the only one of the year that saw any revenue growth, and compared to 2022's fourth quarter, the gross margin (which is crucial for profitability) halved to 16.4% and was still lower than any other quarter in 2023. For the entire year, SMIC saw its revenue shrink by 13% to $6.3 billion, and its net profit cut in half to $900 million. The average gross margin for 2023 was 19.3%.

Concerning 2024, things look like they'll get even worse. SMIC co-CEO Zhao Haijun has warned that business might slow down due to declining orders for smartphone chips. Some of the company's customers have already placed all their orders for the entire year, and they aren't saturating the foundry's production capabilities. This means lower margins, which for the first quarter of 2024 are expected to be 9% to 11%, even lower than last quarter. However, SMIC does at least expect its revenue to increase by a mid-single-digit percentage, which would be an improvement.

The stock market has been pretty mixed for SMIC this week; the stock price rose on Tuesday thanks to the company's fourth-quarter earnings announcement, but today, it fell back to where it was on Monday. It's hard to say how much of this reversal was due to SMIC's warnings as many traders sell into price spikes, but the company's stock price is down about 42% since November when it announced its third-quarter results.

Though SMIC has invested much into its 7nm node and is working on 5nm and even 3nm process technology, the Chinese foundry is still largely dependent on its mature nodes, like 28nm. Although the market for simpler semiconductors produced on more mature nodes is large, its growth potential is basically nonexistent, and the margins for mature processors are generally poorer than for chips made on advanced nodes. Without a decent volume of high-margin smartphone orders, SMIC's revenue and especially its profits could see a substantial reduction.

China's economy is a key factor in decreasing demand for SMIC's chips. The Chinese economy has performed poorly since the COVID-19 pandemic and has suffered from a high amount of debt and deflation, both of which ultimately hurt consumer spending. China's real estate market is especially in trouble with the liquidation of Evergrande, one of the country's largest property developers.

U.S. sanctions are also taking a toll, especially on SMIC, which is under scrutiny for selling chips to Huawei. Though both companies are based in China, the House Foreign Affairs Committee chairman argues that since SMIC uses U.S. technology for its processes, the foundry needs an export license. Such charges could impact SMIC's business abroad, meaning the foundry would need to rely even more on a slowing Chinese economy.

Matthew Connatser
Matthew Connatser

Matthew Connatser is a freelancing writer for Tom's Hardware US. He writes articles about CPUs, GPUs, SSDs, and computers in general.

12 Comments Comment from the forums
  • The Historical Fidelity
    Well, this is to be expected when trying to compete with TSMC without access to EUV. Their 7nm and 5nm processes are defect ridden and require quad patterning steps which raises both SMIC’s cost to produce chips as well as the price they can offer their customers. I think at some point the PRC government will either step in with subsidies or nationalize the firm as SMIC is too important to domestic chip production to lose.
    Reply
  • scottslayer
    B-but Tom's articles told me over the past month that China was going to beat the West in chip manufacture and that the sanctions are worthless...
    Reply
  • Gururu
    Its intriguing that the U.S. believes they need an export license to keep things in China just because they use U.S. technology. Are they talking about machinery?
    Reply
  • peachpuff
    scottslayer said:
    B-but Tom's articles told me over the past month that China was going to beat the West in chip manufacture and that the sanctions are worthless...
    Probably because those articles were written by Anton, this author is more realistic.
    Reply
  • The Historical Fidelity
    Gururu said:
    Its intriguing that the U.S. believes they need an export license to keep things in China just because they use U.S. technology. Are they talking about machinery?
    That’s technology license contracts for you
    Reply
  • George³
    The Historical Fidelity said:
    Well, this is to be expected when trying to compete with TSMC without access to EUV. Their 7nm and 5nm processes are defect ridden and require quad patterning steps which raises both SMIC’s cost to produce chips as well as the price they can offer their customers. I think at some point the PRC government will either step in with subsidies or nationalize the firm as SMIC is too important to domestic chip production to lose.
    TSMC didn't use ASML high na EUV soon.
    Reply
  • xterx1234
    The Historical Fidelity said:
    Well, this is to be expected when trying to compete with TSMC without access to EUV. Their 7nm and 5nm processes are defect ridden and require quad patterning steps which raises both SMIC’s cost to produce chips as well as the price they can offer their customers. I think at some point the PRC government will either step in with subsidies or nationalize the firm as SMIC is too important to domestic chip production to lose.
    More like competing to the US government. I think China wouldn't have so much initiative to forcefully create their own equipments needed to produce microprocessors if not of the Bans.
    Reply
  • Co BIY
    scottslayer said:
    B-but Tom's articles told me over the past month that China was going to beat the West in chip manufacture and that the sanctions are worthless...

    I disagree that Tom's put forward that view. Chinese firms sometimes put out positive press about their progress that Tom's reported even when their tech executives often gave more realistic statements, that Tom's also covered.

    Some comment posters definitely put down the line that sanctions were worthless because they wouldn't work, but they were balanced by others in the forum.

    OTOH

    20% margins last year and 11% probably next year - That is about average for the S&P 500. They are not going out of business,
    Reply
  • The Historical Fidelity
    xterx1234 said:
    More like competing to the US government. I think China wouldn't have so much initiative to forcefully create their own equipments needed to produce microprocessors if not of the Bans.
    Your response is already addressed in my comment. No need to reiterate the stated fact that SMIC does not have access to ASML EUV tools
    Reply
  • The Historical Fidelity
    George³ said:
    TSMC didn't use ASML high na EUV soon.
    What does this have anything to do with what I said? TSMC uses 13nm single pattern feature size limit EUV for its 7nm and smaller processes while SMIC is forced by sanctions to use 45nm single pattern feature size limit immersion DUV in a quad pattern method to reduce feature size to EUV levels which is defect ridden and costly.

    Regular EUV can easily be utilized to create 2nm and 1.5nm processes using double patterning method. It’s when you go above double patterning that the defect rate makes viability questionable which is the point that TSMC is anticipating purchasing high NA EUV for its 1nm and smaller processes.
    Reply