Competition Heats Up in the Chip Industry: SMIC Battles for Market Share
Amidst a fiercely competitive semiconductor industry, China’s chip manufacturing giant Semiconductor Manufacturing International Corporation (SMIC) sounded the alarm on intense competition. “The pricing for commodity products is largely influenced by market trends,” SMIC declared during its earnings call.
Despite being China’s top contract chip manufacturer, SMIC trails behind global leaders like Taiwan’s TSMC and South Korea’s Samsung Electronics. However, the company remains a crucial component in Beijing’s quest to reduce its reliance on foreign semiconductor imports, a goal that has been hindered by U.S. efforts to curb China’s tech power.
Q1 Earnings Disappoint
SMIC’s first-quarter net income plummeted 68.9% year-over-year to .79 million, falling short of analyst estimates of .49 million. Gross margin slid to a record low of 13.7% in nearly 12 years, according to LSEG data.
Balancing these negative indicators, SMIC reported a 19.7% increase in revenue to .75 billion, surpassing expectations of .69 billion. The strong revenue growth was attributed to customers stockpiling chips ahead of anticipated competition and market demand.
Customers Brace for the Storm
“Our global customers are more willing to build up inventory,” SMIC observed. Customers are preemptively stockpiling to mitigate the effects of fierce competition and meet market requirements. SMIC admitted to missing some rush orders due to near-capacity production lines.
SMIC’s chips are widely used in industries such as automobiles, smartphones, computers, and the Internet of Things (IoT), with over 80% of first-quarter revenue sourced from Chinese customers.
Combating Competition
To enhance its competitiveness and gain market share, SMIC is investing heavily in capacity expansion and research and development (R&D). The company emphasized that these investments will help it maintain its leadership position and protect shareholders.
As a consequence, SMIC has decided to withhold dividend payments in 2023, prioritizing growth over shareholder returns. “We are confident that we can ultimately emerge stronger despite the fierce competition,” the company stated.
Outlook: Second-Quarter Projections
SMIC predicts a 5% to 7% revenue growth in the second quarter due to sustained demand. However, gross margin may decline further to between 9% and 11%, attributed to rising depreciation costs as capacity expands.
The U.S. Factor
In 2020, the U.S. government blacklisted SMIC, requiring businesses to obtain licenses before trading with the company. Despite these sanctions, Huawei’s recent Mate 60 Pro smartphone launch showcased a 7-nanometer chip produced by SMIC, defying U.S. efforts to cut it off from key technologies.
TSMC and Samsung remain ahead in chip production, having transitioned to mass production of 3-nanometer chips, indicating more advanced technology. However, SMIC’s presence in the market, especially in China, remains significant.
As the semiconductor industry continues to innovate and evolve, the battle for market dominance will undoubtedly intensify. Whether SMIC can withstand the fierce competition and bolster its position remains to be seen.
