China’s Chip Champion Is Taking It From All Sides

China’s chip champion is fighting a nasty hangover after a long, pandemic-era high.

The West’s semiconductor restrictions on the country will challenge the company’s ambitions. China’s economic slowdown, however, could prove to be an even bigger problem.

China’s top contract chip maker, Semiconductor Manufacturing International Corp. , or SMIC, is slogging through a rough patch—like most other big chip manufacturers. On Thursday, it reported an 18% year-over-year decline in revenue for the quarter ending in June. Earnings took an even bigger hit: Operating profit fell 85% from a year earlier. 

Sales improved slightly compared with first quarter 2023, but were still lower than the peaks of 2022. After the chip shortage of the pandemic, SMIC’s profit margin has normalized. Gross profit margin last quarter was 20%, almost half that of a year earlier. SMIC was a key beneficiary of the chip shortage of the past two years—which was especially acute for chips made using more mature technology, which is SMIC’s wheelhouse.

The easing of that shortage has led to a lower utilization rate at its plants, which stood at 78% last quarter. While that was up from the 68% notched in the first quarter, it’s still far below a year earlier, when SMIC factories were running full tilt. 

Rising depreciation costs are another drag, as the company has been pouring money into new plants. SMIC’s capital expenditure in the past four quarters combined was $6.8 billion—compared with around $2 billion in 2019. As a result, its depreciation and amortization costs last quarter were more than twice the amount four years ago.

The Biden administration’s curbs on exports of advanced chip equipment—joined by Japan and the Netherlands—will no doubt make it harder for SMIC to upgrade its operations.

But it is also spurring China to localize its chip supply as much as possible—especially for those applications that don’t require the most cutting-edge technology. Electric vehicles, which have more semiconductor content than traditional cars, could be a bright spot for SMIC, as they don’t require the most advanced chips. China is the biggest EV market in the world, and its carmakers have grown to dominate the sector.

But SMIC’s continued heavy spending on more mature technology will keep dragging on the company’s earnings. China’s economic slowdown will also hurt, as weak demand for consumer electronics takes a toll. Smartphone sales there fell 4% year on year last quarter, translating into the lowest second-quarter shipments since 2014, according to Counterpoint Research.

SMIC is facing a rougher landscape after the smooth ride in the past couple of years. It still occupies an enviable perch in China’s chip market, but the boom days of 2021 and early 2022 could be a long time in returning.

Write to Jacky Wong at [email protected]