China’s semiconductor giant is feasting on profits as companies everywhere run out of chips. The big question now is how to prepare for leaner times ahead. Heavy investments in new capacity are easy to defend now, but if chip prices cool in the years to come—especially for more mature technologies—the company could find itself in a trickier spot.
Semiconductor Manufacturing International Corp. 981 2.49% , or SMIC, reported on Thursday record revenue and profit margins for last quarter. Its sales grew 61% year over year for the three months ending in December, while its net profit more than doubled. SMIC, China’s largest foundry—meaning a chip maker that manufactures chips to spec for customers—has been a particular beneficiary of the semiconductor shortage caused by the pandemic.
SMIC’s technology is generations behind leading foundries like Taiwan Semiconductor Manufacturing Co. TSM -0.65% or Samsung Electronics, but chips made using its older technologies are in great demand in the current shortage. These more low-end chips—used, for example, to regulate electricity—may not be the most exciting, but are nonetheless crucial for products from automobiles to laptops. Such older technologies haven’t traditionally been the focus of major chip makers’ investment, which has helped exacerbate the current shortfall.
But for now, it means boom times for SMIC. Not only are its chip-fabrication plants running at full capacity, but the company is also raking in big profits. The chip maker’s gross profit margin hit a record 35% last quarter, compared with 18% a year earlier. SMIC expects that its gross margin this quarter will be even higher at 36% to 38%, with revenue growing 15% to 17% from the previous three months.
The question is what lies ahead after the boom. For one, the Trump administration added SMIC to a U.S. entity list that limits access to U.S. technology. This basically makes it impossible to get the cutting-edge equipment required to make the most advanced chips—for instance, extreme ultraviolet lithography systems from Dutch company ASML.
SMIC, however, has still been splashing out on building fabs, though mostly on more mature nodes. It expects capital expenditure this year to be $5 billion, after spending $4.5 billion last year. The danger is that it could face oversupply if supply and demand for more mature chip technologies finally sort themselves out in the next year or two.
The chip shortage has brought fat years for SMIC. Unless the current chip shortage persists even longer than expected, it needs to prepare for leaner years ahead.
Write to Jacky Wong at [email protected]
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