China’s biggest chipmaker SMIC warns of ‘fierce’ competition as it misses quarterly profit expectations

China’s largest chipmaker, SMIC, warns of ‘fierce’ competition after missing quarterly earnings estimates.

Semiconductor Manufacturing International Corporation reported a lower-than-expected first-quarter earnings, citing severe competition in the chip business.

“Competition in the industry has become increasingly fierce, and pricing for commodity products largely follows market trends,” SMIC stated on Friday during the company’s results call.

“The company fulfills its [long-term view] through constructing quality technology platforms that leap here in mainland China by one to two generations,” stated SMIC.

SMIC, China’s largest contract chip producer, is viewed as vital to Beijing’s goal of reducing foreign dependency in its domestic semiconductor industry as the United States continues to limit China’s technological power. Analysts believe SMIC lags behind Taiwan’s TSMC and South Korea’s Samsung Electronics.

The company’s first-quarter net income fell 68.9% to $71.79 million from the previous year, falling short of the average forecast of $80.49 million among LSEG analysts.

Gross margin fell to 13.7% in the quarter, the lowest it has been in nearly 12 years, according to LSEG data.

SMIC reported that revenue for the first quarter was $1.75 billion, a 19.7% increase from the previous year, as consumers stocked up on chips. This easily surpassed LSEG’s projection of $1.69 billion.

“During the first quarter, the IC [integrated circuits] industry was still in recovery mode, and customer inventory progressively improved. “Compared to three months ago, we have noticed that our global customers are more willing to build up inventory,” SMIC stated on Friday.

Customers are stockpiling inventory to prepare for competition and respond to market demand, according to the company, which also stated that it was unable to fulfill a few rush orders in the first quarter due to several production lines operating at near maximum capacity.

SMIC chips can be found in cars, cellphones, laptops, IoT technology, and other devices. According to the company, Chinese consumers accounted for more than 80% of its sales in the first quarter.

Preparing for competition
In order to boost competitiveness and market share, the company stated that it was focusing expenditures in areas such as capacity construction and R&D.

SMIC stated that the business will not pay dividends in 2023 to maintain its competitive edge and protect investor interests.

“We believe that as long as there’s demand from customers along with our technology and capacity readiness, we can ultimately be bigger, better and stronger despite the fierce competition.”

The company forecasts second-quarter sales to increase by 5% to 7% over the first quarter due to robust demand, while gross margins may fall further to 9% to 11%.

“Along with the increase in capacity size, depreciation is predicted to climb quarterly. As a result, SMIC predicts that the gross margin would fall sequentially.

In 2020, the company was placed on a US trade blacklist, requiring enterprises to obtain for a license before selling to SMIC, limiting its ability to purchase certain US technologies.

In a blow to US sanctions, an investigation of Chinese tech giant Huawei’s Mate 60 Pro smartphone, which was released last year, revealed that it runs on a 7-nanometer chip manufactured by SMIC. Despite US efforts to ban Huawei from crucial technology such as 5G semiconductors, the smartphone looks to offer 5G connectivity.

TSMC and Samsung began mass producing 7-nanometer circuits in 2018 and are now making 3-nanometer chips, with smaller sizes indicating more advanced technology.