[Chip Talk] China's Semiconductor Pride SMIC Faces 3 Years of Sales Slump... Is the 'Semiconductor Rise' Breaking?

Sales Plunge 20.6%... Facing Technical Limits
Import of Advanced Process Equipment Blocked by US Sanctions

China's largest foundry (semiconductor contract manufacturing) company, SMIC, has reportedly seen a sharp decline in its first-quarter sales this year, leading to forecasts that China's semiconductor rise will be significantly hindered. Despite strong U.S. sanctions and massive support from the Chinese government for the semiconductor industry, the company is facing technical limitations in developing advanced semiconductors independently, making it difficult to find a breakthrough. It is expected that the Chinese semiconductor industry's leap forward will be challenging before improving relations with the U.S. and the West.

◆Despite Strong Government Support, Both Q1 Sales and Net Profit Underperform

According to the U.S. economic media CNBC, on the 11th, SMIC announced that its first-quarter sales this year reached $1.46 billion (approximately 1.937 trillion KRW), a 20.6% decrease compared to the same period last year. Net profit for the same period also plunged 48.3% year-on-year to $231.1 million, showing a poor performance. This marks the worst performance in the past three years.

SMIC attributes the sales slump primarily to the overall downturn in the semiconductor market. SMIC stated, "The semiconductor market recession is expected to continue this year, with annual sales projected to decline by more than 10% compared to last year, and gross profit margin expected to fall to around 20%. However, conditions are expected to improve from the second quarter compared to the first quarter."

This poor performance by SMIC is also analyzed as a major negative factor for China's semiconductor rise, which has been pursued vigorously. SMIC is the only company in China capable of producing 14-nanometer (nm; one billionth of a meter) semiconductors and is the leading company in China's semiconductor industry, having succeeded in developing 7-nanometer semiconductor processes for the first time last year. SMIC's slump is seen as leading to a broader stagnation in China's semiconductor sector.

◆Deepening Technical Limitations... "Unable to Obtain Advanced Process Equipment"

[Image source=Reuters Yonhap News]

In particular, concerns have been raised that SMIC's poor performance may indicate it has hit technical limits in its independent development efforts.

According to major foreign media, SMIC has succeeded in producing 7-nanometer semiconductors and has started supplying some to domestic manufacturers in China, but is reportedly struggling with mass production. While production technology has been secured, the yield rate for mass production is very low.

Especially, SMIC is reportedly facing significant difficulties in acquiring extreme ultraviolet (EUV) equipment, which is essential for improving semiconductor production yields and developing next-generation fine process technologies below 7 nanometers. EUV equipment is currently produced exclusively by the Dutch equipment manufacturer ASML, and due to U.S. sanctions, exports of this equipment to China are prohibited.

In October last year, the U.S. Department of Commerce banned exports to China of production equipment for DRAM below 18 nanometers, NAND flash with more than 128 layers, and logic semiconductors below 14 nanometers to curb the development of China's semiconductor industry. The specific restriction on 14 nanometers is interpreted as targeting SMIC, which has been producing 14-nanometer semiconductors.

As a result, despite aggressive technology investments, SMIC is widely believed to have already encountered technical limits. Last year, SMIC invested $6.35 billion, equivalent to 87% of its total annual sales, in capital expenditures (CAPEX) for sub-7-nanometer fine process semiconductors but has shown little progress.

◆Political External Risks Also a Major Factor... "Semiconductor Purge Spreading"

[Image source=EPA Yonhap News]

Political risks that periodically hit China's semiconductor industry are also said to be slowing SMIC's growth.

According to Hong Kong's South China Morning Post (SCMP), in September last year, China's top disciplinary body, the Communist Party Central Commission for Discipline Inspection and the National Supervisory Commission, announced an investigation into SMIC's non-executive director Run Kai on charges of disciplinary and legal violations. In the Chinese industry context, such charges typically imply corruption allegations. The anti-corruption investigations in the semiconductor industry, which began in July last year, have been called a "semiconductor purge" and have greatly unsettled the industry.

In particular, after the corruption investigation into Huaxin Investment Management, the managing company of the National Integrated Circuit Industry Investment Fund, which oversees support for the semiconductor industry, government scrutiny has intensified. The fund was originally established in 2014 with $45 billion and supported semiconductor companies including SMIC and the state-owned Yangtze Memory Technologies Co. (YMTC), but has faced criticism for poor performance and worsening profitability.

As a result, voices within China are growing louder calling for the complete abolition of semiconductor industry subsidies. Bloomberg News, citing sources, reported that some senior Chinese officials have been discussing since early this year the possibility of withdrawing semiconductor subsidies altogether, arguing that these subsidies have only led to bribery, corruption, and U.S. sanctions.

However, given the increasing pressure from U.S. sanctions, it is difficult to completely cut off support for the semiconductor industry, and government management oversight or interference over major semiconductor companies is expected to intensify.

This content was produced with the assistance of AI translation services.