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SMIC Faces Intense Competition and Revenue Challenges Amid U.S. Restrictions

Semiconductor Manufacturing International Corporation (SMIC) expressed concerns about heightened competition in the chip sector on Friday after its first-quarter earnings fell short of expectations.


During its earnings call, SMIC stated, "There is increasing competition in the industry, and pricing for commodity products generally aligns with market trends."


SMIC, which is pivotal to China's strategy to reduce dependency on foreign semiconductors, underscored its commitment to advancing its technology in mainland China. "The company is advancing its technological capabilities significantly, aiming to jump ahead by one to two generations," SMIC announced.


As China's largest contract chipmaker, SMIC plays a crucial role in Beijing's efforts to become self-reliant amidst ongoing U.S. restrictions aimed at limiting China’s technological advancement. However, SMIC still trails behind industry leaders like Taiwan's TSMC and South Korea's Samsung Electronics, according to market analysts.


The company reported a sharp 68.9% decline in first-quarter net income to $71.79 million, below the $80.49 million predicted by LSEG analysts. This marks the lowest gross margin in nearly twelve years at 13.7%, per LSEG data.


Despite these challenges, SMIC saw a revenue increase of 19.7% to $1.75 billion from the previous year, outpacing the $1.69 billion forecast by LSEG, driven by strong customer demand for chip stockpiling.


SMIC noted an improvement in customer inventory levels and an increased willingness among global customers to accumulate stocks compared to the previous quarter. However, the company was unable to meet some urgent orders due to nearly maxed-out production capacities.


With over 80% of its first-quarter revenue generated from Chinese customers, SMIC's products are widely used in various technologies including automobiles, smartphones, computers, and IoT devices.


To combat intense market competition and increase its market share, SMIC is focusing on expanding its capacity and investing in research and development. The company also announced it would not distribute dividends for 2023 to prioritize these strategic areas.


"We are confident that with ongoing customer demand and our technological and capacity advancements, we can continue to grow and strengthen our market position," SMIC stated.


For the second quarter, SMIC anticipates a revenue increase of 5% to 7% and warns that gross margin may decline further to between 9% and 11% due to expected increases in depreciation costs as it scales up its capacity.


Additionally, SMIC has been affected by being listed on a U.S. trade blacklist in 2020, which hinders its ability to procure certain U.S. technologies. Despite these challenges, a recent analysis revealed that Chinese tech giant Huawei’s Mate 60 Pro smartphone uses a 7-nanometer chip manufactured by SMIC, demonstrating capabilities in advanced chip technology despite U.S. restrictions. TSMC and Samsung have been producing 7-nanometer chips since 2018 and have moved to even more advanced 3-nanometer technology.


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