China’s Semiconductor Manufacturing International Corp has reported a significant drop in its profit margin, reaching its lowest level since 2009. The company expects further decline as it expands its capacity to meet the growing demand from Huawei Technologies Co. and other clients.
What Happened: Despite a 19.7% increase in revenue to $1.75 billion for the first quarter of 2024, SMIC’s profit plummeted by 68.9% from the previous year to $71.7 million. This led to a gross margin of 13.7%, the lowest since the global financial crisis in 2009, reported Nikkei Asia on Thursday.
The company anticipates a further decline in its gross margin, to approximately 9% to 11% for the current quarter. This is attributed to the increased depreciation of equipment as the company expands its production capacity. Despite this, the rising revenue is driven by clients’ growing willingness to build up inventory.
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SMIC’s primary focus now is not on generating a substantial profit but on aiding China in supplying essential semiconductors amid escalating U.S. export controls aimed at impeding Beijing’s technological advancement.
Huawei has partnered with SMIC to produce crucial 5G mobile chipsets, aiming to revitalize its consumer electronics division. SMIC’s revenue from Chinese clients accounted for 81.6% of its quarterly earnings, up from 75.5% in the previous year’s corresponding period.
Why It Matters: SMIC’s struggles are reflective of the challenges faced by the Chinese chip industry in the face of U.S. sanctions. Despite these challenges, China has been pushing forward in advanced chip development, with SMIC managing to produce more sophisticated chips despite U.S. sanctions.
Despite the tensions, Beijing remains a crucial market for U.S. semiconductor companies, with firms like Intel (NASDAQ:INTC), Broadcom (NASDAQ:AVGO), and Qualcomm (NASDAQ:QCOM) reporting greater revenues from China than from the U.S.
However, SMIC has been facing significant challenges, with an 80% profit drop in its third-quarter earnings amid weak global demand.
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