Warning from China’s largest foundry: Consumer demand for smartphones is declining

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China’s largest foundry, Semiconductor Manufacturing International Corp. (SMIC), is nowhere near the same capabilities to produce advanced chips as TSMC and Samsung. But while China dreams of being self-sufficient when it comes to chips, SMIC’s most advanced chips are basic 7nm SoCs for cryptocurrency miners and 14nm smartphone chips. That can be compared with the 3nm chips that TSMC and Samsung are sending this year.

China’s top foundry, SMIC, is a few process hubs behind TSMC and Samsung

We’ve explained it many times, but the best way to explain the process node numbers without making it too complex is this: the smaller the process node, the smaller the transistors, meaning the higher the number of transistors on a chip. For example, the 7nm Apple A13 Bionic SoC has 8.5 billion transistors in each chipset. Manufactured by TSMC using its first generation 5nm process node, the A14 Bionic has 11.8 billion transistors and the A15 Bionic, which uses TSMC’s enhanced 5nm node, has 15 billion transistors.

The reason this is important is that the higher the number of transistors on a chip, the more powerful and energy efficient it is. The A16 Bionic SoC, which is expected to power the iPhone 14 Pro and iPhone 14 Pro Max, will be produced using TSMC’s 4nm process node.

According to Bloomberg, SMIC has revealed that its customers in industries such as smartphones and televisions have frozen their orders for chips due to declining demand for consumer electronics worldwide. According to co-CEO Zhao Haijun, who addressed the media last Friday, the foundry has had to adjust its production schedule. The director pointed out that his customers have stopped placing new orders for chips, leading to “rapid freezes and urgent order shutdowns”.
For the second quarter of this year, SMIC reported strong sales growth of 42% to $1.9 billion USD, in line with analyst expectations. Net profit exceeded expectations of $469.5 million USD, reaching $514.3 million USD for the three months. The company is hampered by US restrictions that prevent it from purchasing an extreme ultraviolet lithography (EUV) machine from ASML.
The EUV is used to etch circuit patterns on wafers that are cut to become chip dies. To fit billions of transistors into a chip, these patterns are 1/1,000 the width of a human hair. That is why the EUV machine is so important in the production of advanced chips. With the US blocking SMIC’s purchase of the machine (the machine does rely on US technology), the foundry must come up with a solution to catch up with TSMC and Samsung and the prognosis there doesn’t look good.

SMIC still expects its factories to run at high capacity utilization for the next two years

Still, SMIC expects its factories to have high utilization rates in the next two years as more and more devices and products in China, such as appliances and cars, use more chips. And SMIC gets more customers from fabulous chip designers in China. The company’s shares are traded on the Hong Kong stock market, where the foundry has a market capitalization (share price multiplied by the number of shares outstanding) of $201.86 billion Hong Kong Dollars ($25.76 billion USD).

Investors, fearing the global consumer electronics slump would hurt SMIC, sent the foundry’s shares in Hong Kong up 3.1% to $17.08 Hong Kong Dollars ($2.18 USD) on Friday. The 52-week high is $26.30 Hong Kong Dollars, while the 52-week low is $14.64 Hong Kong Dollars.

Top foundries are also dealing with declining demand. Last month, the world’s best foundry, TSMC said it had “excess chip inventory” thanks to “weakening demand” for PCs, smartphones and other consumer products. The company said it will take a few quarters for the chip industry to return to equilibrium. TSMC CEO CC Wei said: “Our suppliers have faced greater challenges in supply chains, extending tool lead times for both our advanced and mature nodes.”

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