Speaking to investors on Friday, CEO Zhao Haijun said the Russia-Ukraine war and China’s Covid lockdowns have massively dented demand for consumer electronics and home appliances, which in turn has led to a “serious” adjustment in chip orders for those segments.
“Many smartphones, PC and home appliance companies had exposure in Russia and Ukraine, and their revenues from those markets are now gone. Sales in their home market of China have also fallen due to the Covid situation domestically,” Zhao said.
“We cannot yet see an end to the downtrends in these segments,” Zhao added. “There are at least 200 million units of smartphones that will disappear suddenly this year and the majority of them are from our domestic Chinese phone makers.”
Demand for consumer electronics “dropped like a rock, very seriously”, the executive said. “Some of our customers are holding more than five months of that type of inventory.”
However, Zhao said SMIC’s factories are still running at 100% capacity, as the company has been allocating resources to products that are still in great shortage, such as power management chips and microcontrollers used in green energy, electric vehicles and industrial applications.
Given the market turmoil, Zhao said, only chip developers with top international clients can continue to flourish. “Those who only serve the local market in China will absolutely see their business seriously impacted,” he said.
Zhao’s remarks signal that the unprecedented chip shortage which has lasted for over a year may be coming to an end, and with it the elevated chip prices. His words also provide the first clear overview from a major tech player of how the monthlong lockdown in China has hit the electronics industry.
Lockdowns in the greater Shanghai area, where SMIC operates its most important production sites, are ongoing, and their impact could last beyond the second quarter, Zhao said.
“Our own production output is one thing,” the CEO said. “We are also cautious on the long-tail impacts of the supply chain, including chip packaging and testing and other supplies down the supply chain. We don’t expect the impacts could go away in this quarter.”
The CEO said manufacturing costs have risen, leading SMIC to negotiate with clients to raise its own prices.
“Prices of everything have gone up. Utility costs like water and electricity have been raised on a big scale. Raw materials costs have also surged. These factors will erode our gross margin by 10%, so we have to negotiate prices with our clients.”
Despite all the uncertainties, SMIC reported revenue growth of 66.9% to US$1.84billion for January-March, while net profit increased 181.5% to US$447.2 million. The chipmaker’s gross margin reached a record 40.7%, thanks to increasing average sale prices in the quarter and a better product mix.
However, the chipmaker said its gross margin in the second quarter will drop to between 37% and 39%, citing lower factory utilisation rates due to the Covid lockdowns and annual maintenance of some production plants.
SMIC expects its revenue for the second quarter to increase 1% to 3% from the first quarter, which would be nearly 40% year-over-year growth at the midpoint, as shortages and supply imbalances persist in areas like WiFi, power management and microcontroller chips.