At the same time, SMIC has increased its planned capital expenditure for 2022 to US$6.6 billion, from US$5 billion, citing the need to pre-order chipmaking equipment to keep its expansion plans on track.
Zhao Haijun, SMIC’s co-CEO, said US-based clients are thinking twice about placing orders with the contract chipmaker. Customers from North America, which include Qualcomm, accounted for about 20% of SMIC’s revenue for the July-September quarter.
“We are working very closely with our customers to clarify the impacts of the new US regulations. … Some of our US customers are hesitant about placing orders at the moment,” Zhao said. As a result, the company has had to slow some operations, including reducing wafer production, he added.
“The global chip ecosystem has been interfered with and disrupted by the US export controls,” the executive said.
Washington announced the new rules, which curb China’s access to certain advanced chipmaking equipment, in October and has asked American companies not to support Beijing’s chip development goals.
Export control lawyers say the new regulations generally do not affect US companies buying from Chinese suppliers, as long as no restricted designs or other items are transferred between them. “But these US companies should consider whether items they transfer to the Chinese companies, such as designs, are subject to US regulations,” Harry Clark, a Washington-based international trade lawyer with Orrick, said.
SMIC’s business model is making chips for outside clients, and to do this it needs to receive design blueprints from chip developers.
Zhao also said there is no sign of recovery for the chip industry, which is grappling with a sharp fall in demand, and the “correction” phase will likely last beyond the first half of 2023.
“We currently see no end to the correction to this down cycle, especially as mobile phone and consumer electronics demand is still very weak,” Zhao said. “Although demand from chips for industrial and automotive applications remains stable and resilient, they could not make up for the loss of massive chunks of chips used in smartphones and other smart devices.”
But the current downturn will not affect SMIC’s long-term plan to build several factories in Beijing, Shenzhen, Shanghai and Tianjin over the next five to seven years, Zhao said. To meet this timetable, the chipmaker has had to increase its prepayment for some equipment.
“We have to make down payments for some equipment such as lithography chipmaking tools, for which the lead time could extend to two years,” Zhao said. “We also have to make down payments for smaller chipmaking tool makers to secure our allocation and delivery time.”
Global lithography chipmaking machine supplies are dominated by ASML of the Netherlands, as well as Canon and Nikon of Japan.
Zhao said the prepayments are like “buying some insurance” to make sure the equipment is delivered on time.
For the October-December period, SMIC said its gross margin will decline to 30%-32%, from 38.9% the previous quarter, citing deteriorating market conditions and the impact of the new US regulations. Revenue for the October-December period will drop up to 15% from last quarter, it added.
Zhao said the new US export controls will hopefully have a minimal impact on SMIC’s expansion plans, as the new factories involved more mature technology outside the scope of the new rules.
SMIC has already been on the Entity List, a US trade blacklist that restricts companies’ access to cutting-edge American equipment, since late 2020. Washington alleges SMIC has links with the Chinese military, which the chipmaker denies.
SMIC’s revenue for the July-September period was US$1.9 billion, up 34.7% from a year ago, while its net profit of US$470.8 million, an increase of 46.5% year-on-year.
The company’s gross margin declined to 38.9%, from 39.4% in the previous quarter, while its factory utilisation rate fell to 92.1%, from 97.1%.