The world’s third-largest foundry (contract semiconductor manufacturing) company, Semiconductor Manufacturing International Corporation (SMIC), which plays a spearheading role in China's 'semiconductor rise,' is reportedly benefiting from U.S. semiconductor sanctions. As Taiwan's TSMC, the world's largest foundry company, hesitates to produce semiconductors for Chinese corporations under U.S. scrutiny, that volume has shifted to SMIC. In addition, the Chinese government is actively encouraging domestic corporations to use local foundries by injecting substantial subsidies to strengthen its semiconductor supply chain.
SMIC noted in a performance conference call on 12th (local time) that its fourth-quarter revenue from Chinese customers last year increased by 34% compared to the previous year. As local demand surged, the share of Chinese customers in total sales reached 85%. SMIC explained that 'the localization of semiconductors in China is progressing rapidly' and that 'demand has increased for both the 8-inch and 12-inch fabs, reaching maximum production capacity.'
Analysis suggests that SMIC’s steady growth, despite the difficult situation with the introduction of advanced facilities, is largely influenced by U.S. sanctions. TSMC, which seeks not to provoke the U.S., notified its Chinese fabless (semiconductor design) clients in November last year that it would no longer accept orders for semiconductors produced below 7 nanometers (1 nanometer is one billionth of a meter). This prompted Chinese semiconductor corporations requiring older processes to proactively shift orders from TSMC to SMIC. According to IT media DigiTimes, TSMC is also notifying Chinese semiconductor clients that requested production of 16 and 14 nanometer chips that final chip shipments will be stopped.
TSMC, facing tariff pressure from the Trump administration, is supplying semiconductors while strictly adhering to the 'white list' (a list of corporations meeting specific criteria) established by the U.S. Department of Commerce. On the 15th of last month, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce strengthened regulations requiring approved semiconductor assembly and testing manufacturers such as TSMC, Samsung, and Intel to obtain U.S. government permission to sell semiconductors below 16 and 14 nanometers to China. Previously, Chinese fabless companies could produce 10-nanometer chips at TSMC and receive chips processed through Chinese packaging companies, but now shipments are blocked if TSMC-produced chips are processed at 'non-certified' packaging companies. As a result, Chinese fabless corporations are compelled to shift orders to local foundries.
Furthermore, the Chinese government is strongly supporting SMIC's growth. SMIC stated that domestic demand for electronic products such as smartphones and PCs has increased due to the Chinese government's stimulus measures, leading Chinese fabless customers to increase inventories. Chinese foundry companies are pursuing a market share expansion strategy, even at the cost of profits, based on large-scale financial support from the Chinese government. SMIC's gross profit margin was 38% two years ago, but it decreased to 18% last year. The increase in capital expenditure resulted in higher depreciation costs, and the lack of yield in advanced processes has significantly impacted profitability as SMIC received orders for chips below 7 nanometers from companies like Huawei.
Nevertheless, SMIC is continuing an aggressive investment stance. Last year, SMIC's capital expenditure amounted to $7.33 billion (approximately 10.65 trillion won), reaching a quarter of TSMC's capital expenditure level. Thanks to large-scale investments across China's semiconductor ecosystem, the domestic foundry industry is growing rapidly despite U.S. sanctions. According to market research firm TrendForce, last year, China recorded the second-largest market share in mature process foundry after Taiwan and is expected to surpass Taiwan to become the largest in the world in the year after next. Now, SMIC is rather concerned about intensifying competition among domestic foundries. However, SMIC has expressed confidence that its revenue growth rate will exceed the global foundry industry's average this year.