In the current semiconductor cycle, driven by the acceleration of domestic supply chain adoption and the expansion of AI computing power, Semiconductor Manufacturing International Corporation (SMIC) has emerged as a focal point for the market. In the third quarter, the largest wafer foundry in mainland China reported strong financial results, delivering revenue of $2.382 billion—a year-on-year increase of 9.7% and a quarter-on-quarter rise of 7.8%—and net profit of approximately $192 million, up 28.9% year-on-year. Production capacity also reached a milestone, with monthly output of 8-inch standard logic wafers exceeding one million units for the first time and capacity utilization climbing to 95.8%, approaching full capacity.
Despite these robust results, SMIC’s guidance for the fourth quarter and next year remains notably conservative, projecting revenue growth of only 0–2% quarter-on-quarter and a decline in gross margin to 18–20%. This cautious outlook contrasts sharply with the company’s current full order book, reflecting management’s careful assessment of both external market conditions and internal cost pressures.
The growth in the third quarter was primarily driven by the ongoing shift to domestic supply chains. During the November 14 earnings call, SMIC co-CEO Zhao Haijun emphasized that the majority of this growth stemmed from Chinese customers, whose revenue contribution rose to 86.2% in the third quarter from 84.1% in the prior quarter. Zhao highlighted the accelerated replacement of overseas supply chains by domestic consumer electronics firms, which has created significant growth opportunities for SMIC. The company has capitalized on this trend, strengthening its position as a stable supplier and securing sustainable demand for its products.
Customer inventory replenishment also played a key role in supporting the third-quarter performance. Zhao noted that many customers had previously exported products in anticipation of higher tariffs, resulting in limited domestic stock. With competitive pressures intensifying, these companies are now restocking inventories, particularly for analog, power, and high-current products. Simultaneously, sentiment in the automotive and industrial sectors has begun to recover. Following a period of inventory depletion, suppliers are replenishing stocks in anticipation of a market rebound in the coming year.
This combination of domestic supply chain shifts and inventory restocking drove operational metrics upward. SMIC’s overall capacity utilization reached 95.8% in the third quarter, exceeding expectations by three percentage points and marking the highest level since the second quarter of 2022. This high utilization rate was instrumental in offsetting cost pressures from the depreciation of newly installed equipment, contributing to a gross profit margin of 22.0%, up 1.6 percentage points quarter-on-quarter. CFO Wu Junfeng noted that the increase in capacity utilization was the single most significant factor supporting gross margins.
The third-quarter growth was accompanied by a notable shift in the company’s product mix. Revenue from consumer electronics rose from 41.0% in the second quarter to 43.4%, while the smartphone segment declined from 25.2% to 21.5%. Zhao explained that this adjustment was strategic, prioritizing orders for analog circuits and memory over certain smartphone Power Management ICs (PMICs), whose volumes and prices were already predetermined. Fierce competition in smartphone CIS (image sensors) and display driver markets also contributed to this seasonal fluctuation. Nevertheless, growth across consumer electronics was broad-based, encompassing processors for smart speakers, Cat.1 positioning chips for electric bicycles, TWS earphones, and Wi-Fi modules, reflecting the rapid iteration and domestic adoption of Chinese technology.
Looking ahead, SMIC’s conservative guidance for the fourth quarter highlights management’s cautious view of the global semiconductor landscape, particularly amid the ongoing memory chip supercycle. AI-driven demand for high-bandwidth memory (HBM) is diverting capacity from traditional DRAM and NAND Flash, driving a significant rebound in memory prices. Market data indicate that DRAM and NAND contract prices could rise 20–30% in the fourth quarter of 2025, and major producers such as SK Hynix and Samsung have already sold out their 2026 production capacities. While this memory supercycle presents opportunities for the broader semiconductor market, it creates challenges for logic foundries like SMIC.
Rising memory prices pose two primary risks to logic foundries. First, supply chain disruptions may prompt end-product manufacturers to reduce purchases of supporting chips, including PMICs, CIS, MCUs, and display drivers—core products for SMIC. This is particularly relevant in the traditionally off-season fourth quarter, where operating rates typically reflect production expectations for the following year. Second, higher memory costs exert downstream pressure on the prices of end products, compelling design companies to negotiate lower prices for other chips to maintain margins. Even with SMIC operating at full capacity, these pressures can squeeze profit margins and intensify industry competition, justifying the company’s conservative margin guidance.
Internal factors further contribute to margin pressure. SMIC’s capital expenditures reached $2.394 billion in the third quarter, with cumulative spending for the first three quarters totaling $5.7 billion. Full-year capital expenditure is projected to match or slightly exceed last year’s $7.3 billion. Geopolitical delays in equipment procurement have recently been resolved, and incoming equipment will be deployed in late 2025 and early 2026, increasing depreciation costs and weighing on gross margins.
Looking beyond 2025, Zhao anticipates continued expansion of China’s wafer manufacturing capacity due to both memory supply shortages and robust demand for independent logic chip innovation. He stressed that, in this competitive environment, success will depend on three factors: providing high-performance, high-quality technology and services; developing customized and differentiated product platforms; and maintaining a competitive edge in cost efficiency, responsiveness, and innovation speed.
SMIC’s performance in the third quarter illustrates the company’s ability to capitalize on structural trends in domestic supply chains while navigating complex macroeconomic pressures. Its cautious guidance reflects prudent risk management amid a memory-driven market environment and rising internal costs, underscoring the nuanced balance between growth opportunities and strategic conservatism in a rapidly evolving semiconductor landscape.
Source: sina finance, ifeng, 36kr, 21jingji
