China’s SMIC Warns of ‘Rapid Freeze’ as Smartphone Demand Skids

(Bloomberg) — Semiconductor Manufacturing International Corp. warned that clients in sectors such as smartphones were freezing orders, underscoring how a downturn in consumer electronics demand is hurting the chip sector.

Most Read from Bloomberg

Waning demand from makers of smartphones and TV components is forcing SMIC to readjust its manufacturing plans, co-CEO Zhao Haijun told analysts on Friday. The economic downturn and inventory adjustments have spurred “rapid freeze and urgent order halts” as some clients hold off on placing new orders, he said on a conference call. SMIC fell as much as 3.1% in Hong Kong.

Investors fear the notoriously cyclical chip industry is hurtling toward a prolonged slump after years of shortages led to heavy investments in capacity. SMIC is among a raft of semiconductor manufacturers now grappling with rapidly crumbling global electronics demand, as consumers leave a pandemic-era boom behind. It’s also contending with steadily tightening US export restrictions as Washington tries to contain Beijing’s technological rise.

China’s largest chipmaker reported revenue rose 42% to $1.9 billion in the second quarter, generally in line with expectations. It posted net income of $514.3 million in the second quarter, surpassing the $469.5 million average estimate.

Read more: Apple Expects to Sustain IPhone Sales in 2022 as Market Slows

What Bloomberg Intelligence Says

Semiconductor Manufacturing International’s return on equity is on track to hit a new high in 2022 despite disruptions to production and capacity expansions due to stricter US export-licensing requirements and China’s Covid-19 lockdowns. The company’s chip foundries will run at high utilization rates over the next two years amid a rapid increase in local fabless chipmaker numbers and increasing silicon content in consumer appliances and automobiles. Its shift toward higher-margin specialty chips — less exposed to sanctions risk — may help to offset soaring depreciation and staff costs.

– Charles Shum, analyst

Click here for the research.

Read more: China Graft Probes Stem From Anger Over Failed Chip Plans

SMIC is at the vanguard of China’s long-term ambition to produce chips sophisticated enough to replace American silicon, which comprise the majority of the country’s annual $155 billion in semiconductor consumption.

It remains a technological leader in a giant domestic industry now gripped by a series of corruption probes, as senior officials frustrated with the nation’s lack of progress in semiconductors begin to hold executives accountable. The outcome of the widening dragnet and its impact on local players remain unclear.

US sanctions have played a central role in curbing the country’s chip ambitions. The Trump administration blacklisted SMIC about two years ago on national security concerns, citing the company’s ties with the Chinese military, an allegation the chipmaker has denied. Washington is now also pressing allies into the effort, so that key suppliers like the Netherlands’ ASML Holding NV and Japan’s Nikon Corp. join its technology blockade.

Read more: US Pushes for ASML to Stop Selling Chipmaking Gear to China

In response, homegrown firms have attempted to develop alternatives to American silicon. The Shanghai-based contract chipmaker has succeeded in advancing its production technology two generations this year to 7-nanometers, though industry experts caution that may not be based on the same standards employed by far larger rivals like Taiwan Semiconductor Manufacturing Co.

SMIC has said sanctions hurt its ability to develop more sophisticated technologies. The company’s capability is severely curbed by its lack of access for instance to ASML Holding NV’s extreme ultraviolet lithography systems, which are required to make the most advanced chips.

The company said in a separate filing that Tudor Brown, the former president of Arm Ltd., has resigned from the board, confirming an earlier Bloomberg report. Zhao also resigned as an executive director, according to the company.