China’s SMIC vows to advance technology despite flagging profits- Nikkei Asian Review

TAIPEI — China’s homegrown contract chipmaker, Semiconductor Manufacturing International Co., on Friday vowed to play catch-up in its chip technologies with the help of government support, despite deteriorating profits and a slowing mobile market.

Co-chief Executive Liang Mong-song, brought in by SMIC last October from Samsung Electronics, said he would accelerate development of advanced chip technologies to capture future growth.

“We have not captured the great opportunity in China because of lack of technology readiness,” he said in an earnings teleconference. “In order to sustain growth in the long run, we must drive technology development.”

Liang said he had revised SMIC’s research and development plan, and hopes to deliver positive results sooner than the company had earlier planned.

SMIC is the world’s No. 4 contract chipmaker by revenue, tailing Taiwan Semiconductor Manufacturing Co., Globalfoundries and United Microelectronics. The state-backed company plays a key role in China’s ambition to build up its own chip industry and cut dependence on foreign suppliers.

Liang, who has also worked for the world’s biggest contract chipmaker, TSMC, added that SMIC is set to test its 14-nanometer FinFet process technology in early 2019. The technology is similar to TSMC’s 16-nanometer process technology, which Apple adopted for its iPhone 7 core processor chips in 2016. SMIC had previously hoped to turn out the new technology in 2020, but has struggled to formulate a feasible strategy.

On Jan. 30, SMIC announced a $10.24 billion joint venture backed by China Integrated Circuit Industry Fund and Shanghai IC Fund, two major government investment vehicles in the chip industry, to build a facility mainly for the 14-nanometer process technology that China does not yet own.

Despite government financing for its technology development, the company sees a grim business outlook and worsening profits in 2018.

“Looking forward to 2018, we will continue to confront increasing competition, pricing pressure, and slow growth in certain end-markets,” said Zhao Haijun, the company’s other co-chief executive.

“The year 2018 will also be challenging for our profitability, as our customers face competition in the communications and consumer space,” Zhao added.

SMIC’s key customers, including Tsinghua Unigroup’s mobile chip arm Spreadtrum Communications, and fingerprint chip provider Fingerprint Cards, both face headwinds in a slowing handset market, struggling to stay afloat amid ferocious competition, said Rick Hsu, an analyst at Daiwa Capital Markets.

Its other customer, Huawei’s chip division Hisilicon Technologies, moved some orders to TSMC in 2017 because SMIC’s chip manufacturing technology was not yet ready to meet demand. SMIC also makes low-end chips for various connected devices for the U.S. mobile chip titan Qualcomm.

For the current quarter through March, SMIC forecasts revenue between $842 million and $858 million, including a one-time gain of $150 million as a technology licensing fee from the newly created joint venture.

Excluding the one-time gain, sales guidance for the period is $692 million-$708 million, down 10.7-12.7% from the same period a year earlier. Gross margin would drop sharply to 10-12% compared with 27.8% in the year-ago period, Zhao said.

For the October-December period, SMIC generated 3.4% less revenue of $787.17 million from a year earlier. Operating profit dived 93% from a year ago to $3.17 million.

For all of 2017, SMIC’s revenue increased 6.4% to $3.1 billion from a year earlier. Net income fell by more than half, to $180 million.

Analysts say investor interest in SMIC is not based on its financial fundamentals, but on its role as a recipient of strong government support to grow the nation’s semiconductor competitiveness.

SMIC’s shares closed lower 2.3% at 9.75 Hong Kong dollars in Hong Kong on Friday, while stocks across Asia all fell sharply following a major global selloff overnight in U.S. markets.

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