In its latest earnings call, China's leading pure-play foundry, SMIC, acknowledged an increase in domestic competition, resulting in a growing supply even as demand begins to recover. The company is aiming to capture a larger share of revenue from the automotive sector, driven by the heightened competitiveness among Chinese automakers.
Anticipating rising chip supply and demand in China
On February 12, SMIC held an earnings call after releasing the financial results for the quarter that ended in December. According to the company, the overall semiconductor market in 2024 showed signs of recovery, with IC design firms' inventories returning to healthy levels, adding that the transition to locally-made chips is accelerating.
By region, sales revenue contributions stood at 85% from China, 12% from the US, and 3% from Europe and Asia. Revenue from Chinese customers grew 34% year-over-year, driven by localization trends and supply chain restructuring, which helped boost SMIC's market share.
SMIC noted that the fourth quarter remained a traditional off-season for the semiconductor industry, with relatively weaker customer demand. However, the company optimized its product mix while adding 28,000 wafers per month of 12-inch capacity. This led to a 6% quarter-over-quarter increase in its average selling price (ASP), largely offsetting the impact of lower shipments on revenue and rising depreciation costs.
The company anticipates ASP pressure in the second half of 2025. SMIC remains focused on enhancing utilization rates and product portfolio expansion to maintain profitability amidst depreciation challenges.
Eyes profitability amid depreciation pressure in 2025
SMIC expects significant depreciation pressure on its gross margin in 2025, with pricing and capacity utilization also playing key roles. The company remains committed to sustained profitability and plans to counter depreciation by improving utilization rates.
While localized production is driving market demand, intense competition and structural overcapacity continue to pose challenges, even as the market recovers. SMIC aims to strengthen its core competitiveness through technological advancements and increased capacity utilization.
To mitigate pricing pressure, the company is expanding its product portfolio and maintaining a market-driven pricing strategy, refraining from proactive price cuts. However, it remains open to strategic pricing adjustments in collaboration with key customers to safeguard market share and competitive advantages across various segments.
Strong first-quarter demand but expects ASP pressure in 2H25
SMIC anticipates a significant boost in sales across smartphones, PCs, and e-bikes due to recent stimulus measures, prompting IC design customers to increase inventory in preparation for potential market expansion. This has led to a strong first quarter, with higher capacity utilization and rising demand filling both its 8-inch and 12-inch fabs. However, as 8-inch wafer shipments increase, the weighted ASP is expected to decline.
While SMIC continues to expand capacity each quarter—adding 8,000 wafers per month in the fourth quarter—the rapid ramp-up requires filling new fabs with a mix of orders, including lower-priced and commodity products.
As a result, ASPs for both the first quarter and the full year are projected to decline. Looking ahead to the second half, SMIC foresees two key risks: a potential demand slowdown following the strong pull-in during the first half of 2025 and intensifying price competition as additional industry capacity comes online. Given these factors, the company expects a downward trend in pricing rather than an increase in the second half of the year.
Targets automotive growth, aims for 10% revenue share
In the fourth quarter of 2024, SMIC's automotive and industrial segment contributed around 8-10% of its total revenue. The company's initial goal is to increase the automotive segment's share to 10% by collaborating with both direct customers and end-device manufacturers. To achieve this, SMIC is systematically validating all its product platforms for automotive applications to scale production gradually.
Given the relatively smaller volume of automotive chips compared to consumer electronics, this transition will take time. While annual smartphone shipments reach around 700 million units—of which 200 million use OLED flexible displays and another 600 million use LED screens—China's annual vehicle production is significantly lower, with approximately 10 million EVs and 20 million internal combustion vehicles.
SMIC plans a phased approach, first focusing on consumer-grade products, then industrial applications in the second year, and full automotive-grade validation in the third year. If SMIC achieves its 10% revenue target from the automotive sector, it could account for roughly one-third of the domestic semiconductor demand in the industry.