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Interface News reporter | Li Biao

Jiemian News Editor | Wen Shuqi

As the semiconductor market slowly recovers, the two chip foundry giants are unwilling to engage in price wars anymore.

On July 8, SMIC released its second quarter financial report for 2024. The company's performance achieved growth beyond expectations, with revenue of US$1.9 billion in the second quarter, a year-on-year increase of 22%. The market had previously expected US$1.84 billion.

In terms of profit, SMIC's net profit in the second quarter was US$164 million, down 59% year-on-year. However, this figure is much higher than market expectations, which previously expected the company's profit to be US$77.8 million in the quarter.

In the past two years, domestic wafer foundries represented by SMIC have chosen to expand production in the downward cycle of sluggish global semiconductor demand. Wafer foundry is a typical heavy asset industry. During the ramp-up phase of new capacity, many manufacturers have to bear the pressure of counter-cyclical expansion. The new capacity cannot be digested in time, and the capacity utilization rate has dropped significantly, resulting in shrinking profits.

Zhao Haijun, co-CEO of SMIC, said that the company's second-quarter revenue and profits exceeded expectations, mainly because the demand in the semiconductor market has gradually recovered from the trough this year, and customers in consumer electronics industries such as smartphones have begun to actively stock up in advance, allowing part of the newly expanded production capacity to be digested as effective capacity.

The company's wafer sales in the second quarter (uniformly converted to 8-inch wafers) were 2.11 million pieces, a year-on-year increase of 50%. SMIC's current foundry production of wafers is mainly 8-inch and 12-inch, and the production capacity is mainly used to manufacture mature process chips of 28 nanometers and above. Zhao Haijun said that the company's expansion is mainly based on 12-inch wafers, and this part of the production capacity has been in short supply in the first half of this year.

As a key indicator to measure the capacity utilization and semiconductor market prosperity, SMIC's capacity utilization rate has been steadily increasing since the beginning of this year. Based on the low capacity utilization rate of 75% in the whole of last year, the capacity utilization rate in the first quarter of this year reached 80.8%, and the capacity utilization rate in the second quarter further increased to 85.2%.

It is worth noting that while improving capacity utilization, SMIC has always been very cautious about domestic price wars. During the second quarter earnings call, an analyst asked whether the company would reduce prices to speed up shipments in order to increase capacity utilization. Zhao Haijun responded by emphasizing that SMIC would not actively reduce prices to engage in price wars, but would work with customers to face the price reduction strategies of its competitors and "follow the competition" to maintain market share and competitiveness.

Since last year, the domestic foundry industry has been in a frenzy of cutting prices to grab orders, and domestic manufacturers such as SMIC, Hua Hong Semiconductor, and Jinghe Integrated Circuit have all been caught in the vortex. According to a report released by the American think tank Rhodium Group, by the end of 2023, price competition in the field of mature process chips has become fierce. SMIC, Hua Hong and other Chinese mainland foundries have won customers from GlobalFoundries in the United States and Samsung in South Korea by promising lower prices to customers, while foreign foundries have to cut prices by 10%-30% in response to market competition. Domestic manufacturers also bid against each other to compete for customer orders.

This trend has continued into this year. At the first quarter earnings conference, Zhao Haijun admitted that the price war in the chip industry has been very fierce. He said that SMIC's 12-inch wafer production line has been fully loaded since February, but its peers have adopted an aggressive low-price competition strategy. "Many of the company's strategic customers, whether set-top boxes or smartphones, may lose orders if other competitors in the market offer lower prices, and tens of millions of yuan in orders will disappear."

Wafer prices and the company's gross profit margin have also been impacted by the price war in the market. According to the second quarter financial report, SMIC's average wafer sales price fell 8% month-on-month. The management has previously mentioned that SMIC may face pressure to reduce prices in the face of price wars.

However, the company expects that the average wafer unit price will increase quarter-on-quarter in the third quarter, driving up gross profit margin. Currently, SMIC's gross profit margin is 13.9%, 13.7% in the first quarter of 2024, and 20.3% in the same period last year. The company expects revenue in the third quarter to increase by 13% to 15% quarter-on-quarter, and gross profit margin to further increase to between 18% and 20%.

Not only SMIC, but also Hua Hong Semiconductor, which is known as the "two giants of chip foundry", has expressed the same attitude towards the price war.

Previously, due to factors such as the sluggish market and fierce price competition, Hua Hong Semiconductor's revenue and profits were greatly impacted. In the second quarter financial report released on the same day, although the company's performance was still sluggish, revenue decreased by 24.2% year-on-year, net profit fell sharply by 90% year-on-year, and gross profit margin was as low as 10.5%. However, Hua Hong Semiconductor's overall capacity utilization rate is currently 97.9%, which is close to full production. Morgan Stanley, Jefferies and other institutions believe that as its production capacity has steadily increased to close to full production this year, it has the confidence to raise prices, and it is very likely to repair its performance through price increases in the next step.

A semiconductor analyst from an international organization said in an interview with Jiemian News this year that the price war in the foundry industry is unlikely to continue. In the domestic market, the long-standing practice of foundries is to give up profits to obtain higher capacity utilization. The gross profit margins of many manufacturers have dropped to very low levels, and have only been in the single digits for a long time, which is already a very low level. He believes that based on this situation, further price competition is "not impossible, but the space is much smaller than before."

After the financial report was released, SMIC's Hong Kong stock price rose 2.7% as of press time, while Hua Hong Semiconductor's stock price fell 7.2%.