SMIC bets on capacity expansion despite margin headwinds

Beijing: China's largest contract chipmaker, Semiconductor Manufacturing International Corp, warned of margin pressure this year as it expects a surge in depreciation costs due to a massive capacity expansion to meet strong demand for chips.

The company's Hong Kong-listed shares dropped nearly 4% on Wednesday after the company said it expected flat revenue growth ‌in the ⁠current quarter ⁠from the previous quarter and warned of a 30% jump in depreciation costs this year.

"We maintained high ​capital spending, which drove rapid revenue growth but also placed considerable depreciation pressure on gross profit margins," ​SMIC's CO-CEO Zhao Haijun said during an earnings call on Wednesday, citing efforts to capitalise on demand from Chinese chip designers.


The semiconductor supply chain - previously based on overseas design ​and manufacturing for the Chinese market - shifted to Chinese ⁠production throughout the ‌year, Zhao said.

Analog circuits saw the fastest transition, followed ​by display drivers, image ​sensors and memory, microcontrollers (MCUs), and logic chips.

SMIC would add about ⁠40,000 12-inch equivalent wafers in new monthly capacity by the end of this year, Zhao said. It added 50,000 12-inch wafers in monthly capacity in 2025.

Zhao said strong AI memory demand was squeezing supply to other sectors, especially mid-to-low-end phones, causing memory shortages and cost increases for manufacturers.

China remained SMIC's biggest market, accounting for 87.6% of its revenue in the fourth quarter, while the U.S. contributed 10.3%.

The company pre-purchased critical equipment, while ancillary equipment remained pending, creating ‌timing mismatches, Zhao said. As a result, already-acquired equipment might not translate into full production capacity this year.

SMIC reported a 60.7% jump in fourth-quarter ​profit on Tuesday, ​beating analyst estimates. Revenue ⁠rose 12.8% to $2.49 billion, also topping forecasts.

Its monthly production capacity increased 3.5% quarter-to-quarter to 1.06 million eight-inch equivalent wafers, with utilisation rates - measuring a foundry's production intensity - reaching 95.7%, flat from ​the third quarter.

SMIC shipped 2.51 million 8-inch equivalent wafers in the fourth quarter, up 0.6% from the previous quarter. SMIC's capital spending for 2025 reached $8.1 billion, up 10.5% from 2024 and higher than the company's original projection earlier last year.

Zhao said he expected SMIC's 2026 capital spending to be the same as 2025's levels.