Is capacity tight? Are prices rising? Where does demand come from? SMIC addressed these questions one by one during its earnings call.
SMIC co-CEO Zhao Haijun stated at the company's second-quarter earnings call that, driven by strong artificial intelligence demand, the company's second-quarter performance exceeded market expectations. SMIC's earnings report released on the 13th showed that in the second quarter, the company's overall sales revenue reached $30.06 billion, a sequential increase of 20%; gross margin was 25.3%, an increase of 5.2 percentage points sequentially. These results exceeded the previous guidance upper limit. Looking ahead to the third quarter, SMIC provided a revenue guidance of 2% to 4% sequential growth, with a gross margin guidance of 26% to 28%.
AI-related chip demand is robust, with wafer volume and price rising simultaneously
Zhao Haijun said that in the second quarter, the company saw a simultaneous increase in wafer volume and price, with single-quarter revenue exceeding $30 billion. All core operational metrics showed significant year-over-year and sequential growth. Among them, shipment volume increased by 14.4% sequentially, and the average selling price of wafers rose by 5.7% sequentially. The increase in shipments was mainly due to the surge in demand for AI-related chips and customers pulling forward shipments. During the quarter, the company added 8,000 wafers of monthly capacity (equivalent to 12-inch wafers); capacity utilization rate was 93.7%, a sequential increase of 0.6 percentage points. Notably, Zhao Haijun also revealed that AI-related chips are not yet included in a separate statistical category, with related demand dispersed across the industrial and consumer electronics sectors. The company plans to separately disclose this business data in the future to more accurately reflect the contribution of AI demand.
In terms of quarterly revenue by region, the China region, US region, and Europe-Asia region accounted for 90%, 8.2%, and 1.6%, respectively. All regions saw an increase in absolute terms, with the China region experiencing the largest growth of 22%, primarily benefiting from strong demand for AI-related chips, the return of overseas orders, and the continued strengthening of localization manufacturing trends. By wafer size, 12-inch and 8-inch wafers accounted for 78% and 22% of wafer revenue, respectively. In terms of absolute value, 12-inch wafer revenue grew 24% sequentially, while 8-inch wafer revenue grew 11% sequentially. The increase in gross margin was mainly due to the rise in average selling prices and better-than-expected capacity utilization rates. Regarding wafer pricing, Zhao Haijun disclosed that wafers produced in the third quarter have already implemented new pricing. He explained that the company did not announce a one-time price increase but rather negotiated prices with customers individually, with different prices for different market segments and specific customers. "SMIC is neither the first to raise prices nor the one that raised them the most." On capacity, Zhao Haijun stated that in the third quarter, the company expects shipments to continue to grow. The utilization rate, including newly added capacity, is expected to remain at a high level of around 95%, effectively diluting unit fixed costs.
Shipment growth significantly outpaces capacity
In the second quarter, SMIC's shipment volume grew 14.4% sequentially, significantly higher than the 1.7% capacity growth rate. In response, Zhao Haijun explained that the core driver of shipment growth was strong customer demand for wafers. In the second quarter, the company adjusted its production schedule, prioritizing processes that were close to the output stage while appropriately postponing some new wafer starts. Under the premise of unchanged total capacity, this enhanced the allocation of back-end process manufacturing resources to meet customer delivery demands, boosting shipments for the quarter. On the other hand, capacity built over the past few years has been continuously completing verification. The average cycle from new equipment installation and line setup to product introduction and finally to mass production at customer terminals is about 16 months. The capacity built in previous years is gradually ramping up under current customer demand, also contributing to net capacity additions and shipment growth. At the same time, Zhao Haijun stated that the shipment growth rate in the third quarter is expected to stabilize. The company maintains a steady and gradual capacity ramp-up, with the monthly average increase in 12-inch wafers remaining at a stable level, without significant jumps. Meanwhile, the pace of pulling shipments that temporarily overdrew capacity in the second quarter is unsustainable. To ensure the long-term healthy operation of the production lines and balance the production rhythm between front-end and back-end, third-quarter revenue will be appropriately smoothed, showing an overall stable growth trend.
Where does demand come from? Which market segments have the strongest demand?
Zhao Haijun pointed to three directions: First, the currently tight-demand, high-growth segment is computing-related, specifically AI-related chips, including logic chips, BCD (Bipolar-CMOS-DMOS) power management ICs, and optical modules. Supply and demand remain tight, with long-term demand looking positive. The second category includes traditional businesses that are gradually being squeezed out due to being crowded out by AI-related chip orders, such as NOR Flash. These products are experiencing supply gaps, where capacity cannot match demand, leading to rising prices. The third category is the trend of capacity repatriation. Products like mobile phone chips and TV/monitor display driver ICs (DDIC), which previously had weak market demand, are now facing capacity shortages. Customers, concerned about not securing capacity later, have begun negotiating long-term capacity plans and pricing.
Zhao Haijun further explained that the prosperity of different market segments in the industry is clearly diverging. Areas of supply shortage are concentrated in AI, computing, data centers, and edge computing-related products, primarily logic chips. Computing infrastructure requires a large number of power management chips. GPUs, CPUs, HBM, DRAM, SSDs, cooling motor drivers, and optical modules all require supporting power management devices. He exemplified that a single cabinet equipped with 72 GPUs can require over 16,000 power management devices, placing these products in a state of supply shortage. The sectors facing destocking pressure are mainly mobile phone-related categories. Consumer products like panel drivers currently have low prices and weak orders; inventory levels are not high, but end-user demand has not yet recovered. However, the market is beginning to worry about insufficient capacity supply when demand for mobile phones, TVs, monitors, and PCs recovers next year. Combined with expected price increases across the upstream wafer, packaging, testing, and materials supply chain, customers are now starting to stock up in advance and lock in long-term capacity to avoid future capacity shortages and higher procurement costs. This trend of capacity repatriation has already emerged, with customers negotiating capacity allocation for the end of this year and next year. The increased share of the industrial and automotive sectors is not entirely due to increased end-user demand. The production lines of relevant customers can simultaneously supply automotive, industrial, mobile phone, and panel markets. Currently, customers are prioritizing output for the automotive and industrial sectors, while actual shipments to the mobile phone and consumer sectors have declined, thus passively raising the share of these sectors.
Price increases contribute more than product mix optimization
Zhao Haijun revealed that the company's orders have already covered the fourth quarter, and he sees no possibility of price cuts this year. The current price levels, gross margins, and capacity utilization rates are sustainable. Zhao Haijun admitted that the contribution of price increases to gross margin is greater than that of product mix optimization. The company's capacity allocation is not simply about tilting capacity towards customers willing to pay higher prices. The product mix adjustment stems more from demand-side changes: when demand for some products falls, the corresponding capacity is reallocated to products that are in short supply and command better prices. For example, reducing some logic circuit capacity to shift to MCUs and dedicated memory, or when LCD driver demand declined, shifting capacity to NOR Flash. At the same time, all newly added capacity comes from long-term orders locked in by customers in advance. The new capacity released is directly used to produce high-value products, which also contributes positively. However, depreciation pressure objectively exists. The company's annual depreciation is expected to increase by 30% year-over-year, totaling nearly $5 billion, with the incremental depreciation each quarter continuously eroding profits. In terms of the timeline, under the original expansion plan, the depreciation peak is expected in 2027. However, due to this year's AI demand significantly exceeding expectations, the company is dynamically adjusting its expansion plans and optimizing factory layout. New capital expenditures will continue to be capitalized and depreciated, creating some uncertainty regarding the depreciation peak, which will be updated dynamically. Regarding capacity, Zhao Haijun stated that the company's capacity utilization rate will remain around 95%, with 5% of capacity reserved for R&D. The company will not squeeze R&D resources to further increase utilization rates. Against the backdrop of an industry-wide capacity crunch, SMIC has established clear principles for capacity allocation: prioritizing the fulfillment of commitments with long-term strategic customers, honoring the capacity building and supply agreements already reached with existing customers, and refusing to simply allocate capacity to the highest bidder, thereby upholding the value of long-term cooperation.
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