China’s ‘workshop of the world’ struggling to increase production?

Consumer demand for electronic goods dropped sharply

Leading Chinese chipmaker Semiconductor Manufacturing International Corp (SMIC) gave a bleak outlook on consumer electronics demand and “shows no signs of recovering anytime soon”.

Sharing with investors on May 13, CEO Zhao Haijun said that the Russia-Ukraine conflict and China’s decision to social distance because of Covid-19 reduced demand for consumer electronics and appliances. household appliances, leading to a huge adjustment in chip orders for these products.

SMIC CEO Zhao Haijun

“Many Chinese smartphone, PC and home appliance companies operate in Russia and Ukraine. Sales in these markets are no longer available. Sales in the home market are also down due to the Covid situation. -19 in the country,” said Mr. Zhao Haijun. “We don’t see the end of the downtrend yet. At least 200 million smartphones disappeared this year and the majority of them came from domestic Chinese phone makers.”

The SMIC CEO likened the rapidly falling demand for consumer electronics to “a falling rock”. “Some of our customers are holding inventories for more than five months,” said Zhao Haijun.

However, the CEO said that SMIC’s factories are still operating at 100% capacity, as the company is allocating resources to products that are still in large shortfalls such as power management chips and microcontrollers used in computers. green energy, electric vehicles and industrial applications.

Zhao Haijun said that in the face of market uncertainty, only major chip developers and top international customers can continue to grow. “Companies that only serve the domestic market will feel their business severely affected.”

Global smartphone sales may drop by 200 million units this year

According to Nikkei Asia, the SMIC CEO’s sharing provides the first clear overview from a large technology corporation on the impact of the month-long shutdown in China on the electronics industry.

Production costs increase

Mr. Zhao Haijun said lockdowns in the Shanghai area, where SMIC has the most important production sites, causing heavy impacts, could last beyond the second quarter of this year.

“SMIC’s output is one thing. We are also concerned about the long-term impacts of the supply chain, including packaging and testing chips and other supplies. The impact is unlikely to be reversed during the quarter. the begin of the year”.

SMIC executives said production costs increased, leading the company to negotiate with customers to increase product prices. “The price of everything is going up. Costs like water and electricity are up across the board. Raw material costs are up too. These factors will erode our gross margin by 10 percent, so that’s why. The corporation must negotiate the price with the customer”.

SMIC still maintains a good chip production segment

Despite the uncertainties, SMIC reported revenue growth of 66.9% to $1.84 billion from January-March-March, while net profit increased 181.5% to $447.2 million. The chipmaker’s gross margin hit a record 40.7%, thanks to an increase in average selling prices during the quarter and a better product mix.

However, China’s top chipmaker said its gross profit margin in the second quarter of 2022 will drop to between 37-39%, due to lower factory utilization due to closures and maintenance procedures. Annual maintenance of some production facilities.

SMIC expects revenue in the second quarter of this year to grow by 1-3% compared to the first quarter, which is a growth of nearly 40% year-over-year. Supply shortages and imbalances persist in areas such as Wi-Fi, power management, and microcontroller chips.

Meanwhile, SMIC President Gao Yonggang said that the Covid-19 wave and political conflicts brought the global chip manufacturing industry a lot of uncertainty. However, the company “expects revenue growth this year to be better than the foundry industry average”.

He said SMIC will try to control the risk of the impact of the Shanghai lockdowns to within 5% of group revenue.

Last year, SMIC claimed to benefit from domestic chipmakers’ demand to increase domestic production. The company’s revenue from China posted a record 68% growth in the last quarter of 2021.

According to Bao Nhi