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China’s SMIC warns of ‘rapid freeze’ in chip orders as smartphone demand skids

BEIJING (BLOOMBERG) – Semiconductor Manufacturing International Corp (SMIC) has warned that clients in sectors such as smartphones are freezing orders, underscoring how a downturn in consumer electronics demand is hurting the chip sector.

Waning demand from makers of smartphones and TV components is forcing SMIC to readjust its manufacturing plans, co-chief executive officer Zhao Haijun told analysts on Friday (Aug 12).

The economic downturn and inventory adjustments have spurred “rapid freeze and urgent order halts” as some clients hold off on placing new orders, he said during a conference call. SMIC shares fell as much as 3.1 per cent in Hong Kong.

Investors fear the notoriously cyclical chip industry is hurtling towards a prolonged slump after years of shortages led to heavy investments in capacity.

SMIC is among a raft of semiconductor manufacturers now grappling with rapidly crumbling global electronics demand, as consumers leave a pandemic-era boom behind. It is also contending with steadily tightening United States export restrictions as Washington tries to contain Beijing’s technological rise.

China’s largest chipmaker reported that revenue rose 42 per cent to US$1.9 billion (S$2.6 billion) in the second quarter, generally in line with expectations. It posted a net income of US$514.3 million in the second quarter, surpassing the US$469.5 million average estimate.

SMIC is at the vanguard of China’s long-term ambition to produce chips sophisticated enough to replace American silicon, which comprises the majority of the country’s annual US$155 billion in semiconductor consumption.

It remains a technological leader in a giant domestic industry now gripped by a series of corruption probes, as senior officials frustrated with the nation’s lack of progress in semiconductors begin to hold executives accountable. The outcome of the widening dragnet and its impact on local players remain unclear.

US sanctions have played a central role in curbing the country’s chip ambitions. The Trump administration blacklisted SMIC about two years ago on national security concerns, citing the company’s ties with the Chinese military, an allegation the chipmaker has denied.

Washington is now also pressing allies into the effort, so that key suppliers like the Netherlands’ ASML Holding and Japan’s Nikon join its technology blockade.

In response, home-grown firms have attempted to develop alternatives to American silicon. The Shanghai-based contract chipmaker has succeeded in advancing its production technology two generations this year to seven nanometres, though industry experts caution that this may not be based on the same standards employed by far larger rivals like Taiwan Semiconductor Manufacturing Company.

SMIC has said sanctions have hurt its ability to develop more sophisticated technologies. The company’s capability is severely curbed by its lack of access, for instance, to ASML Holding’s extreme ultraviolet lithography systems, which are required to make the most advanced chips.

The company said in a separate filing that Mr Tudor Brown, the former president of Arm, has resigned from the board, confirming an earlier Bloomberg report. Dr Zhao also resigned as an executive director, according to the company.