China’s top chipmaker says geopolitical tension adds to industry ‘panic’

Rising geopolitical tension, high inflation and a cyclical downturn in chip demand have triggered “some panic” in the chip industry, the chief of China’s largest semiconductor maker has warned, in comments that follow a week of Chinese military exercises near Taiwan.

The overlap of factors that include the threat of “regional conflict overseas” had “brought some panic to the industry and led to an extreme quick freeze reaction in some parts of the supply chain” with customers abruptly cancelling orders, Zhao Haijun, Semiconductor Manufacturing International Corporation’s chief executive, said on Friday.

Zhao did not mention Taiwan, but analysts said the remark highlights the risk geopolitical tension poses to an industry already shaken by the impact of the Ukraine war.

Zhao’s remarks come a day after ex-Arm chief Tudor Brown resigned from the SMIC board, saying that “the international divide has further widened”.

China’s military said on Wednesday that the exercises it conducted around Taiwan in retaliation for a visit by US House of Representatives Speaker Nancy Pelosi were complete, but added that it would continue regular patrols in the area.

Analysts believe that a further escalation in tensions, especially Chinese military activity that frequently interferes with the island’s air and shipping traffic, could disrupt global chip supply chains.

Taiwan Semiconductor Manufacturing Company accounts for more than half of the world’s made-to-order chips and for about 90 per cent of the global supply of the most advanced chips.

A hot conflict would also increase the likelihood of Washington further toughening sanctions against Chinese technology companies. In December 2020, the US Department of Commerce added SMIC to its “entity list” after months of regulatory scrutiny of the chipmaker. The entity list is an export blacklist of foreign businesses for which US companies need to obtain licences in order to sell them technology.

Zhao said demand had slowed the most for chips used in smartphones and consumer electronics. Chinese smartphone vendor sales dropped by half in the first six months of the year, he said. “We see many orders stopped,” Zhao added.

SMIC reported a 3.3 per cent increase in revenue to $1.8bn and a 15 per cent jump in net earnings to $447mn in the second quarter over the previous three months.

It forecast growth to slow to about 1 per cent in the current quarter, but said its gross margin, now at 39.4 per cent, would not be significantly affected.

SMIC’s Shanghai-listed stock was down nearly 1 per cent on Friday and 18.7 per cent year-to-date.

Zhao said demand for chips used in industrial controllers, automotive applications and high-end connectivity remained strong and stable, and supply shortages in these segments persisted. Demand in the Chinese market was also expected to buffer the weakness elsewhere for SMIC, he said.

Mark Li, an analyst at Bernstein, said the semiconductor market correction was doing less damage to SMIC than feared.

While growth in average selling prices of the company’s chips sharply slowed to 1 per cent from 9 per cent in the previous quarter, the strong profit margins suggested that “the correction is more gradual and benign than expected”, Li wrote in a research note.