September 29, 2022

Rising geopolitical tensions, high inflation and a cyclical decline in chip demand have led to “some panic” in the chip industry, the head of China’s largest semiconductor maker warned in comments following a week of Chinese military exercises near Taiwan.

The overlap of factors, including the threat of “regional conflict abroad” had “caused some panic in the industry and led to an extremely rapid freeze response in some parts of the supply chain” with customers abruptly canceling orders, Zhao Haijun, Semiconductor Manufacturing International That said the CEO of Corporation on Friday.

Although Zhao did not directly mention Taiwan, the statement marks the first time a mainland Chinese semiconductor boss has publicly hinted at the impact of rising tensions in the region.

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

The Chinese military said on Wednesday that exercises it conducted around Taiwan in retaliation for a visit by US House Speaker Nancy Pelosi had been completed, but added it would continue regular patrols in the area.

Analysts believe a further escalation in tensions, particularly Chinese military activity that often disrupts 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 custom chips and about 90 percent of the world’s most advanced chips.

A hot conflict would also increase the likelihood of Washington further tightening sanctions against Chinese tech companies. In December 2020, the US Department of Commerce added SMIC to its “entity list” after months of regulatory scrutiny from the chipmaker. The Entity List is an export blacklist from foreign companies that requires US companies to obtain licenses to sell them technology.

See also  Changing the Construction Industry Through Information Systems

Zhao said the demand for chips used in smartphones and consumer electronics has declined the most. Sales of Chinese smartphones have halved in the first six months of the year, he said. “We’re seeing a lot of orders being discontinued,” Zhao added.

SMIC reported a 3.3 percent increase in revenue to $1.8 billion and a 15 percent increase in net profit to $447 million in the past three months.

It predicted growth would slow to about 1 percent in the current quarter, but said gross margin, now 39.4 percent, would not be significantly affected.

Shanghai-listed share of SMIC fell nearly 1 percent on Friday and 18.7 percent so far.

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

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

While average sales price growth for the company’s chips slowed sharply to 1 percent from 9 percent in the previous quarter, strong profit margins suggested “the correction is more gradual and milder than expected,” Li wrote in a research note.