BEIJING, CHINA – DECEMBER 04: A logo hangs on the Beijing branch building of Semiconductor Manufacturing International Corporation (SMIC) on December 4, 2020 in Beijing, China. (Photo by VCG/VCG via Getty Images)

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China’s largest chipmaker SMIC reported an 80% drop in third-quarter profit on Thursday as weak global demand hit foundries hard.

Net profit for the quarter ending September plunged 80% year-on-year – more than the 64% decline in the second quarter of 2019, according to company figures.

Here are SMIC’s third-quarter results compared to LSEG’s consensus estimates:

  • Revenue: $1.621 billion versus the expected $1.625 billion
  • Net income: $93.98 million versus the expected $165.1 million

SMIC, or Semiconductor Manufacturing International Co., posted revenue of $1.62 billion in the third quarter of the year, down 15% from a year ago. Net income was $93.98 million in the period, well below analysts’ expectations of $165.1 million.

SMIC is China’s largest foundry and makes semiconductor chips that other companies design. The company is seen as a key hope for Beijing’s ambitions to boost its domestic semiconductor industry and catch up with rivals such as Taiwan’s TSMC and South Korea’s Samsung – even as the US continues to curb China’s chipmaking technology and exports.

“In the Chinese market, the high product inventory problem that began in the third quarter of last year has been alleviated and inventory levels have declined to relatively healthy levels,” SMIC said in its conference call Friday morning.

“But American and European customer inventories will remain at historically high levels,” the company said.

A persistent decline in demand for certain chips used in consumer products, such as memory, has hit SMIC as well as companies such as its Asian rivals TSMC and Samsung hard.

Due to rising inflation, consumers have limited their purchases of consumer devices. As a result, smartphone and PC makers struggled with excess chip inventory and memory chip prices fell.

SMIC, which also makes automotive chips, said inventories for such chips are “now at relatively high levels after three years of shortages” and that this has led to major customers “cutting back their orders.”

“After more than a year of ups and downs in the market, this year customers have seen the shift from aggressive expansion two years ago to defense,” SMIC said.

Data from the Semiconductor Industry Association said global semiconductor sales rose 1.9% in September compared to the previous month, showing signs of a chip recovery. Global, In September, sales fell 4.5% year-on-year.

“Global semiconductor sales increased month-over-month for the seventh consecutive month in September, reinforcing the positive momentum the chip market has experienced midway through this year,” said John Neuffer, president and CEO of the Semiconductor Industry Association.

“The long-term outlook for semiconductor demand remains strong as chips enable countless products on which the world depends and create new, transformative technologies of the future,” Neuffer said.

SMIC was in the spotlight for a “game-changing” 5G chip in Chinese tech giant Huawei’s new smartphone, which was launched in September.

The US has imposed sanctions on Huawei and SMIC.

In 2019, Huawei was placed on the U.S. trade blacklist, which prevents American companies from doing business with the Chinese company. The U.S. also restricted Huawei’s access to foreign-made semiconductors made with U.S. technologies and barred its agencies from purchasing Huawei equipment or services.

SMIC was also placed on a U.S. trade blacklist in 2020, limiting its ability to acquire certain U.S. technology as exporters had to apply for a license to sell to the company.

In a blow to US sanctions, a teardown of Huawei’s latest smartphone, the Mate 60 Pro, revealed a SMIC-made Kirin 9000s chip that appears to support 5G, even as the US sought to bar Huawei from key technologies, including 5G. Chips, to be ruled out.

The advanced 7-nanometer processor in Huawei’s new phone signals that China is making initial progress in building self-reliance in science and technology, leaving behind U.S. efforts to contain Beijing’s rise. Analysts have previously said that SMIC’s technology is several generations behind TSMC and Samsung.

Last year, Washington introduced sweeping export restrictions to cut off China from advanced chip technology and equipment. These limitations have cut off SMIC from key chip-making tools for producing the most advanced semiconductors.

SMIC expects fourth-quarter revenue to increase 1% to 3% compared to the third quarter.

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