In the new semiconductor cycle driven by domestic supply chain shifts and AI computing expansion, Semiconductor Manufacturing International Corporation (SMIC, 688981.SH) has become a market focal point.
The company, China's largest wafer foundry, delivered strong Q3 results: revenue reached $2.382 billion, up 9.7% YoY and 7.8% QoQ, while net profit rose 28.9% YoY to approximately $192 million. Its 8-inch equivalent monthly capacity surpassed 1 million wafers for the first time, with utilization rates climbing to 95.8%, nearing full capacity.
However, despite robust order books, SMIC offered cautious guidance for Q4 and next year—expecting flat to 2% QoQ revenue growth and lowering gross margin forecasts to 18%–20%.
What concerns SMIC amid accelerating domestic supply chain shifts and a global memory chip supercycle?
**Domestic Supply Chain Shift Drives Utilization Rates Beyond Expectations** SMIC's Q3 growth was primarily fueled by the "domestic supply chain shift" trend. Co-CEO Zhao Haijun noted that 86.2% of Q3 revenue came from Chinese clients, up from 84.1% in Q2. "Revenue from domestic customers grew 11% QoQ," Zhao emphasized, highlighting opportunities from consumer electronics clients replacing overseas suppliers.
Inventory replenishment also contributed. Zhao explained that clients, anticipating tariffs, had previously shipped products overseas, leaving domestic stocks low. Now, they are rebuilding inventories, particularly for analog, power, and high-current products. Additionally, automotive and industrial sectors, having depleted stocks, are now replenishing amid expectations of a 2026 recovery.
These factors pushed SMIC’s utilization rate to 95.8%, a post-Q2 2022 high and 3 percentage points above guidance. High utilization offset depreciation pressures, lifting gross margins to 22.0%, up 1.6 percentage points QoQ.
Product mix shifts were notable: consumer electronics revenue rose to 43.4% (from 41.0%), while smartphone-related sales fell to 21.5% (from 25.2%). Zhao attributed this to prioritizing analog and memory chips over lower-margin smartphone PMICs.
**Full Capacity but Cautious Outlook: Memory Supercycle’s Double-Edged Sword** Despite strong performance, SMIC’s conservative Q4 guidance reflects concerns about the memory chip supercycle.
Driven by AI-driven HBM demand, DRAM and NAND prices have surged since Q2 2025, with SK Hynix and Samsung announcing 20%–30% Q4 price hikes. While this benefits memory makers, it poses risks for logic foundries like SMIC.
Zhao outlined two critical impacts: 1. **Supply Chain Mismatch**: If memory shortages persist, OEMs may cut orders for PMICs, CIS, MCUs, and display drivers—SMIC’s core products—leading to weaker Q1–Q2 2026 demand. 2. **Cost Pressure**: Memory price hikes squeeze OEM margins, forcing them to demand lower prices for other chips. "Clients won’t raise phone prices but expect cheaper logic chips to offset memory costs," Zhao said.
This pressure cascades to foundries, intensifying competition. Hence, despite high utilization, SMIC forecasts lower Q4 margins.
Internal cost pressures are also rising. SMIC’s Q3 capex hit $2.394 billion, with year-to-date spending reaching $5.7 billion. Full-year capex is expected to match or slightly exceed 2024’s $7.3 billion. New equipment arrivals will drive higher depreciation in Q4 and Q1 2026, further pressuring margins.
Zhao acknowledged 2026 will see continued capacity expansion but stressed the need for differentiation: "We must excel in performance, customized platforms, and speed to stay ahead."