Following two years of US sanctions, Chinese foundry champion Semiconductor Manufacturing International Corp. (SMIC) has been focusing on legacy process nodes like 28nm.
According to the Chinese foundry, 28nm is the node favored by SMIC customers in applications like consumer electronics, Internet of Things (IoT) and automotive electronics. Indeed, as the SMIC annual report revealed on March 28 shows, smartphones and consumer electronics remain the main revenue sources for SMIC, accounting for 27% and 23% of its 2022 revenue, respectively.
The fact that the Chinese market has a high demand for mature node technology also helps: latest financial report sees China accounting for 74% of SMIC revenue in 2022.
However, SMIC is not spared from the talent shortage gripping Chinese semiconductor industry. The foundry pointed out that the pace of talent drain only slowed in 2022 thanks to the improvement in employee welfare and wages.
As reported by SCMP, as of the end of 2022, SMIC has 2,326 R&D engineers, accounting for 10.8% of total SMIC employees. According to SMIC, its R&D engineers have an average annual salary of US$66,000 in 2022. Sources also indicated that competitors like China's semiconductor equipment manufacturer NAURA Technology Group have been coveting SMIC's engineering talent pool.
Talent shortage certainly exacerbates the foundry's declining R&D share of revenue: latest result marks the third consecutive year in which SMIC's R&D spending as a percentage of revenue declines, from 17.3% in 2020 to 11.7% in 2021, then ti 10.1% in 2022.
All in all, SMIC has grim prediction for 2023. Its latest annual report expects gross margins to fall to 20% in 2023 - a sharp contrast to SMIC's performance between 2021 and 2022 that saw its gross margins grew from 30.8% to 38%.
As SMIC indicated, depreciation is expected to increase by more than 20% year-over-year, while depreciation and amortization expenses in the past three years have not decreased either.
Considering that SMIC's average selling price (ASP) is barely US$1000 - not even reaching half of TSMC's ASP - the Chinese foundry's plan to fund capacity expansions via legacy technology while sustaining commercial mass production seems to be a heavy burden. Despite the recent downturn and a falling utilization rate below 80%, SMIC continues to undertake massive expansion projects, focusing on four main sites, namely SMIC Shenzhen, SMIC Jingcheng, SMIC Lingang and SMIC Xiqing.