SMIC will eventually shift from mass producing 7nm chips to 5nm ones, with an earlier report stating that China’s largest semiconductor manufacturer has set up production lines to cater to Huawei. Unfortunately, it will be a costly endeavor for the chip maker, seeing as how one estimate claims that producing 5nm chips could be up to 50 percent more expensive than what it costs TSMC, and there is also a yield problem, which we will discuss here.
In addition to high production costs, SMIC’s 5nm yield is said to be just one-third of TSMC’s, making the transition to advanced chips significantly more difficult
A report from TrendForce discussed the financials of SMIC, summarizing that the firm’s revenue exceeded expectations, but it was at the cost of a significant drop in gross margin, which consequently led to a decline in net profit by less than 50 percent to below $1 billion in 2023. If things were not bad enough, SMIC has also stated that its gross margin will slip further to around 10 percent for the first quarter, with single-digit figures at the lower end.
For 2023, SMIC witnessed a revenue decline of over 13 percent to $6.3 billion, with a net profit decrease of 50.4 percent to $900 million. The gross margin was approximately halved to 19.3 percent. With these ‘less than impressive’ figures, SMIC will likely continue to seek government subsidies as it transitions from 7nm to 5nm production. Even now, industry experts believe that chip fabrication on the aforementioned nodes is between 40 to 50 percent more expensive than what it costs TSMC.
Also, since SMIC has been reported to utilize its current-generation DUV machinery instead of the cutting-edge EUV hardware due to an import ban executed by the Biden administration, production of 5nm chips was always going to be expensive. One chip guru believes that while it is possible for SMIC to mass produce 5nm chips successfully, the manufacturer will face a myriad of problems. At this time, the Chinese chip maker’s yield is said to be one-third of TSMC’s, meaning that its goal of achieving self-sufficiency will continue to bear losses for a while.
It is also unconfirmed if SMIC will offer its first 5nm batch to Huawei at a discount, thereby absorbing more financial strain, or pursue a different strategy by passing the cost increases to its client. Whatever decision is reached, it still harms China, and there appears to be no straight solution in sight.
News Source: TrendForce
