China Top Chipmaker Misses Earnings Estimates as Sanctions Bite

Semiconductor Manufacturing International Corp.’s earnings missed projections, reflecting a global pullback in spending on devices and computers.

Semiconductor Manufacturing International Corp.’s earnings missed projections, reflecting a global pullback in spending on devices and computers.

China’s largest chipmaker reported $470.8 million in net income for the third quarter, up 47% from a year earlier, versus the $489.7 million average estimate. Revenue of $1.91 billion also trailed the forecast for $1.93 billion.

The results underscore how SMIC is succumbing to US sanctions that’ve cut it off from critical American technology just as the market is slowing sharply.

Washington in October enacted its most sweeping restrictions yet to try and counter China’s technological ambitions, hitting the country’s tech firms more broadly over the longer term. At the same time, sales of electronics from smartphones to computers are petering out as consumers curb spending to cope with a potential economic downturn.

In the earnings statement, SMIC cited weak demand in the mobile phone and consumer market along with the US export control rules for its expectation that revenue will decline as much as 15% sequentially in the fourth quarter.

Some industry players are faring better thanks to their technological edge. On Thursday, Taiwan Semiconductor Manufacturing Co. — the most advanced chipmaker — posted a 56% increase in sales for October. SMIC’s Hong Kong stock has shed more than 10% of its value this year as of Thursday’s close, while its Shanghai-listed shares have slid more than 20%.

Washington in October unveiled a salvo of curbs on the way chip companies do business with China’s tech industry, a series of restrictions that together represent some of the strongest actions taken so far to contain the rise of a geopolitical rival.

The actions, which incensed Beijing and provoked accusations of unfair targeting, threaten to disrupt a global economy already dealing with a potential recession, soaring inflation and lingering supply snarls. Some analysts warn it could strike a further blow to companies from Nvidia Corp. and TSMC to Applied Materials Inc., as well as a raft of Chinese up-and-comers, that underpin the $550 billion chip industry.

Depending on how broadly Washington enforces the restrictions, the impact could extend well beyond semiconductors and into industries that rely on high-end computing, from electric vehicles and aerospace to gadgets like smartphones.

On a personal level, the curbs may force SMIC’s American staff to reconsider their employment. Tudor Brown, the former president of Arm Ltd., in August resigned after nine years on SMIC’s board.

SMIC is among a raft of Chinese semiconductor manufacturers contending with steadily tightening US export restrictions as Washington tries to contain Beijing’s technological rise. That’s on top of rapidly crumbling global electronics demand, as consumers leave a pandemic-era boom behind.

In response, homegrown firms have attempted to develop alternatives to American silicon. The Shanghai-based contract chipmaker has succeeded in advancing its production technology two generations this year to 7-nanometers, though industry experts caution that may not be based on the same standards employed by far larger rivals like TSMC.

Also, that pre-dated Washington’s latest restrictions, which are expected to exact a heavier toll on China’s tech industry.

SMIC is critical to China’s ability to produce chips domestically as the US tries to undercut the country’s tech advancements. Beijing may be willing to subsidize losses at domestic competitors like SMIC — out of fear its companies won’t have access to key components.

But its blacklist status hurts its ability to develop sophisticated technologies. The company’s capability is severely curbed by its lack of access to ASML Holding NV’s extreme ultraviolet lithography (EUV) systems, which are required to make the most advanced chips. The Dutch firm has not shipped a single EUV machine to mainland China because of US pressure on the Dutch government.

The Trump administration blacklisted SMIC about two years ago on national security concerns, citing the company’s ties with the Chinese military, an allegation the chipmaker has denied.