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China’s SMIC Reports Strong Q1 Profit Surge but Warns of Cloudy Outlook Amid Tariffs and Yield Risks

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Semiconductor Manufacturing International Corp (SMIC) posted a strong financial performance in the first quarter, with profit surging 162% to $188 million and revenue rising 28% year-over-year, driven partly by rush orders from U.S. clients seeking to preempt newly imposed tariffs. However, despite the gains, the results missed analyst expectations, and SMIC’s Hong Kong-listed shares dropped 6.8% following a cautious Q2 forecast.

SMIC, China’s largest chip foundry, said it expects revenue in the second quarter to decline by as much as 6%, citing potential challenges from lower production yields as the company integrates new manufacturing equipment.

Key Financials (Q1 2025):

  • Profit attributable to shareholders: $188 million (vs. $222.4M LSEG estimate)

  • Year-over-year profit growth: +162%

  • Revenue growth: +28%

  • U.S. customer contribution: 12.6% of revenue (up from 8.9% in Q4 2024)

Tariff Impact and Industry Risks:
Co-CEO Zhao Haijun acknowledged the escalating U.S.-China trade tensions, noting that although the current impact is limited—thanks to tariff exemptions and a diversified supply chain—uncertainty looms for the second half of the year.

“If customers cut back purchases due to price increases, the sector could face a hard landing,” Zhao warned.

The company remains largely focused on legacy chips for consumer electronics and home appliances, while advanced chips, such as those powering Huawei smartphones, make up a very small portion of its business. SMIC has not confirmed any production ties to Huawei.

Broader Policy Context:

  • The Trump administration in April approved tariff exclusions on selected Chinese electronics including smartphones, computers, and memory chips, partially easing import pressures for U.S. firms.

  • Meanwhile, Chinese authorities have granted exemptions on some semiconductor imports and are in active talks with the domestic chip sector to mitigate the trade war’s impact.

Despite its strong Q1, SMIC’s outlook reflects the fragility of the global semiconductor supply chain in a climate of geopolitical tension, policy shifts, and technological transition—especially as it scales new equipment and process nodes.

Taiwan’s Legacy Chip Industry Faces Competition as China Expands Market Share

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Taiwan’s legacy chipmakers, once dominant in the production of mature node chips, are grappling with increased competition from Chinese foundries that are rapidly expanding their market share. The shift began in 2015 when Taiwan’s Powerchip Technology entered a deal with China’s Hefei city to establish a foundry, Nexchip. Initially hoping to access the promising Chinese market, Powerchip now faces Nexchip as a major competitor, leveraging Beijing’s support and steep price discounts. This rivalry is most prominent in the $56.3 billion market for 28-nanometer chips, which are commonly used in sectors like automotive and display panels.

Chinese foundries, including Nexchip, Hua Hong, and SMIC, have aggressively expanded production capacities and undercut Taiwanese prices, further intensifying competition. The increased Chinese capacity has prompted concerns in Taiwan’s chip industry, with Powerchip and other Taiwanese companies like UMC and Vanguard International now focused on more advanced or specialized chip technologies.

Taiwanese chipmakers are struggling to maintain their foothold in the mature node segment as Chinese firms benefit from substantial state backing and lower margins. According to TrendForce, in 2024, China is projected to control 34% of global legacy chip production, surpassing Taiwan’s 43% share by 2027. The situation is made worse by the U.S. trade tensions, with U.S. President Donald Trump proposing up to 100% tariffs on semiconductors produced outside the U.S., which could impact Taiwanese exports.

Chinese foundries have become more aggressive in their efforts to capture business from Taiwanese clients. Many Chinese customers, particularly in consumer sectors like display panels, are increasingly opting to use Chinese fabs, following Beijing’s push for domestic supply chain localization. Taiwanese chip designers have acknowledged that they must adapt to survive, with some already shifting focus to more advanced technologies like 3D stacking, which combines logic and DRAM chips to enhance performance.

Despite the growing Chinese competition, some relief may come from the U.S. efforts to restrict China’s chip industry, particularly in light of rising geopolitical tensions. Taiwanese chipmakers are beginning to receive orders from international clients asking for chips to be made outside of China, a shift away from previous reliance on Chinese foundries.

Biden Administration Launches Probe into Chinese Legacy Chips, Prepares to Transition to Trump

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In its final weeks, the Biden administration has initiated a trade investigation targeting older Chinese-made semiconductors, known as “legacy” chips, which are widely used in everyday products such as automobiles, home appliances, and telecommunications equipment. The probe, under Section 301 of the Trade Act of 1974, aims to counter China’s state-supported semiconductor expansion, which U.S. officials argue undermines global competition by offering artificially low-priced chips.

The investigation, announced by U.S. Trade Representative Katherine Tai, is designed to protect American semiconductor producers and those in allied nations. The effort will be handed over to the incoming Trump administration, which could use it to impose additional tariffs of up to 60% on Chinese imports, aligning with Trump’s campaign promises to take a tough stance on China.

Outgoing President Joe Biden has already implemented a 50% tariff on Chinese semiconductors, effective January 1, and imposed stricter export controls on advanced chips and chipmaking tools. The Biden administration has also highlighted alarming findings, with Commerce Secretary Gina Raimondo reporting that two-thirds of U.S. products using chips contain Chinese legacy semiconductors. Moreover, half of U.S. companies, including some in defense industries, are unaware of their chips’ origins.

China’s commerce ministry denounced the investigation as “protectionist,” warning of potential disruptions to the global chip supply chain and threatening retaliatory measures. Meanwhile, Tai accused Beijing of seeking global dominance in the semiconductor industry, stating that China’s practices could harm market-oriented competitors.

PUBLIC HEARING AND TIMELINE
The probe will accept public comments starting January 6, with a public hearing scheduled for March 11-12. The investigation is expected to conclude within a year. The framework for this probe mirrors earlier Section 301 investigations that led to the imposition of tariffs on $370 billion worth of Chinese goods during the Trump administration, igniting a protracted trade war.

The Information Technology Industry Council, a U.S. tech trade group, has expressed concerns about the investigation’s potential economic ramifications. The group urged both the Biden and Trump administrations to approach the inquiry collaboratively and objectively, particularly given the complexities of the semiconductor supply chain and the risks associated with unilateral actions during a presidential transition.

IMPACT ON DOWNSTREAM GOODS
The investigation will examine not only the direct impact of imported legacy chips but also their role in downstream components and products critical to industries such as defense, automotive, and medical devices. It will also assess China’s production of silicon carbide substrates and wafers essential for semiconductor manufacturing.

The COVID-19 pandemic highlighted vulnerabilities in global semiconductor supply chains, leading to disruptions in industries like automotive and healthcare. In response, the U.S. has allocated $52.7 billion to bolster domestic semiconductor manufacturing, research, and workforce development.

The Biden administration’s last-minute actions set the stage for the Trump administration to shape the future of U.S.-China trade relations, particularly in the high-stakes semiconductor industry, as Trump has vowed to prioritize American dominance in critical technologies.