At the end of December 2020, SMIC, the Chinese chip foundry giant and the hope of the whole village in China’s chip industry, was hit hard by the United States and was added to Huawei’s “same model” entity list.

Since the high-end chip manufacturing equipment used by SMIC is provided by Western companies such as Europe, America and Japan, the blacklisting this time has a profound impact on SMIC. Generally speaking, the companies on the list are not completely cut off from supply, but confirm which technologies and items can be imported and which cannot be imported under the review of the US side. But for SMIC, when it was added to the list this time, the United States directly added a clause: For chip manufacturing equipment with the most advanced technology below 10nm, the United States directly refused to approve it and did not allow it to be imported.

And we must know that the current 1,2,000 mobile phones have also begun to use 7nm process chips. Therefore, this blackout basically makes SMIC blocked the possibility of further expanding its business in the field of high-end chip manufacturing in the future.

In this context, last week, SMIC released its first quarterly financial report after being blocked. Although SMIC’s stock price has come out of an avalanche of decline since it was added to the list, as if it will go bankrupt tomorrow, in fact, judging from the financial report, people are actually doing well.

In the first quarter, SMIC’s revenue was 7.29 billion yuan, a year-on-year increase of 13.9%; net profit was 1.032 billion yuan, a year-on-year increase of 136.4%; gross profit margin was 26.97%, compared with 21.46% in the previous quarter. It increased by 5 points in a single quarter.

To sum up, it means that SMIC’s revenue has increased slightly, its profits have soared, and its earning ability has been greatly improved.

However, from the perspective of revenue sources, on the one hand, in the context of global mobile phone shipments hitting a new high since 2015 (global smartphone shipments reached 340 million units in the quarter, an increase of 24% year-on-year), SMIC is a smartphone chip maker. The proportion of revenue brought by foundry has dropped significantly. On the other hand, SMIC’s highest-end process chips only stop at 14nm, and the proportion of revenue brought by 14nm process chips has also shown a downward trend.

Compared with TSMC, the global chip foundry leader, its latest financial report shows that the company’s revenue from 5nm process chip manufacturing has exceeded 20% in the two quarters, and half of its revenue is brought by 5nm and 7nm process chips.

In addition, more than half of TSMC’s revenue is from the mobile phone chip business, and more than 30% is brought by the manufacture of computer and server chips for world-renowned CPU or GPU giants such as AMD and Nvidia.

Therefore, TSMC’s business is getting more and more high-end, and it can even be said that large companies that do high-end chips will find TSMC. For example, major mobile phone chip manufacturers such as Apple, Qualcomm, and MediaTek all manufacture 5G chips by TSMC. Before Huawei was cut off from supply, all HiSilicon high-end chips could only be manufactured by TSMC.

Therefore, there is a technical gap between SMIC and TSMC, which is widening under the shadow of supply interruption.

So why is SMIC still making money?

This is because, from 2020 to the present, the global chip has been lacking crazy (why can read the chip lack such a ghost). Simply put, the demand for chips in all walks of life has exploded. Today, when the chip industry is highly divided, except for a few major chip manufacturers with their own chip manufacturing lines, such as Intel and Samsung, neither Apple, Qualcomm nor Nvidia have any chip manufacturing capabilities. The chip company is only doing the design of the chip, and finally the chip must be manufactured by a few chip foundries in the world.

Even masks, protective gloves and other anti-epidemic supplies suffered from severe shortage of production capacity during the epidemic, not to mention the high-end “jewel in the crown” level of high-end chips with complex production processes, highly specialized production processes, limited global supply of production equipment, and scarce engineers. In the manufacturing industry, when the demand increases, the production line expands slowly and cannot increase production in the short term.

For the majority of small and medium chip companies, it is even more impossible to build their own chip production lines. Therefore, no matter what process or level of chip orders, they must snatch the limited chip manufacturing capacity.

Demand exceeds supply, which naturally leads to price increases.

More importantly, although there is no advanced process (5nm, 7nm, 10nm such high-end chip process) revenue in SMIC’s business composition, in fact, the mature process of more than tens of nanometers in the global chip market share still accounts for the vast majority. most.

Then some students may have to ask. Now, when I look at the news about chips, they are all commercial 5nm, impacting 3nm, even IBM has come up with 2nm, TSMC has started to develop 1nm, why are dozens of nm antiques from several generations ago Is there such a big market for chips?

This is because, except for a very small number of chips used in mobile phones, computers, and servers, which require high-end manufacturing processes, the chips required for almost all Electronic components at present do not have such high process requirements.

For example, the most in short supply of automotive-grade chips used in automobiles, mainstream products of 28nm are considered high-end, while RF chips, memory chips, IoT chips and other seemingly high-end components actually do not have such high process requirements.

Therefore, when the big mobile phone chip manufacturers and computer chip manufacturers are fighting the bayonet in the “high-end player zone” of the chip manufacturing process, the vast majority of technology companies are still quietly using tens of nanometers or even microns. chip. This is the real broad market for the chip industry.

Although SMIC has no ability to sit on the table of the masters, it occupies a place in the public mahjong room.

In other words, SMIC’s production line can produce almost all chip products except for a few high-end chip products. At present, the most short-circuit chip companies are not the advanced process chip companies with deep pockets and the ability to seize TSMC’s production capacity, but the mature process chip companies that have to queue up a little later. Therefore, in the eyes of the Chinese people, SMIC, which is “incompetent in technology”, is actually a genuine sweet pastry in the chip industry. On the one hand, the production line is running at full capacity, and on the other hand, the OEM price is rising, which makes SMIC. International made a lot of money.

Even companies at the level of Qualcomm and Broadcom have many types of chips handed over to SMIC for foundry. Even in 2020, when they are blocked, their US customer revenue will account for a quarter.

Zhao Haijun, CEO of SMIC, even released the following words: “The company’s production capacity allocation principle is to give priority to satisfying customers who have long-term cooperation and common development with SMIC, and secondly to consider high-margin products, while maintaining close relationships with other customers. Communicate and negotiate to ensure the most important needs.” You can say whether you are crazy or not.

However, compared with other chip foundries, still being listed on the entity list is the biggest hidden danger of SMIC. When TSMC and UMC began to put aside their sleeves to introduce equipment and build production lines to expand production capacity, although SMIC had money, it really had nowhere to spend. If they wanted to expand production capacity, almost all the equipment and technologies they wanted to buy had to be approved by Americans. agree.

Gao Yonggang, Chief Financial Officer of SMIC, commented: “The entire market is developing positively this year. Under normal circumstances, the company should have continued its rapid growth last year. However, the company has been included in the entity list by the US government and is purchasing US-related products and technologies. The company is still facing uncertain risks in the second half of this year.”

Therefore, in the face of the golden age of explosive chip demand and making money, although SMIC, which is “surviving in the cracks”, can still continue to make money, the money is indeed not solid and unpleasant.