According to a report in Commercial Times, the leading Chinese semiconductor foundry, SMIC (Semiconductor Manufacturing International Corporation), released its financial report for the third quarter on the evening of November 7. Due to robust growth in wafer production capacity and sales, SMIC’s revenue in the third quarter increased by 14% sequentially to USD 2.17 billion, a record high, reaching the milestone of USD 2 billion in a single quarter for the first time.

As for the Q4 guidance, however, the forecast is relatively muted. According to its press release, SMIC forecasts a 2% year-over-year increase in revenue for the fourth quarter. The company also expects its gross profit margin for the fourth quarter to be between 18% and 20%.

According to a report in the Reuters, in its third-quarter earnings call, SMIC CEO Zhao Haijun noted that current oversupply conditions are prompting the company to adopt a more cautious approach to capacity expansion. Zhao pointed out that industry utilization rates are around 70%, well below the optimal 85%, reflecting significant overcapacity. He warned that this overcapacity, especially in mature node chips, is likely to persist through 2025, if not worsen. As a result, SMIC was cautious on building new capacity.

In its press release, SMIC reported a 34% increase year-over-year in revenue for the period, reaching USD 2.17 billion. The gross profit was USD 444.2 million, and the gross margin was 20.5%, compared to 13.9% in 2Q24 and 19.8% in 3Q23.

According to Commercial Times, citing Wallstreetcn, SMIC’s financial report indicated that its wafer sales in the third quarter increased by 38% year-over-year to 2.122 million units. Additionally, the company added a monthly production capacity of 21,000 12-inch wafers in the third quarter, further optimizing its product structure and increasing the average selling price.

The Commercial Times report pointed out, citing Wallstreetcn, in terms of revenue composition, the revenue share from 8-inch wafers dropped by 4.5 percentage points from the previous year to 21.5%, while the revenue share for 12-inch wafers reached 78.5%.

According to another report by Reuters, SMIC is primarily known for producing mature node chips for standard electronic devices. However, the company is also involved in manufacturing advanced chips for Huawei’s high-end smartphones, including the Mate 60, launched last August, and the Pura 70 series, released in April.

According to a report from Wccftech, it was rumored that SMIC is able to produce 5nm chips for Huawei this year, without the need for extreme ultraviolet (EUV) lithography machines manufactured by Dutch company ASML, but later it was indicated that Huawei’s next Kirin SoC for the Mate 70 Series will still be limited to the 7nm process but will utilize a more refined “N+3” node, according to another report by Wccftech.

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• [News] Huawei’s Mate 70 Will Reportedly Use a Kirin SoC Made with SMIC’s 7nm Node instead of 5nm
• [News] SMIC Reportedly to Manufacture 5nm Chips for Huawei Without EUV Machinery

The U.S. Federal Reserve announced a 25 bps rate cut to 4.5%-4.75% at its monetary policy meeting on November 7, aligning with market expectations.

In its statement, the Fed removed the phrase “job gain have slow” and replaced it with “Since earlier in the year, labor market conditions have generally eased.” Additionally, the Fed dropped the language stating it had “greater confidence that inflation is moving sustainably toward 2 percent,” and reaffirmed the committee’s view that risks related to both inflation and employment are now roughly balanced.

Regarding future monetary policy adjustments, the Fed eliminated the reference to “the progress on inflation and the balance of risks” and reiterated that it will continue to base rate adjustments on current economic data, outlook, and the balance of risks. The Fed also emphasized that it will persist in reducing its holdings of Treasury securities, agency debt, and MBS to achieve maximum employment and a return to 2% inflation.

Overall, the Fed’s stance has shifted from the highly dovish position in September to a more neutral one. Unlike the previous meeting, where one member dissented on a 50 bps rate cut, this time all members supported a 25 bps cut, reflecting the resilience of the U.S. economy and a diminished perception of downside economic risks.

Read more at Datatrack

According to FedWatch data, the market now anticipates that the Fed will cut rates by 25 bps each in January, March, and June of 2025, bringing the rate down to 3.75%-4%, compared to the previous expectation of four 25 bps cuts in 2025.

(Source: FedWatch)

Post-Meeting Press Conference Q&A Highlights

Q1: One year ago, the 10-year Treasury yield was at 5%, while the 30-year mortgage rate stood at 8%. At the time, the Federal Reserve expressed concerns that further rate increases could pressure the economy. Now, despite the Fed easing restrictive policies, the 10-year Treasury yield continues to climb. How does this differ from the risks seen a year ago?
A1: The Federal Reserve acknowledges the rise in Treasury yields. However, these increases may more accurately reflect stronger-than-expected U.S. economic growth or a reduction in downside risks related to a potential recession.

Q2: Given the current economic environment, is the September SEP (Summary of Economic Projections) rate path still relevant?
A2: Overall, economic performance has indeed surpassed expectations. The upward revisions in NIPA (National Income and Product Accounts), strong September employment, and robust October retail data all support this view. As a result, downside economic risks have diminished, and we will continue to incorporate such factors into our assessments. Additionally, we have upcoming reports in December, including one more employment report, two inflation reports, and other economic data, which we will use to inform further policy decisions.

Q3: The latest PCE (Personal Consumption Expenditures) growth is 2.1%, which is very close to the Fed’s target, yet core PCE remains at 2.7% and has been steady at this level since July. Why did these figures not prompt the Fed to pause rate cuts at this meeting?
A3: The 3-month and 6-month annualized core PCE growth stands at 2.3%, indicating notable progress on inflation. However, we expect some volatility. For example, the core PCE annual growth rate was exceptionally low in the last three months of last year but saw a seasonal uptick in January 2024. We anticipate further declines by February next year. Currently, core PCE excluding housing services and goods (approximately 80% of core PCE) has already fallen to 2%—comparable to levels in 2000—and housing services inflation should ease as new lease agreements are signed. Moreover, labor market conditions are no longer contributing to inflationary pressures. While we are not declaring a full victory over inflation, we are confident that inflation can steadily decline to 2% within this scenario without being disrupted by one or two months of short-term data fluctuations.

Q4: Is the Federal Reserve actively working toward achieving a neutral rate, or does the Fed have a timeline for reaching this neutral rate target?
A4: Given the current economic landscape, the Federal Reserve is not rushing to reach a neutral rate. As long as the economy remains strong, we believe we can identify a reasonable rate path that balances the risks of easing policy too quickly or too slowly.

Comparison of the September and July FOMC Statements

Amid the passion of the wild election, U.S. chip giant Qualcomm reported an upbeat first-quarter (ended December 31) sales forecast, with revenue rising between USD 10.5 billion and USD 11.3 billion, eyeing for an over 10% quarter-over-quarter growth at most. The strong momentum, according to a report by Reuters, could be attributed to the smartphone market recovery led by China.

Boosted by New Smartphone Launches led by Xiaomi, Oppo

It is worth noting that China remains Qualcomm’s largest market, and the momentum is driven by new smartphone releases from brands like Xiaomi, Oppo, and Vivo, according to the report. Qualcomm has derived 46% of its revenue in its most recent fiscal year from customers with headquarters in China, Reuters says.

A previous report by the South China Morning Post suggests that China’s smartphone maker Xiaomi will be the first to equip Qualcomm’s newly-released Snapdragon 8 Elite with its Xiaomi 15 series at the end of October, followed by other local smartphone brands such as Honor, Oppo’s OnePlus and Realme.

As the smartphone market starts to rebound following a challenging 2023, Qualcomm’s positive outlook is said to be driven by consumers upgrading devices for AI applications like chatbots and image generation tools, Reuters notes.

Business Expansion beyond Apple Remains Key  

On the other hand, Qualcomm is working hard to diversify its revenue streams in anticipation of the eventual end of its profitable partnership with Apple, which is developing its own modem chips to replace Qualcomm’s. According to Reuters, though the agreement to supply chips to Apple lasts until at least 2026, attention is on whether Qualcomm’s expansion into laptops and AI-driven data centers will grow swiftly enough to balance any future reductions in Apple-related revenue.

Regarding the potential impact if President-elect Donald Trump does impose broad tariffs of 10% to 20% on nearly all imports, with potential tariffs exceeding 60% on Chinese goods, Reuters notes that if higher tariffs were applied to chips from Taiwan, though rather unlikely, could incentivize Qualcomm to shift manufacturing to the U.S.

For the fourth quarter (ended September 30), Qualcomm posted a net income of USD 2.92 billion, or USD 2.59 per share, marking a significant increase from last year’s USD 1.49 billion, or USD 1.23 per share. The company’s total revenue for fiscal 2024 reached USD 38.9 billion, a 9% rise compared to 2023, according to its press release.

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• [News] Qualcomm Rumored to Decide Its Next Move Regarding Potential Intel Acquisition after US Election

(Photo credit: Qualcomm)

Following previous controversies of supplying 7nm chips to Huawei through proxies, TSMC has reportedly notified all its AI chip customers in China by formal emails that starting next week (November 11), it would halt shipments of all the 7nm and more advanced chips to its AI/GPU clients there, according to Chinese media outlet ijiwei.

While this decision may temporarily reduce TSMC’s business in China, in the long run, TSMC could gain more opportunities in the U.S. market by complying with American regulations, the report says.

According to ijiwei’s analysis, TSMC’s move, which highlights the foundry giant’s delicate position in the global semiconductor supply chain amid the heating chip war between the world’s two superpowers, could become a watershed moment in the future of technology development, with long-lasting impacts.

According to the ijiwei report, with the newly elected Trump claiming that TSMC should pay a “protection fee,” the company’s latest move seems to be an effort to align itself with the U.S. Department of Commerce. The two parties, together, have created a stringent review system to completely block advanced process from China’s reach, the report notes.

According to another media outlet SEMICONVoice, the U.S. Department of Commerce has reportedly instructed TSMC to make the move, as production could only proceed after being reviewed and approved by the U.S. Department of Commerce’s BIS (Bureau of Industry and Security) and receiving a license. This would effectively tighten the availability of advanced 7nm and below processes for all Chinese AI chips, GPUs, and autonomous driving ADAS systems, the report notes.

According to the latest report by Bloomberg and Reuters, TSMC has almost finalized binding agreements for multi-billion dollar grants and loans to back its U.S. factories, which may allow it to receive the funding from the Biden administration soon.

TSMC’s package, announced in April, includes USD 6.6 billion in grants and up to USD 5 billion in loans to aid the construction of three semiconductor factories in Arizona.

On the other hand, TSMC’s decision would be a major blow to China’s AI ambition, as AI and GPU companies in China will no longer have access to TSMC’s advanced process, which could lead to higher costs and longer time-to-market, and significantly impact their product performance and market competitiveness, the ijiwei report states.

A supply chain reshuffle is likely to follow, as Chinese chip design companies may need to seek alternative foundries, according to the report.

China’s SMIC, currently the world’s third largest foundry, is said to successfully produce 5nm chips using DUV lithography instead of EUV. However, as previously reported by the Financial Times, industry sources have indicated that SMIC’s prices for 5nm and 7nm processes are 40% to 50% higher than TSMC’s, while the yield less than one-third of TSMC’s.

According to TrendForce, as of the second quarter of 2024, SMIC maintains a solid 5.7% market share, securing its position in third place, after TSMC (62.3%) and Samsung (11.5%).

Read more

• [News] TSMC Reportedly Halts Shipments to Chinese Firm Sophgo After Chip Found in Huawei Processor

(Photo credit: TSMC)

Taiwan’s semiconductor factories operate around the clock, consuming significant amounts of electricity. Taiwan Power Company has raised industrial electricity rates twice this year, and the financial impact is now starting to appear in corporate earnings.

According to Economic Daily News, TSMC Chairman C.C. Wei highlighted in the recent earnings call that Taiwan’s electricity rates have become the highest among regions with wafer fabs. TSMC warned that rising power costs and inflation could reduce its. gross margin by one percentage point. GlobalWafers, a major supplier of semiconductor wafers, also reported lower-than-expected gross margins for Q3, acknowledging energy costs as a key factor.

Wei stated that Taiwan’s electricity rates increased by 14% in October, following hikes of 15% in 2022 and 17% in 2023, with a further 25% increase anticipated in 2024. While TSMC’s third-quarter gross margin surpassed expectations at 57.8%, driven by high capacity utilization, the company projects margins could edge toward 58% this quarter. However, Wei cautioned that surging electricity costs and the costly transition from 5nm to 3nm technology are likely to dampen these gains.

The Economic Daily News report noted that GlobalWafers posted a 30% Q3 gross margin, falling short of market forecasts. Chairman Doris Hsu attributed the shortfall to four main factors: rising electricity costs worldwide, increased depreciation due to investments in multiple plants, declining silicon carbide prices, and changes in product mix, which lowered revenue and margins.

Hsu pointed out that energy is the second-largest production cost for GlobalWafers, comprising 8–9% of total expenses. At the company’s Texas facility, the unit cost of electricity is roughly one-third of Taiwan’s rate. If energy costs remain low and exchange rates are favorable, the gross margin for U.S. plants could slightly exceed that of Asian plants, excluding depreciation differences due to the longer operational history of Asian facilities.

Taiwan Power recently raised industrial rates again in October and announced a carbon fee for 2026. Hsu estimated that a carbon fee of NT$300 per ton could impact Taiwan’s production costs, reducing gross margins by 0.5 to 0.7 percentage points on a consolidated basis.

Establishing production facilities in North America offers logistics advantages by bringing production closer to clients and reducing shipping costs. Hsu explained that transporting a 300mm (12-inch) wafer from Japan to Europe currently costs ¥300, set to rise to ¥550 in November. Shipping to the U.S. would cost even more, but distribution from Texas would significantly reduce these expenses. GlobalWafers’ Texas facility is expected to complete construction by the end of 2024, with mass production slated for late Q1 2025.

TSMC’s first North American wafer fab is expected to begin production in Q1 2025, with two additional fabs set to meet customer demand by 2028 and 2030. Focused on operational efficiency, TSMC aims to leverage AI tools to boost productivity, with each 1% improvement projected to add $1 billion to profits.

(Photo credit: TSMC)