Semiconductor Manufacturing International Corp. (SMI) is a semiconductor wafer fabrication manufacturer, or foundry, based in Shanghai, China. The company makes semiconductor wafers containing multiple copies of integrated circuits (ICs) based on a customer's design or those of customer-affiliated designers. As the only pure play mainland Chinese semiconductor foundry, the company is tapping into domestic demand growth with the Rise of China's Middle Class.
SMI is a manufacturer, and operates its factories throughout mainland China. The company has taken advantage of local tax incentives spurred by Chinese municipalities to gain tax incentives and foster relationships throughout the country.
Strategic alliances with Chartered Semiconductor Manufacturing (CHRT), Toshiba (TOSBF), Infineon Technologies AG (IFX), Fujitsu Limited (FJTSY), Motorola (MOT), ARM, Elpida Memory, Inc. and IMEC have provided access to intellectual property (IP) associated with a variety of semiconductor process technologies. Other services include libraries and circuit design blocks, in-house photomask capability, wafer probing, assembly/test and design support.
In 2009, SMI incurred a net loss of $213.6 million on revenues of $20.9 million. This represents a turnaround from 2008, when the company generated a net income of $92.0 million on revenues of $208.5 million.
SMI operates through one reportable segment which manufactures and sells semiconductor wafers.
As the withdrawal from the DRAM business demonstrated, changes in SMI's business can cause negative financial results, due to distances to the utilization of the factories. This is because SMI needs to run its factories at full-steam to make itself profitable, due to the high level of fixed costs involved in its business. Decreases in business caused by issues with suppliers, fewer orders, or any other volatility would amplify the negative operating profitabiliy of the company, as it needs to continue to pay its laborers and researchers, depreciate its capital investments, and have "lights-on" at the plant for the capacity that is being used.
As one of the world's largest developing markets, the potential for semiconductor consumption in China is huge. SMI has nurtured its relationship with domestic semiconductor companies, and has it advantage as the "local" foundry. At present, approximately 10% of its sales come from domestic chip design firms. Other once-luxury goods that are demanded by Chinese consumers with newly disposable income include computers, cars, and other electronics. SMI is poised to take advantage and gain sales if domestic consumers turn to domestic consumer electronics companies.
The decreased political tensions, and easing of economic restrictions between China and Taiwan opens up the mainland to investment by SMI's chief competitors: Taiwan Semiconductor Manufacturing Company (TSM) and United Microelectronics (UMC). In the past TSM has tangled with SMI legally over IP Theft, and SMIC settled for $175 million. SMI is still getting legal attention from TSM. The opening of borders between the two territories can either allow for increased competition if the competition chooses to grow organically, or a strategic acquisition, if they choose to solve the issue by acquiring the competition. For TSM, this would give them further capability in China, and solve many of the legal issues. For UMC, it would help to purchase manufacturing power in cheaper China.