SMIC's bid for profitability falls short

China's largest chip maker reports $35.1 million loss for the third quarter

Semiconductor Manufacturing International Corp. (SMIC), China's largest chip maker, reported a loss of $35.1 million for the third quarter, falling far short of an earlier pledge by its top executive that the company would turn a profit in the period.

In February, SMIC President and Chief Executive Officer Richard Chang promised investors the contract chip maker would show a profit for the full year 2006, with particular emphasis on the third quarter, which is traditionally the strongest quarter of the year for chip makers. The company seemed to be moving in the right direction in the second quarter when a $18.9 million tax credit helped it nose into the black with a $2.2 million profit. But it slid backwards in the third quarter.

The second quarter was SMIC's first quarterly profit since the third quarter of 2004.

Despite that boost, the third quarter proved tougher than expected. "SMIC is undergoing a very difficult time," Chang said, speaking to analysts on a conference call Tuesday.

SMIC reported revenue of $368.9 million, up 19 percent over the previous year. However, the company's losses during the period increased by 34 percent, from $26.1 million during the same period last year.

Chang blamed tough competition and weaker demand for the losses. "We see some of our competitors actually lower their pricing very much. ...We don't like it, but we have to comply to the market trend," he said.

SMIC also struggled with production issues, Chang said, citing problems ramping up production at its 300-millimeter chip plants and difficulties moving the production of some DRAM (dynamic RAM) chips to a 90-nanometer (nm) production process. The 90-nm process accounted for 4.9 percent of SMIC's revenue during the period, but production issues hurt the company's average selling price.

"Our [DRAM] yield was not very high," Chang said, promising that the company will do "much better" during the fourth quarter.

Hoping to see the company return to profitability, SMIC has slashed its capital expenditure forecast for 2007 from $1.1 billion to $700 million, down from around $1 billion this year. Instead of focusing on expanding capacity next year, the company will focus its efforts on improving management, Chang said.

Lower capital expenditures and a coming drop in depreciation costs should help put the company back into the black early next year, Chang said. "Our profitability will start to show," he said.