The semiconductor industry has always been a focal point of attention due to its rapid changes over the years, and for China's leading chip manufacturer, Semiconductor Manufacturing International Corporation (SMIC), this year could very well mark a turning point with significant changes on the horizon. What exactly is this turning point, and will it bring about a positive reversal?

Semiconductors, as a crucial industry for high-end manufacturing, have always been the subject of speculation with every slight movement. Recently, SMIC, the industry leader, released its financial report. According to the report, the fourth-quarter revenue was $1.621 billion, a sequential decline of 15% and a year-on-year increase of 2.6%. In summary, the overall performance met the internal expectations, but it was also within the realm of possibility. In fact, during the third-quarter communication meeting, SMIC had already expressed a rather pessimistic outlook for its development in the coming year. This is because the entire industry is still in a phase of reducing capacity. Although there has been an increase in automotive semiconductors, this is not enough to compensate for the decline in the mobile phone industry chain.

So, why is this year considered a turning point?

There are several reasons for this. First, the utilization rate of production capacity has declined, indicating a decrease in downstream market demand. Looking at the data from the fourth quarter of last year, the utilization rate was only 79.5%, which is not ideal. The company has also clearly stated that if the proportion of the mobile phone industry can recover to around 35% and the proportion of consumer electronics can reach around 30%, then the company's production capacity utilization rate could return to around 90%.

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However, the key point is that the entire industry is in this state, including companies like United Microelectronics Corporation (UMC) and GlobalFoundries. Many wafer fabs have seen their utilization rates drop to 70%, or even lower, and this situation cannot be changed in the short term. In the wafer manufacturing sector, half of the revenue is contributed by the mobile phone and consumer electronics sectors.

But looking at the data, last year's shipments of smartphones in China declined significantly, and it is not easy to boost mobile phone sales. This is because since 2016, the mobile phone industry has been in a continuous downward trend, with innovation accounting for a large part of the reason. Why do we say this?

In smartphones, an important point is that chips have reached the 4-nanometer level, and pixel counts have reached 100 million. In fact, making new innovations is not that easy anymore. We can see from the changes in mobile phones over the years that most of the changes are in charging speeds or appearances, such as folding screens, and there is relatively less innovation than before. Although the rise of automotive intelligence in recent years has brought an increase in chips overall, for those wafer fabs, the order prices for mobile phones are much better than those for automotive, so it is also not easy to make up for the loss.

There is also the issue of pricing. The price war has already arrived. UMC has taken action on pricing, stating that it will reduce prices for customers who place orders in the second quarter by about 10-15%. Samsung has also done the same, reducing prices for mature wafers by about 10%. Overall, more and more wafers will be reduced in price because, no matter what, there is still an overcapacity, so prices will definitely decline. This is definitely not favorable for SMIC.

In addition, equipment depreciation is also a problem. Wafer fabs often require investments of tens of billions, and after the initial capitalization, they face a huge amount of depreciation, which will greatly erode profits. This is inevitable. In recent years, SMIC has been building factories quite densely, with significant investments, mainly in Shanghai, Beijing, Tianjin, and Shenzhen, all of which have expanded capacity, and the project progress is almost the same. So in the next few years, it will enter a peak period of depreciation, which is still very stressful for SMIC.

Moreover, about 70% of SMIC's current customers are domestic, with only about 30% being overseas. So it is clear that the focus of SMIC's performance is still on the choices of domestic customers. Therefore, for SMIC, if domestic customers can strongly support and domestic demand increases significantly, and the market can recover quickly, then this year is indeed a turning point for SMIC. However, if these domestic customers are attracted away by the low prices mentioned earlier, then it would be disastrous for SMIC.However, compared to other industries, the semiconductor industry is undoubtedly a major industry with an extremely long period of prosperity. It has always followed a cyclical pattern. From a historical perspective, it generally takes about three years, regardless of whether the turning point is in a positive direction or temporarily declines, it is actually normal and within the normal range of fluctuations. Regardless, the trend of rising will not change.