SMIC Expands Capacity as AI Chip Demand Beats Forecasts

China's Top Foundry Races to Keep Pace With the AI Boom

Semiconductor Manufacturing International Corporation (SMIC), China's largest contract chipmaker, is weighing the installation of additional equipment in its factories after demand for mature-node chips used alongside AI processors surged beyond expectations, according to company management.

Speaking after the company released second-quarter results on Thursday, co-CEO Zhao Haijun told analysts that customer orders had increased significantly from forecasts made earlier this year, driven by a global artificial intelligence infrastructure boom that is triggering shortages across the supporting chips AI servers rely on. "Future wafer starts are far exceeding our previous expectations," Zhao said, referring to the volume of new chip batches entering the production line.

Tags: SMIC, semiconductor foundry, AI chips, chip capacity, wafer demand, Zhao Haijun, chip prices, mature-node chips, BCD power management, China tech, AI infrastructure, semiconductor equipment

Foundry Runs Near Full Capacity as Wafer Orders Pile Up

The demand surge arrives with SMIC already operating close to what management called its practical capacity limit. The foundry's capacity utilisation rate reached 93.7 per cent in the second quarter, up from 93.1 per cent in the previous three months, according to its earnings report. Wafer shipments rose 14.4 per cent quarter on quarter, while monthly production capacity increased to the equivalent of about 1.1 million 8-inch wafers.

Zhao noted that SMIC intended to cap utilisation at around 95 per cent, reserving roughly 5 per cent of capacity for research and development rather than pushing facilities to full operational limits. The company is adjusting its expansion plans and may install additional equipment at existing sites where space is available, with further details to be disclosed in upcoming announcements or briefings.

Supporting Chips Drive Orders Visible Through 2027

The most intense demand is coming from the ecosystem around AI processors rather than the processors themselves. Zhao singled out supporting chips in AI servers and data centres – including logic chips, power-management products and optical module components – as areas of particular strength. Orders for BCD (bipolar-CMOS-DMOS) power-management products were visible through the end of 2027, he added.

The pattern reflects how the AI build-out is reshaping the semiconductor value chain: as hyperscalers and AI startups race to secure graphics processors and accelerators, the surrounding components that manage power, signal integrity and optical connectivity are becoming bottleneck items in their own right. For mature-node foundries like SMIC, which cannot produce the most advanced processors, this spillover demand has become a profitable second pillar.

The dynamics echo what executives at rival foundries have described in recent quarters. As leading-edge capacity is absorbed by flagship AI accelerators, the mature-node fabs that produce the glue logic, voltage regulators and interconnect components around those accelerators are running at near-record utilisation. SMIC's comments suggest that the bottleneck is no longer confined to the most advanced processes but has spread across the entire AI supply chain, from power-management chips that keep server racks stable to the optical modules that move data between machines.

Price Hikes Spread as Shortages Bite

The tightness is translating into pricing power. SMIC raised prices on some supply-constrained products after client negotiations earlier this year, although the increases did not cover its entire portfolio. Smartphone chips and display-driver integrated circuits were not subject to the increases due to weakness in consumer electronics.

Further price increases remained likely as shortages spread and customers scrambled to secure capacity for next year, Zhao added, particularly if smartphone and consumer electronics demand recovers. The selective approach suggests SMIC is balancing margin gains against the risk of alienating clients in softer end-markets.

The pricing stance marks a notable shift for an industry long accustomed to oversupply. For much of the past two years, Chinese foundries competed for orders in a market flooded with mature-node capacity, keeping prices under pressure. The AI-driven squeeze has inverted that dynamic, at least for the components tied most directly to data-centre build-outs, and SMIC's guidance implies management expects the tightness to persist into the second half of the year rather than fade as a short-term spike.

Second-Quarter Results Show Momentum Building

For the quarter ended June 30, SMIC reported revenue of US$3.01 billion, up 20 per cent sequentially and 36.1 per cent year on year. Gross margins expanded to 25.3 per cent from 20.1 per cent in the first quarter. The company expects third-quarter revenue to grow an additional 2 per cent to 4 per cent quarter on quarter, with gross margins widening further to between 26 per cent and 28 per cent.

Domestic clients continued to drive the bulk of business, with China accounting for about 90 per cent of second-quarter revenue. The US and Eurasia contributed 8 per cent and 2 per cent, respectively. While sales grew across all three geographic regions, China led with the fastest growth at 22 per cent sequentially – a surge Zhao attributed to AI-related chip demand, returning overseas orders, and ongoing supply-chain localisation. SMIC's Shanghai-listed shares rose 1.04 per cent by the midday break on Friday, while its Hong Kong-listed shares gained 1.92 per cent.

Japan's Chip Supply Chain Stands to Benefit

SMIC's expansion plans carry direct implications for Japan, one of the world's most important suppliers of semiconductor manufacturing equipment and materials. Japanese firms such as Tokyo Electron and Screen Holdings are leading producers of the etch, deposition and cleaning tools that mature-node foundries need to add capacity, while Japanese materials makers supply photoresists, silicon wafers and specialty gases.

Yet the relationship is constrained by export controls. Tokyo has restricted shipments of advanced chipmaking equipment to China since mid-2023, aligning with US policy aimed at slowing Beijing's semiconductor ambitions. SMIC's new investment is concentrated in mature-node capacity rather than cutting-edge processes, a segment that falls outside the strictest restrictions but still relies heavily on Japanese tools. Meanwhile, Japan's own semiconductor revival – led by Rapidus's bid to manufacture 2-nanometre chips and TSMC's expanding Kumamoto fab – means Tokyo is competing with China for the same equipment supply, a factor that could keep lead times long and prices firm across the industry.

For Japanese suppliers, the export-control balance is a commercial tightrope. Advanced tools bound for Chinese fabs face licensing hurdles, but mature-node equipment – deposition systems, etching tools and inspection gear – remains a substantial and growing market. SMIC's plan to add equipment at existing sites, where infrastructure such as cleanroom space and utilities is already in place, favours toolmakers that can deliver retrofit and expansion hardware quickly. That plays to the strength of Japanese vendors, which have long dominated the segments where SMIC is now signalling demand.

What to Watch For

Three signals will determine how far SMIC's capacity push goes. First, the company's next announcements on specific equipment purchases will show whether the expansion is incremental or structural, and which suppliers win the orders. Second, third-quarter guidance of 26 to 28 per cent gross margins will test whether pricing power persists as new capacity comes online across the industry. Third, the trajectory of consumer electronics demand will decide whether price increases broaden beyond AI-related products.

For Japan's equipment and materials sector, the immediate takeaway is encouraging: a major customer is signalling years of elevated orders, with BCD power-management demand already visible through 2027. The longer-term question is whether export-control policy and geopolitical competition will keep China's foundries dependent on Japanese tools – or push them, as Beijing intends, toward deeper self-sufficiency.

By Kenji Tanaka, Staff Writer

This article was produced with AI-assisted research and editorial support. Sources: South China Morning Post, TrendForce, Investing.com.