SMIC, the largest Chinese foundry by capacity, has decided to accelerate in 2026 to respond to the strong domestic demand for semiconductors. The company plans to add approximately 40,000 12-inch wafer equivalents per month of new capacity by late 2026, after incorporating another 50,000 during 2025. However, the message comes with small print: this expansion involves more factories, more equipment, and above all, more depreciation. In the earnings call, co-CEO Zhao Haijun projected a rough 30% increase in depreciation costs during 2026, exerting direct pressure on gross margins.
The market responded to the “grow strongly now, pay the accounting cost later” strategy. SMIC’s shares in Hong Kong dropped nearly 4% after the company also indicated flat revenue growth for the current quarter compared to the previous one, and warned about the impact of depreciation on margins.
Why growth tightens margins
In a foundry, CapEx isn’t just “noticed” when a machine is purchased; it translates into depreciation over years. SMIC admits that it has maintained high investment levels to accelerate capacity and capture local designer demand, but this pace “eats into” short-term margins.
Furthermore, the company acknowledges logistical frictions: it pre-bought critical equipment, but some auxiliary equipment is still pending, which can cause timing mismatches and prevent already acquired tools from reaching full production as quickly as planned.
Domestic demand and the shift toward “local” manufacturing
Zhao framed the expansion within a structural change: the supply chain, which previously relied heavily on external sources to serve the Chinese market, is shifting toward domestic production. Within this transition, SMIC sees traction in several chip families, starting with analog, followed by display controllers, image sensors and memory, then microcontrollers (MCUs), and finally logic.
In terms of geographical exposure, the business remains highly concentrated: China contributed 87.6% of Q4 revenue, while the U.S. accounted for 10.3%.
“AI effect”: rising memory costs and pressure on the rest
Another key point from the discussion was the indirect impact of Artificial Intelligence on the supply chain: SMIC warned that strong demand for AI-oriented memory is tightening supply for other segments, especially mid- and low-range mobile devices, creating tensions in availability and costs.
Quarterly figures: growth but with margins under close watch
In its results, SMIC reported a 60.7% increase in profit and revenues of $2.49 billion, representing a +12.8% rise, surpassing forecasts from LSEG.
Operationally, its monthly capacity rose to 1.06 million 8-inch wafer equivalents (+3.5% quarter-on-quarter), and utilization remained very high at 95.7%.
For investments, CapEx in 2025 was $8.1 billion (+10.5% YoY), and Zhao expects a similar level in 2026, reinforcing the idea that capacity remains the top priority, even if it short-term margins.
Background: technological sovereignty and major local clients
Although SMIC doesn’t usually disclose client details, the context of “localization” is closely linked to major national champions. Reports based on analyses by firms like TechInsights have connected SMIC with the manufacturing of advanced chips for Huawei over recent quarters, indicating how the Chinese ecosystem is attempting to complete the loop (design + manufacturing + finished product) despite Western restrictions.