China’s SMIC hit by sliding DRAM prices

Semiconductor Manufacturing International Corp. (SMIC), China’s largest chip maker, saw its average selling price (ASP) drop 10 percent during the first quarter due to falling prices for DRAM (dynamic RAM) chips, the company said Friday.

“The majority of the ASP drop is due to DRAM pricing,” said Richard Chang, SMIC’s president and chief executive officer, during a conference call with investors on Friday. DRAM is the main memory type used in PCs.

The lower DRAM prices helped push down SMIC’s first-quarter ASP to $829, as compared to the previous quarter when the company’s ASP was $917. The effect on SMIC’s bottom line was magnified by the company’s increased DRAM production during the first quarter. DRAM chips accounted for 33 percent of SMIC’s first-quarter production, compared to 20 percent during the final quarter of last year, according to the company.

Overall, SMIC had a tough first quarter. It reported a first-quarter net loss of $30 million on revenue of $249 million. By comparison, the company reported a net profit of $27.5 million on revenue of $187 million for the same period last year.

“That was the worst quarter ever for SMIC, but I think the second quarter will be better,” said Helen Lau, an analyst at Celestial Asia Securities Holdings, in Hong Kong. Nevertheless, Lau still expects SMIC to post a net loss of $21 million for the second quarter.

The first-quarter net loss was in line with market expectations, Lau said, adding that she was encouraged by signs of strong demand for the company’s chip-making services.

In addition to lower DRAM prices, high inventory levels among chip vendors worldwide slowed demand. SMIC’s first-quarter capacity utilization rate was 85 percent, down from 95 percent during the last quarter of 2004, the company said. The figure refers to the proportion of a company’s total chip-making capacity being used.

The uptick in SMIC’s DRAM output is attributed to increased production at Fab 4, the company’s first 300-millimeter chip fabrication plant. At present, Fab 4’s entire production capacity is being used to manufacture high-speed DDR2 (double data rate 2) memory, Chang said. That production is likely for German chip maker Infineon Technologies, which uses SMIC to produce some DRAM chips under contract.

Looking ahead, DRAM production could rise to 35 percent of SMIC’s total output during the second quarter, Chang said. “The customer wants us to make more DDR2,” he said, adding that increased production of higher priced DDR2 should help offset the effect of lower prices for other DRAM types.

Fab 4 will continue to produce only DRAM chips during the second quarter, Chang said. The plant is expected to begin producing logic chips using a 90-nanometer production process during the last part of the third quarter or during the beginning of the fourth quarter, he said.

Despite a generally slow first quarter for chip makers, Chang said prospects are looking up for the industry. “The second half of this year is going to have a stronger recovery,” he said.