The good news is that SMIC's first 90 nanometer logic product shifted into mass production at its 300 millimeter wafer fab in Beijing last quarter. It also started mass producing Elpida Memory's 90nm, 512Mbit DDR2 DRAM and will do the same for Qimonda AG in the fourth quarter. Last quarter, 90nm contributed 4.9 percent of total wafer revenues. SMIC expects to ramp up its 65nm technology in the second half of 2007.

But like other parts of the IC supply chain, SMIC is suffering from an inventory build. Its average selling prices declined last quarter, and utilization rates have been declining for several months, hitting 84 percent in third quarter. That's the lowest in five quarters. "We continue to see customers going through a period of inventory correction carrying over into the fourth quarter. This inventory situation is improving and depending on the holiday sell-through, it may continue to improve," the company said in its earnings statement.

SMIC was also knocked by an increase in R&D, which hit $27.3 million, up 12.2 percent quarter on quarter. It attributed the higher cost to 65nm R&D activities and a decrease in R&D subsidies from the Chinese government. Foreign exchange losses also played a small role, as did increases in depreciation and amortization.

SMIC also cautioned that it may need to set money aside in case things go bad in a new lawsuit filed by rival Taiwan Semiconductor manufacturing Co. A few months ago, TSMC once again accused SMIC of using its stolen intellectual property. Saying the lawsuit is at a "very early stage," SMIC plans to review whether intangible assets acquired during the last settlement, including licensed patents, will lose their value. Those assets have a net book value of $99.5 million, the company said.

By: DocMemory
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