Semiconductor Foundry

What a foundry does

A foundry turns other companies chip designs into finished wafers. The design firm keeps the intellectual property and the customer relationship; the foundry owns the fab, runs the lithography, etching, deposition and testing steps, and ships wafers to a packaging firm. SMIC describes its own service this way: semiconductor foundry and technology services to global customers on 8-inch and 12-inch wafers (Q2 2026 results announcement). The wafers then go to outsourced assembly and test firms such as those on the semiconductor packaging and testing node.

Foundries split into two kinds. Leading-edge foundries compete on the smallest process nodes for phone and AI processors. Specialty foundries compete on mature nodes and special processes: power devices, embedded memory, microcontrollers, sensors and radio frequency chips, where reliability and cost matter more than transistor density. China two listed foundries cover both ends of that split, but neither leads at the leading edge.

Where China stands

TrendForce puts the top ten foundries combined revenue at US$53.49bn in the second quarter of 2026, up 11.5% quarter on quarter to a record (TrendForce top ten foundry ranking, Q2 2026). TSMC took 72.5% of it at nearly US$40.2bn. Samsung was second at US$3.26bn and 5.9%, then SMIC third at US$3.01bn and 5.4%, up 20.0% quarter on quarter, narrowing the gap with Samsung. Hua Hong Grace was sixth at US$1.27bn and 2.3%, up 3.5%.

The Chinese position is therefore third and sixth in the world, with a combined share under 8% against one firm at 72.5%. SMIC is the scale play: monthly capacity above one million 8-inch equivalent wafers, 93.7% utilisation in the quarter, and 90.2% of its second-quarter revenue from mainland China. Hua Hong is the specialty play: record shipments and ten straight quarters of sequential revenue growth, built on domestic demand for microcontroller, flash, power and logic chips.

Economics

Foundry margins track node mix. SMIC earned a 25.3% gross margin in the second quarter of 2026 and 22.9% for the half (SMIC Q2 2026 results announcement; SMIC 2026 interim results announcement). Hua Hong earned 16.5% in the quarter and 14.8% for the half (Hua Hong 2026 interim report). Both are far below TSMC economics, and both are spending heavily to grow: SMIC capital expenditure was about US$3.4bn in the half, Hua Hong US$356.6m in the second quarter alone, mostly for 12-inch capacity. New fabs add depreciation before they add profit, which is why Hua Hong profit, though up 409% in the half, is still only US$59.57m on US$1.378bn of revenue.

What to watch

• SMIC pricing power. The company guided third-quarter revenue up 2% to 4% sequentially with a 26% to 28% gross margin. Whether average selling prices keep rising as new capacity qualifies is the test of its 25.3% second-quarter margin.
• Hua Hong Fab 9 ramp. Wuxi Phase II planned monthly capacity of 83,000 wafers was fully moved in by the end of June 2026. How fast that capacity converts into revenue at margins above the 14.8% half-year level decides whether the specialty model scales.
• Consolidation. Hua Hong interim report says it is progressing a proposed acquisition of 97.5% of Huali Micro. A completed deal would make China second foundry materially larger in the same mature-node market.

Our view: China foundry strength is domestic demand plus capacity, not process leadership. SMIC closing on Samsung for second place is a ranking story, not a technology story: the gap to TSMC is more than thirteen times SMIC revenue. The investment question is narrower, whether mature-node pricing and utilisation hold up while both firms add capacity into the same domestic market.