China's two biggest chip foundries just posted their best quarters ever, and the export bans meant to slow them down look like they did the opposite.
SMIC's net profit jumped 261.7% year over year in the second quarter to $479.2 million. Revenue crossed $3 billion for the first time, up 36.1% from a year earlier. First time ever. According to Global Times, Hua Hong Semiconductor's net profit soared 385.9% to $38.6 million on record revenue of $717.5 million. Both companies pointed to the same driver: a surge in orders for chips that support China's domestic AI buildout, at a moment when Washington has spent years trying to choke off Beijing's access to advanced silicon.
Margins Up, Fabs Maxed Out #
SMIC co-CEO Zhao Haijun told investors the company expects AI-related chip demand to climb another 40% in the third quarter, according to Global Times. Gross margin at SMIC rose to 25.3% in the quarter, up from 20.1% in Q1, as fabs ran at 93.7% utilization and monthly capacity hit 1.1 million 8-inch-equivalent wafers. Fabs are basically maxed out. Hua Hong's gross margin climbed to 16.5%, up 5.6 percentage points from a year ago, as pricing power returned to a foundry business that had been stuck in a years-long downturn.
Neither company is building chips that rival Nvidia's H100 or H200 GPUs. That's not the point. SMIC and Hua Hong don't need to match Nvidia chip for chip to matter here, they just need to supply everything around it: memory, microcontrollers, power management chips and the mature-node components that go into AI servers and data centers being built across China. As CNBC reported in April, Chinese chipmakers hit record revenue as AI demand and U.S. export curbs collided to push buyers toward domestic supply. A tight market for mature-process chips, the kind SMIC and Hua Hong actually make at scale, has let both companies raise prices for the first time in years.
Washington's Squeeze Play Backfires #
Washington's logic was straightforward: cut China off from advanced chips and the tools to make them, and its AI ambitions stall. Instead, years of restrictions forced Chinese buyers, from state-backed cloud operators to phone makers, to source locally wherever they could, and that demand is now showing up directly on SMIC and Hua Hong's income statements. China's domestic chip production hit 28% self-sufficiency in the fourth quarter of last year, up from 16% twelve months earlier, backed by roughly $150 billion in state subsidies aimed at an 80% self-sufficiency target.
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The irony deepens at the advanced-node level. Hua Hong is readying 7-nanometer production at its Huali Microelectronics facility in Shanghai, which would end SMIC's monopoly on China's most advanced domestic manufacturing. SMIC has doubled its own 7nm capacity plans for this year and started pilot runs on a 5nm process, despite lacking access to the extreme ultraviolet lithography machines that ASML sells to everyone else. Neither company can yet match TSMC or Samsung at the leading edge, and estimates put China's advanced-chip output at only 1% to 2% of U.S. capacity this year. But that gap is closing from a starting point Washington didn't expect Beijing to reach this fast.
There's a wrinkle in the Nvidia story too. In mid-January, the U.S. government authorized exports of Nvidia's H200 chips to China under a restrictive framework, complete with a 25% tariff and certification requirements meant to keep the chips out of military or surveillance use. It's not a clean break from Nvidia. It's a Chinese AI industry that now runs on both: some Nvidia silicon trickling back in under tight conditions, and a fast-growing base of domestic mature-node chips from SMIC and Hua Hong filling in everywhere the restrictions still bite.
For Nvidia, the risk isn't losing China's AI chip market overnight. It's losing the habit. Every quarter Chinese cloud operators and device makers build their supply chains around SMIC and Hua Hong instead of waiting on Washington's next licensing decision, the harder it becomes to win that business back even if restrictions ease further. Jensen Huang has said publicly that Nvidia doesn't want to cede the Chinese market to domestic rivals like Huawei, and these earnings show exactly why he's worried. SMIC expects revenue to grow another 2% to 4% next quarter with gross margin climbing toward 26% to 28%. Hua Hong is guiding to $770 million to $780 million in revenue. Neither number will scare Nvidia's board today. Not yet, anyway. But four years ago, these were struggling foundries surviving on thin margins and a domestic pity policy. Now they're posting the kind of profit growth that gets a CEO's attention, built almost entirely on a market the United States tried to wall them out of.
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