Ladies and gentlemen, welcome to the Semiconductor Manufacturing International Corporation's fourth quarter 2014 webcast conference call. Today's conference call is hosted by Dr. T.Y. Chiu, Chief Executive Officer, Dr. Gao Yonggang, Chief Financial Officer, Mr. Gareth Kung, Executive Vice President of Investment and Strategic Business Development, Finance, and Company Secretary, and Mr. En-Ling Feng, Vice President of Investor Relations. Today's webcast conference call will be simultaneously streamed through the internet at smics.com. Please be advised that your dial-ins are in listen-only mode. However, at the conclusion of the management presentation, we will be having a question and answer session, at which time you will receive further instructions as to how to participate. The earnings press release is available for download at www.smics.com. Webcast playback will also be available approximately one hour after the event at www.smics.com.
Without further ado, I would like to introduce to you Mr. En-Ling Feng, Vice President of Investor Relations, for the cautionary statement.
Good morning and good evening. Welcome to SMIC's fourth quarter 2014 earnings webcast conference call. For today's call, our CEO, Dr. T.Y. Chiu, will first provide some general remarks. Afterwards, CFO, Dr. Gao Yonggang, will highlight our financial performance and give next quarter's guidance. Our Executive VP of Strategy, Strategic Business Development, Finance, and Company Secretary, Mr. Gareth Kung, will give the detailed financial commentary. This will then be followed by our Q&A session. As usual, our call will be approximately 60 minutes in length. The earnings press release and quarterly financial presentation are available for you to download at www.smics.com under Investor Relations in the Events and Presentation section. Before I turn the call over to Dr. T.Y. Chiu, let me remind you that the presentation we will be making today includes forward-looking statements.
These statements and other comments are not guarantees of future performance, but represent the company's estimates and are subject to risk and uncertainty. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings with the U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange Limited, including our annual report on Form 20-F filed with the United States Securities and Exchange Commission on April 14, 2014. During the call, all the references made to 2014 annual figures are based on an unaudited basis using the summation of reported quarterly results. Also, during the call, we will make reference to financial measures that do not conform to general accepted accounting principles, GAAP.
These measures may be calculated differently than similar non-GAAP data presented by other companies. Please refer to the table in our press release for a reconciliation of GAAP to the non-GAAP numbers we will be discussing. Please note that all currency figures are in USD, unless otherwise stated. I will now turn the call over to our CEO, Dr. T.Y. Chiu, for the opening remarks.
Thank you, En-Ling. Good morning and good evening to everyone. Thank you all for joining us. Today, I would like to highlight SMIC's recent accomplishments and the coming opportunities. As a management team, our first target had been to bring SMIC into sustainable profitability, and we have accomplished that. In Q4 2014, we achieved our 11th consecutive profitable quarter, and this is our third consecutive year of positive earning. We are able to maintain a healthy utilization of 93%. We continue to aim for sustained profit as we enter our next stage of growth. 2014 was marked with achievements in the development of technology and operations in preparation for further growth in 2015 and beyond. We made progress in 28 nm development, in differentiated technology development, and the development of new fab operations, and various new partnerships to expand business and opportunities in China and internationally.
We were happy to announce in December the successful fabrication of 28 nm for Qualcomm's Snapdragon 410 processor which signifies the on time and the steady progress of our 28 nm product qualifications. We continue to anticipate production to begin in Q2 this year, with revenue recognition in the second half. Successfully, we plan polysilicon production to be followed by High-K Metal Gate two to three quarters later, and then 28 RF in 2016. In terms of differentiated technology, in 2014, we have ramped various new technologies into production, such as back-side illumination for CMOS image sensor, MEMS, embedded flash, bank card ICs, and fingerprint ICs. PMIC, CIS, and EEPROM accounted for 38.4% of our wafer revenue in Q4 2014, and grew 18.8% compared to Q4 2013.
Fingerprint IC volume has been growing strong with revenue in Q4 2014, growing more than 25% quarter-over-quarter, and more than quadrupling compared to Q4 2013. 55-nm embedded flash also has shown a very strong ramp as well, more than doubling quarter-over-quarter and increasing more than 300 times compared to Q4 2013. Our BSI CIS entered small volume production in the fourth quarter of 2014 and is expected to enter volume ramp-up this year. A lot of talk in the market surrounding the launch of bank card IC in China market. Already, we see the fruition of a modest ramp-up. From a very small contribution to revenue in 2014, we forecast financial transaction-related IC contribution to our revenue may more than triple in 2015.
SMIC continued to be the only foundry in China to have independently developed 38 nm NAND flash, and that we have several customers in pilot production at this time. In addition to new technologies, we have prepared new capacities for the opportunity at hand. Given the diversification of our mature technology, we continue to have great demand for 8-in capacity. To address the 8-in demand, we have started operation in Shenzhen and installed 10,000 wafer per month capacity at the end of 2014. We anticipate this capacity should be ready for production in the next two quarters. By the end of this year, we plan to install an additional 10,000 wafer per month capacity. Our 12-in fab in Shanghai has 14,000 per month capacity, mainly for 40 nm, 45 nm, and R&D, of which 6,000 wafer per month is now capable of 28 nm.
By the end of this year, we plan to have 10,000 wafer per month installed capacity for 28 nm at our joint venture 12-in fab in Beijing. Year-end capacity will grow 5.8% in 2014 compared to 2013, primarily due to increase in 8-in capacity. Annual capacity in 2015 is planned to grow another 7.8%. 2014 was also marked by the formation of several new partnerships, which display SMIC's leading role in the strengthening China semiconductor ecosystem. In May 2014, we announced the formation of an R&D consortium, which will become our center of advanced node R&D. The consortium will begin with 14 nm R&D activity and is open to partnership with mutual interest to collaborate in developing the technology. In August last year, we formed a bumping joint venture with JCET.
This project is on schedule with equipment move-in scheduled for the first half of 2015 and production targeted to begin in the second half of this year. About $50 million of our planned 2015 CapEx is allocated to this venture. In December 2014, we announced that we had entered into a co-investment agreement to participate in the acquisition of STATS ChipPAC, together with JCET and the National IC Industry Investment Fund. Under the agreement terms, SMIC will invest around $100 million and take an equity stake of about 19%. We see this as a way to demonstrate our support to China's growing ecosystem and have ensured return. Should we wish to sell our share to JCET, we are guaranteed a 10% to 12% annualized effective compound rate of return.
By supporting bumping and OSAT domestically, our customers and future potential customer can further localize the supply chain, which is feeding back to the largest consumers of IC, China. Revenue from China has continued to be over 40% of our total revenue in the past six quarters and accounts for more than 45% of our total revenue in Q4 2014. As the largest and the most advanced foundry in China, we are looking forward to benefiting from the overall growing IC ecosystem in China. We are optimistic about our long-term growth. For the near term, we see a better-than-expected first quarter guidance with low single-digit growth quarter-over-quarter. We have also witnessed a recent large influx in 65 and 40 new tape-outs, thus have reason to believe that utilization will pick up in the existing 12-in fab this year.
In conclusion, 2014 was a year of development and preparation with a better than expected guidance for Q1 and encouraging feedback on 28 nm. We continue to be optimistic about the future as we ramp up a new 8-in facility in Shenzhen and 28 capacity in both Shanghai and Beijing. We continue to have confidence in China market, mobile products, smart consumer products, and the coming IoT and other alluring profitable market segments. We believe that we have a sound strategy and a sound execution capacity to capture these growth opportunities in China. We stay committed to sustainable profitability and building value for all stakeholders. Thank you for your time. I will now hand the call over to Yonggang for the financial highlights and the 2015 Q1 guidance.
Thank you, T.Y. Greetings to all our listeners. First, I will highlight our 2014 full year unaudited results and our fourth quarter 2014 results, then we will give our first quarter 2015 guidance. Revenue in 2014 was $1.97 billion compared to $2.07 billion in 2013. The decrease was mainly due to discontinued wafer shipments from Wuhan Xinxin since Q1 2014. Excluding revenue contribution from Wuhan Xinxin in the past years, our non-GAAP revenue reached a record high of $1.97 billion in 2014, comparing to $1.96 billion in 2013. Our gross margin in 2014 was 24.5%, the highest in the last nine years. To compare, 2013 gross margin was 21.2% including Wuhan shipments and 22.2% excluding Wuhan shipments. The increase in gross margin was primarily due to improvement in fab efficiency in 2014.
Our profits for the period attributable to SMIC in 2014 was $153 million compared to $173.2 million in 2013. If excluding gain from disposal of living quarters, our profits for the period attributable to SMIC was $140 million in 2014, a record high, compared to $114.7 million in 2013. Our year-end cash and cash equivalents increased to $600 million in 2014 from $462.5 million in 2013. The 2014 capital expenditures for foundry operations were $958.5 million and $55.9 million for non-foundry operations. In 2014, we successfully raised funds of $795 million in the public market. Now I will highlight our fourth quarter 2014 results. Our revenue was $485.9 million in 4Q14, compared to $521.6 million in 3Q14. Gross margin was 22.5% in 4Q14, compared to 25.9% in 3Q14. Profits from the period attributable to SMIC was $28.4 million in 4Q14, compared to $47.5 million in 3Q14.
Now looking ahead into the first quarter of 2015, our revenue is expected to increase by 2%-5% quarter-over-quarter. Gross margin is expected to range from 27%-29%, while non-GAAP operating expenses, excluding the effect of employee bonus accrual, government funding, and gain from the disposal of living quarters, are expected to range from $123 million- $128 million. The planned 2015 capital expenditures for foundry operations are approximately $1.4 billion, while the planned 2015 capital expenditures for non-foundry operations are approximately $100 million. I will now hand the call over to Gareth for more detailed financial commentary.
Thank you, Gao Zong . I will now comment on the details of our last quarter financial results. On the income statement, revenue decreased to $485.9 million in Q4 2014, down 6.9% quarter-over-quarter from $521.6 million in Q3 2014, mainly due to a one-time adjustment relating to the turnkey services. Cost of sales decreased to $376.6 million in Q4 2014, down 2.6% quarter-over-quarter from $386.7 million in the previous quarter. Gross margin decreased to 22.5%, down from 25.9% in the previous quarter. The change was mainly due to a one-time adjustment relating to the turnkey services. Excluding the above adjustment, the gross margin in Q4 2014 stayed relatively flat compared to the previous quarter. Operating expenses in Q4 2014 were $107.7 million, an increase of 14.4% quarter-over-quarter from $94.1 million in Q3 2014.
R&D expenses decreased to $53.1 million in Q4 2014 from $54.9 million in Q3 2014. Excluding the funding of R&D contract from the government, R&D expenses increased by $4.8 million quarter-over-quarter to $65.5 million in Q4 2014, mainly due to higher R&D activities. Funding of R&D contracts from the government was $12.4 million in Q4 2014, compared to $5.8 million in the previous quarter. General administrative expenses increased to $46 million in Q4 2014, up 32.8% quarter-over-quarter from $34.7 million in Q3 2014, mainly because of, first, the startup cost relating to the two new fab projects, the new 8-in fab in Shenzhen and the 12-in fab in Beijing. Second, accrued employee bonus increased in Q4 2014.
Other operating income was $0.9 million in Q4 2014, decreased 83.8% quarter-over-quarter from $5.5 million in the previous quarter, mainly because of lower gain realized from disposal of living quarters in Q4 2014. Excluding the effect of employee bonus accrual, government funding, and gain from the disposal of living quarters, non-GAAP operating expenses was $113.2 million in Q4 2014, compared to $98.3 million in Q3 2014. Profit from operation in Q4 2014 was $1.6 million, compared to $40.8 million in Q3 2014. Other income was $10.3 million in Q4 2014 compared to $7.8 million in the previous quarter. Income tax expenses was $10.4 million in Q4 2014, compared to income tax benefit of $18,000. The change was mainly due to the payment of land value-added tax.
Non-controlling interest was $26.9 million credit to SMIC attributable profit in Q4 2014 compared to $1.2 million debit in the previous quarter. The change was mainly because our Beijing joint venture company shared part of the SMIC group's advanced technology R&D expenses in Q4 2014. Moving to the balance sheet at the end of the fourth quarter of 2014. Cash and cash equivalents increased to $603 million in Q4 2014 from $362.2 million in Q3 2014. Other financial assets increased to $644.1 million in Q4 2014 from $336.8 million in Q3 2014, mainly because of net proceeds received from the issuance of corporate bonds and capital contribution from the other shareholders of our Beijing joint venture company in Q4 2014. Our long-term borrowing increased $39.2 million and short-term borrowing decreased $214.9 million compared to the previous quarter.
At the end of Q4 2014, our total debt-to-equity ratio was 39% compared to 32.2% in the previous quarter. In terms of cash flow, we generated $195.2 million cash from operating activities in Q4 2014 compared to $134.2 million in Q3 2014, mainly because of the changes in the working capital and others. Cash used in investment activities increased to $644.8 million in Q4 2014 compared to $144 million in Q3 2014, mainly because of more financial asset investments made by SMIC in Q4 2014. Cash flow from financing activities changed from inflow of $202.3 million in Q3 2014 to an inflow of $690.2 million in Q4 2014, mainly because of the issuance of corporate bonds and capital contribution from the other shareholders of our Beijing joint venture company. To examine our revenue by applications, the consumer and communication segments contributed 43% and 42.7% of our revenue, respectively.
Geographically, revenue from China contributed 45.6% of total revenue. Revenue from North America contributed 41.8% of total revenue. Revenue from Eurasia contributed 12.6%. In terms of technology, revenue from 45/40 nm node contributed 10.9%. Revenue from 65/55 nm node and 90 nm contributed 24.7% and 4.2%, respectively. Meanwhile, 0.13 micron and above line-width contributed 60.2% of our revenues. In terms of our overall capacity, total monthly capacity at the end of fourth quarter was still 247,500 wafers. The overall utilization was 93% in the fourth quarter of 2014 compared to 91.9% in the third quarter of 2014. The planned 2015 CapEx for foundry operations are approximately $1.4 billion, which are mainly for the expansion of capacity in our new Beijing 12-in fab and the new 8-in fab in Shenzhen, and also for R&D equipment, mask shops, and intellectual property acquisitions.
The planned 2015 CapEx for non-foundry operation, mainly for the construction of living quarters, are approximately $100 million. The company plan to rent out or sell these living quarter units to the employees in the future. I will now hand the call back to En-Ling for the Q&A session.
Thank you, Gareth. I would now like to open up the call for Q&A. As usual, please be reminded to limit your questions to two per person. Operator, please assist.
Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Our first question comes from the line of Randy Abrams from Credit Suisse. Please go ahead.
Okay, thank you. Good morning. I wanted to ask a first question on the gross margin guidance you are giving for first quarter for a strong improvement. If you could go through where the leverage is coming from, where utilization in Q4 was already low 90s. So the driver for that margin improvement, and if you could walk through within that, the outlook for depreciation and also with the one-time turnkey expense, what that was.
Okay. Randy, let me first of all, respond to your question of gross margin. First of all, as explained in our management script, the Q4 gross margin was impact by a one-time adjustment. Let me explain to you what this adjustment about. What happened is that, we have booked a revenue relating to the turnkey services in Q3, and normally we will, based on an estimated testing time for our new products to build customers. In this case here, because subsequently, based on the actual testing time, it was shorter than what was expected by our customers. So, we will have to issue a credit note to a customer to reverse that revenue in Q4. The impact is about $8.5 million. The net effect of this adjustment is that, they had lower our gross margin in Q4. So we have done some calculation.
Our gross margin should be about 24%, if not for this adjustment in Q4. On the Q1 gross margin, we are guiding 27%-29%, and this is mainly driven by high utilization. We are running a beautiful loading for most of our fabs in Q1. So, we are expecting high utilization, which is the main reason driving up the gross margin guidance in Q1.
Okay.
Yes, please go on.
Okay. No, go ahead with the second part. Go ahead.
Yeah. Your question also on the depreciation. Year-on-year, we are expecting the depreciation to increase about $30 million in 2015 relative to 2014.
Okay. On the gross margin then, you guided 19%-22%, and I guess without that, did you expect the turnkey charge? Because without that, you came in at 24%, or was there some upside, or had you already guided that you would have the one time? The second question I had on 28 nm, if you could give an update just how the progression is for that. If we think about second half, both from a revenue and also from the margin side, if we should factor, you could get to higher gross margin or factoring in 28 nm, we may be coming down from margin into second half.
Okay. When we guided the Q4 gross margin 19%-22%, we did not consider the one-time adjustments. As I said, if we exclude the one-time adjustment, actually, the margin for Q4 was closer to 24%. Our performance is really because the loading in Q4 actually was higher than what we earlier expected. So actually, our loading is close to about 93%. When we made the guidance in our Q3 earning call, we're expecting about 90% utilization.
Then on the 28 nm, I guess the expected contribution and if any, a dampener on margin as that ramps.
Yes. Actually both our new Beijing fab and also our Shenzhen fab will start ramping probably the second quarter of 2015. As we ramp the fab at the early stage, it is a relatively small-scale production, and that may have some negative impact on the gross margin. But, we are seeing actually our existing fab, the loading is improving. Hopefully that will offset part of this negative impact.
Okay. It sounds like a relatively modest second half contribution. It won't impact margin much, but still won't be a big contributor to sales. Or would it start to pick up towards, say, 5%-10% of sales by second half?
We are definitely looking at. We will definitely target to increase our top line this year. But exactly how much the increase will be will depend on the speed of ramp for the 28 nm process. So far, based on all the indications that we've got from our customers, it is pretty positive.
Okay, thanks a lot.
Thank you, Randy.
Thank you. Our next question comes from the line of Steven Pelayo from HSBC. Please go ahead.
Yeah. Just to follow up on Randy, can we quantify a little bit more what percentage of revenues do you expect Q3, Q4 this year to have 28 nm?
Steve, obviously, we have a pretty aggressive target internally, but I would hesitate to talk about it in earning call at this stage, because right now, we are still in the product qual process. Maybe come next one or two quarters when we actually start shipping, we can provide more visibility on this contribution from the 28 nm process.
Let me ask the question the other way, from a capacity side. I think you talked about having 6,000 in Shanghai right now and wanting to have 10,000 of 28 nm capacity in the Beijing fab by year-end. What will those capacity numbers be at middle of the year? Or can you talk about the linearity of that 28 nm capacity ramp?
We're going to have about. Actually, the 6,000 capacity in our 12-in fab in Shanghai is already installed, okay? So we will have at least 6,000 by middle of the year. As we speed moving equipments into our new Beijing fab, I think by mid-year, we have about 6,000. What happened is that right now, our plan is for our Beijing fab, apart from qualifying for the new 28 nm process, we are also starting to qualify some of the 40 nm process in Beijing as well. Yeah.
Okay. One more quick question on that. 40 nm and 45 nm, I think if I have the numbers correct, were down year-on-year for you this year. You've now talked about starting to see some pickup. I'm curious, do you think your 40 nm, 45 nm revenues can grow every quarter for the foreseeable future here, or what are you thinking about that over the next few quarters?
Yeah. We are very pleased to see that actually, both our 40 nm and 65 nm are doing well. In fact, we are seeing pretty good growth in Q1. I think we have been talking about it in the last few quarters, that we have been qualifying new products for the 40 node and the 65 node. I think that is bearing results for us.
Sorry, just to follow up quickly on that last question. I imagine that is run primarily in your first Beijing fab, and I think that was a fab that had kind of the lower utilization rate that was holding back your margins. Can you talk a little bit about 200 mm versus 300 mm utilization rates and maybe specific to your Beijing 300 mm fabs, your existing capacity there?
Yeah. As I mentioned, in Q1, we are running almost full loading for almost all our fabs. Yes, we are seeing substantial improvement in the loading for our 12-in fab in Beijing as well as in Shanghai.
Okay. I will get back in the queue. Thank you.
Thank you. Our next question comes from the line of Andrew Lu from Barclays. Please go ahead.
Thank you. Two quick questions. First one is operating expenses in the prior quarter, Q4, is about $109 million. In this quarter, guidance of $123 million- $128 million, including some others. Can you give us some color on this? Is that we are going to see this level, $125 million, for the next few quarters, or any one-off in this number?
Okay. I think the OpEx in Q1, we are getting higher for two reasons. One is the startup cost for the new fab in Shenzhen and Beijing. Because based on the accounting rules, prior to starting commercial operation in the new fabs, all the preparation costs are being charged to the OpEx. That has increased the general administrative expenses. The second reason is because of the R&D spending. Actually, if you follow our R&D spending, that will be increasing steadily because we have been investing more in the R&D to bring in new product for our customers. So that has increased our R&D spending. But at the same time, we have introduced a lot of new processes to our fab in the last few quarters, and that have been bearing result for us.
So Gareth, can we say this $125 million probably will last for a few quarters?
Well, what happened is that in terms of the startup cost for the Shenzhen and the Beijing fab, once we started commercial operations for these two fabs, these expenses were moved out of the OpEx line into what we call the cost of sales line. That impact would be reduced. But in terms of R&D spending, I think we are still looking at a steady R&D spending in 2015 relative to 2014.
Thank you. The second question I have is CapEx number. If we calculate from cash flow, CapEx for last year is about $653 million based on your cash flow number. But you announced that your CapEx, $959 million plus $56 million non-foundry business. I wonder this year plan, $1.4 billion CapEx number on the foundry side. If we look at from the cash flow for modeling purpose, what will be the number from the cash flow numbers?
Andrew, I think you did a very precise calculations. Yes. One thing is that our cash flow from CapEx last year was actually lower than the announced CapEx, because some of the payments are to be made this year. So this year, we are talking about $1.5 billion CapEx. I think our cash flow would be similar to our announced CapEx. But we have actually very comfortable in terms of funding this CapEx because actually more than half of the CapEx for this year is for our Beijing fab, which is partly funded by our joint venture partners. At the same time, right now, as you can see from our balance sheet, including the short-term investment, we have over $1.2 billion cash on hand. So we are in a very comfortable cash positions.
Thank you.
Thank you. Our next question comes from the line of Daniel Heyler from BAML. Please go ahead.
Yes, thanks. Good morning, guys. The question, as you are looking at your full year depreciation number, which you gave us, what is the first quarter and second quarter depreciation?
Just give me one second. Actually, the depreciation is relatively steady compared to Q4.
Okay.
For the first two quarters, yes.
Okay. Presumably, though, I do not understand that because you have got your startup costs now, which are hitting your OpEx number to the tune of close to $20 million. That moves to the cost of goods sold in second quarter, right?
That is correct.
Wouldn't the—
Yeah.
Wouldn't the depreciation increase considerably in 2Q as a result of that?
Yeah. Let me explain to you. Because based on the GAAP rule, we only start depreciating our equipment when we start commercial operations. But at this point in time, actually, both new fabs are not in a commercial operation mode. So we start with fab cost right now, is mainly all the material that we spend in terms of qualifying new products and also the new people that we bring into new fabs.
Well, I know. That's what I'm asking. I think you're starting the fab in the second quarter, right? Shouldn't the depreciation go up as you convert your operating—
Yes.
—expense in second quarter that goes to the cost of goods sold. You just said that depreciation would be steady in second quarter. So I'm just trying to understand what happens to depreciation in the second quarter.
Well, there's slight increase, but most of increase would come in Q3 and Q4.
Got it. Okay. As we looked at the second quarter expansion plans, could you elaborate for us what is going on, I guess, in China's semiconductor policy right now? It is interesting that Intel is transferring designs and helping your customers, Spreadtrum and Rockchip, considerably with a pretty aggressive strategy. The plan there is for Intel to do foundry, and for those customers on advanced technology. It looks as though the Chinese government is looking to additional foundry players in this ecosystem. I know that one of the big stories for SMIC over the years has been that you are a very local foundry and you have lots of opportunities in China. Do you anticipate that the China foundry business competition is going to be hurt by increased competition, in addition to TSMC talking about building a fab in China as well.
Maybe talk a bit about what has changed and how SMIC can continue to grow in China.
Yeah. Okay. Thank you for this question. I think indeed, this proves that some of the thesis we have been holding in the past few years. We believe that China semiconductor market is really gaining a huge market share in terms of the consuming goods. This is the market to be. We have been here for the last over 10 years, and so we have really firmly established our market positions.
At this moment, local production accounts for probably around 20% of all the semiconductor consumption here in China. There are huge amount of market for all these manufacturing companies to thrive in this market. We do not feel that these new players entering into China will significantly hurt SMIC in any way. As a matter of fact, it will strengthen and create a lot more robust market here in China, which will eventually benefit both SMIC as well as all the fabless company here in China.
Could you elaborate a little bit on how the increased competition helps you? Or maybe elaborate a little bit on—
Right. Actually, I think that competition actually is good for the semiconductor, and it really help us to be more efficient and more innovative. Actually, we are putting a lot more new process in the mature area, which we see competitions in those areas all the time. So we don't think that additional competition will hurt us in a significant way.
Dan, just want to add two points to what T.Y. said. I think we are the only major foundry player with 100% of our capacity in China. This is important because we're really at the center of the growth of the semi industry. Secondly, relationship with many of the local Chinese design company have more than 10 years history. We practically incubate most of the Chinese design companies. I think this relationship would remain intact going forward.
Okay, fair enough. Thank you, gentlemen, for the answer.
Thank you, Dan.
Our next question comes from the line.
Let me add another one. It is just that, I think that SMIC, as you see, that we have been putting more and more resource in terms of our R&D funding. We will be coming up with very innovative and competitive products in terms of our technology. Okay.
Great. Thank you. Our next question comes from the line of Chris Yim from Mizuho. Please go ahead.
Hi, good morning. Just want to ask a question on the R&D sharing from your Beijing JV, and also how is that going to trend? Also your R&D support from the government, how that is going to trend? Can you give us some color on that?
Okay. Let me explain to you the R&D sharing arrangement in our Beijing fab, and the impact on our financial statement. First of all, you understand that the new fab in Beijing, which is mainly for the 28 nm productions, is a majority owned fab by SMIC, but they are not wholly owned by us. Okay. When we enter in this JV arrangement with our partners, this arrangement that this JV fab is going to share part of the R&D expenses on the advanced logic process, mainly for the 28 nm process. Okay. What happened is that, in Q4, because this is the last quarter for a year, so we have done some detailed calculation in terms of the spending on our 28 nm process.
Based on the projected revenue, between our joint venture fabs and also our 12-in fab in Shanghai, we have apportioned part of the R&D cost to our joint venture company. Because this joint venture company is not wholly owned by SMIC, so actually that has a positive impact on the income attributable to SMIC, because part of it will have to be shared by the joint venture company. I'm not sure, it's kind of complicated, but I hope I've made it clear to you. In terms of the R&D support, because actually, as you understand, the Chinese government have retargeted this semiconductor industry to be a major growth driver for the economy going forward. So actually, we do expect the ongoing support from the government on the R&D side would increase. Okay.
So, if you look at the amount of R&D grant that we received from the government in the last 2013 to 2014, there has strong increase from about $28 million in 2013 to about $40 million in 2014. So, we do expect the trend to increase in 2015. But I think it's a bit early for us to talk about the exact amount because that depends on the projects that have been approved by the government and also in terms of the milestone achieved by SMIC. Yeah.
So we can look at the R&D sharing as a one-time item. It's not going to show up in 1Q or 2Q.
Actually, the sharing will continue until we complete all the R&D spending on 28 nm process. So as I understand, we are still investing R&D spending on the 28 nm process in 2015.
Investing in IPs.
The IPs. The sharing will still have an impact on the 2015 financial statements.
Okay, great. Thanks. One more question on 28 nm . I know a lot of things are still uncertain, but you said great customer feedback. Can you talk about number of customers and tape outs you're having in your hands right now, for second half production?
We are hoping that, this year, besides our Qualcomm customers, we will be having two new product tape out on the polysilicon, as well as two new tape out on the High-K Metal Gate technology. So, four of these new tape out will occur all within the span of this year.
Okay. Thank you.
Yeah. I just want to add on to what T.Y. said. I think this is based on our current visibility.
Yes.
As we demonstrate more results to our customers, we do expect the amount of tape out will improve. Yeah.
Thank you. That is all I have.
Thank you.
Thank you, Chris.
Our next question comes from the line of Leping Huang from Nomura. Please go ahead.
Thank you for taking my question. The first question is about your R&D roadmap for beyond the 20 nm. When will you start the future R&D process, and what will be the impact on your overall CapEx? Thank you.
Yes. We have already been working on our FinFET technology, and we expect that this R&D effort will intensify on second half of this year. SMIC will indeed continue to invest in the advanced technology and will be reflected in the R&D cost. We will also, just like Gareth had indicated earlier, that we also hope that the national R&D contract funding will help us in this aspect.
This will be done by SMIC. It will not be done by, for example, joint work with third party. It will be mainly done by SMIC. Is my understanding correct?
We have a consortium on the advanced technology R&D, and the technology part will mainly be done by SMIC. Of course, we also are working with close partners, as well as our customers, to utilize our FinFET early on.
The second question is about your joint investment with JCET on the STATS ChipPAC. What will be your future? I think there is a lot of investment opportunity in the China semiconductor industrial. Which areas you will not do or which you will do? Are there any principle when you do this external investment to, let us say, enhance your ecosystem?
I think the main things in our consideration in the investment is in the adjacent area, especially on those areas that is critical to the advanced logic consideration. That is the reason we have done the JV in the bumping and in the STATS ChipPAC acquisition, we are looking at the advanced packaging area as well.
Yeah, I just want to add on to what T.Y. said. I think our co-investment in the acquisition for STATS ChipPAC is both strategic and financial. It is strategic because we want to see the growth of strong backing company in China that would enhance the IC ecosystem in China. It is also financial because, as disclosed in the terms of investments, that we are guaranteed returns in these investments. So we think that this is good for our shareholders.
Thank you.
Right. Thank you. Our next question comes from the line of Ken Hui from Jefferies. Please go ahead.
Thank you for taking my question. First I want to follow up on the minority interest, the long controlling interests regarding the sharing of the R&D expenses with the JV partners. So how should we model the amount for the coming few quarters? Because it is quite significant to the bottom line. This is my first question.
Yes. Right now, the arrangement is that we are going to sort of share the cost with them. Do the calculation once a year. We do not expect to make this adjustment on a quarterly basis. Unless a different arrangement going forward, we expect the adjustment comes in Q4. Yeah.
Okay. Thank you. I think, in the last quarterly earnings, you did guide that you are going to expand the capacity in your Tianjin fab, but it seems that it actually did not happen. Can you give us the reason and how should we expect the capacity expansion for this quarter?
Okay. The capacity expansion for Tianjin fab did happen, and actually, this year, the Tianjin fab will actually achieve a monthly capacity of 42,000 wafer per month. That is indeed an expansion from the previous capacity.
You mean by end of this quarter?
Yes. By end of the first quarter into second quarter, I think, we will get to 42,000 per month.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Szeho Ng from BNP. Please go ahead.
Hi, good morning, gentlemen. With regard to 28 nm, is this still fair to assume it will come in probably six to nine months after you ramp up the polysilicon version?
That is correct.
Okay. All right. Great. Also following up on Ken's question on the minority interest, is it possible to share with us what sort of number we should model for this year? Yeah, because that seems to be a huge figure. Yeah.
We have estimate, but I do not want to throw it out at this point in time because all depends on the progress on the outspending. Probably it is fair to estimate about the same or slightly lower.
Okay. All right. You mean in Q4 this year, right? Are we talking—
Right now, the arrangement is that we only do this allocation at the end of the year, unless, going forward, there's different arrangement that we need to talk to our joint venture partners.
Oh, okay. All right. Okay. That's useful. Thank you very much. Yeah. Very fast.
Thank you. Our next question comes from the line of Gokul Hariharan from JP Morgan. Please go ahead.
Yeah. Hi, thanks for taking my question. First of all, could you outline a little bit, your capacity expansion plans on the 8-in side and also talk a little bit more about the wins that you've got on the bank card ICs and related products. Is that starting to embed some of your memory technologies already? Is it like the 55-nm kind of stuff, or is it already still in the 8-in nodes? Thanks.
Okay. At this moment, we are seeing a ramp up, some product ramp in our 8-in embedded non-volatile memory. Definitely at this moment, we are seeing a lot of customer start showing interest in our 55-nm embedded flash. There are, I think by the second half of this year, there will be products under design. I do not mean coming out, under design, using our 55 embedded flash.
I just want to get back to your question on the increase in the 8-in capacity. Compared to the year-end capacity in 2014 and 2015, our existing 8-in fab in Shanghai will increase from 96,000 to 98,000, and our Tianjin fab will increase from 39,000 to 42,000, and our Shenzhen fab will increase from 10,000 to 20,000. You are seeing basically about 15K increased in all of our existing 8-in fabs year on year.
Okay, got it. Just one follow-up. I think you mentioned that you are expanding some 40 nm capacity, or converting. Could you talk a little bit about what you are doing on the 40 nm side? I remember that you got some tape outs last year. Could you talk a little bit about the linearity of that 40 nm ramp-up as well?
40 nm, of course, that we have 14,000 wafer capacity in Shanghai that is capable for 40 nm as well as 6,000 of that is capable of the 28 nm. In addition, we are installing our 40 nm technology in B2, Beijing JV fab. That, the new capacity, which is 10,000 by the end of the year, will be able to address both the 28 nm as well as 40 nm demand.
Do we know, at this point, how much of that would be 40 nm versus how much of that would be used for 28 nm, or that is still fluid?
I think it's still fluid because I think what we're doing is right now creating more flexibility for our fabs, so they won't be impacted by the demand on a specific node. I think right now, we are just making the preparations. Yeah.
Okay. If I could squeeze in one last question. Could you talk a little bit about the gross margin differential between your mature 8-in facilities and the 12-in facilities? At least even if you don't quantify it, give us some kind of idea in terms of what is the spread between these two margins.
Well, I would say that the 8-in margin is better. But as our 12-in production matures, actually, the margin will also receive substantial improvement. Yeah.
Okay, thanks.
All right, thank you. I would now like to hand the call back to the CEO, Dr. Chiu, for closing remarks.
In closing, I would like to thank everyone who participated in today's call, and again, thank all of our shareholders, customers, employees, and suppliers for their trust and support. Thank you.
Thank you. This is the end of SMIC's fourth quarter earnings conference call. We thank you for joining us today.