The end of the year is approaching, which is the traditional peak season, but the major wafer foundries do not seem to be having an easy time. Recently, relevant companies and people in the industry chain said that major mature process production lines have cut prices again, mainly for orders in the first quarter of 2024.
Globally, mature process production lines are mainly distributed in Taiwan, China, and mainland China. Especially in Taiwan, China, its overall process technology level and market influence are higher than those in mainland China. Therefore, relatively speaking, the overall chip generation in this region is Labor prices are higher than those in mainland China, and under the dual pressure of the sluggish market and competitors, Taiwanese factories had to succumb.
01. Price reduction Throughout 2023
It is reported that mature process manufacturers such as UMC, World Advanced Micro Devices and Power Semiconductor Manufacturing Co., Ltd. have slashed their order quotations in the first quarter of next year in order to ensure that capacity utilization does not decline. This price reduction has caused the overall price of the mature wafer foundry process market to fall to a new low after the epidemic.
Although the PC and mobile phone markets are showing signs of recovery, due to the overall economic downturn, and in the past year or so, many IC design companies have been clearing inventory. Everyone is cautious and conservative, and the overall production volume is not optimistic. Customer order volume has only returned to 40% of the pre-epidemic level. If things continue like this, it will be difficult for wafer foundries to persist. Even major manufacturers in Taiwan, and China, can only reduce prices to avoid losing orders to competitors.
Among all production lines, the 8-inch price reduction is larger, especially in the power management IC, driver IC, and MCU production lines. The market inventory is relatively high, resulting in the largest order price reduction. In addition, in recent years, in order to improve cost-effectiveness, some types of chips originally produced in 8-inch wafer production lines have been transferred to 12-inch production lines. This has made matters worse for the 8-inch foundry production lines, resulting in capacity utilization. further decline.
UMC expects that its capacity utilization rate in the fourth quarter of this year will drop to 60%-63% from 67% in the third quarter, which is the lowest point in a single quarter in recent years. Affected by the continued decline in capacity utilization, the company’s gross profit margin will decline from 35.9% in the third quarter to 31%-33%, returning to the level of early 2021. The supply chain revealed that in order to consolidate customers’ willingness to place orders, UMC will once again offer 5% profit to large customers on the basis of the original price. Considering that the first quarter of 2024 is the traditional off-season, in order to attract customers to increase the amount of film production, the price will be set early next year. For customers with capacity, UMC will also expand price reductions to double-digit percentages.
Another mature process wafer foundry, the world’s most advanced, has also reduced prices by 5%. Customers with large production volumes are expected to receive a 10% discount. This is only the price in the second half of this year. Price cuts are also likely to reach double-digit percentages in the first quarter of next year.
The situation of Power Semiconductor Manufacturing Co., Ltd. is not optimistic either. Its performance in the third quarter of this year was a loss and its capacity utilization rate was only about 60%. In this case, price cuts are inevitable.
TSMC is living a pretty good life, mainly because of its large scale and high level of advanced manufacturing processes, and its pricing power, which can drive sales of mature process production capacity. Moreover, TSMC’s foundry prices for mature manufacturing processes have been relatively stable over the years. We have not followed the ups and downs of the market, and customers will accept it if we don’t lower prices now.
For mature process wafer foundries in mainland China, price is the main advantage. In this wave of price reductions, the competitiveness of related production lines will be weakened. If they want to maintain the original capacity utilization rate, they can only reduce prices further. .
Taking Hefei Jinghe Integration as an example, its mature process order prices continue to decline, among which DDIC (panel driver IC) and power management IC are the most obvious. Through price reduction, Jinghe Integrated’s capacity utilization rate can be maintained at around 70%, which is higher than the three major factories in Taiwan, and China. However, under the pressure of Taiwanese manufacturers continuing to cut prices, Mainland China wafer foundries such as Jinghe Integration still need to think of more ways. Simply cutting prices is not a long-term solution.
In South Korea, 8-inch wafer foundry production lines are also reducing prices, by about 10%, and some even dropped by 20%. Taking DB Hitek, South Korea’s largest mature process wafer foundry, as an example, its capacity utilization rate has dropped to less than 70%, compared with about 90% in the same period in 2022.
In fact, this is not the first time that mature processes have seen significant price reductions. After entering 2023, price reductions have lasted almost throughout the year. Especially since the second half of the year, capacity utilization has been very weak and prices have to be reduced.
IC design companies said that there are many mature process foundries to choose from around the world, and the yield rate will not differ much. Choosing low-priced production lines has become the primary consideration. Although switching factories requires more time and manpower, however, under the pressure of market competition, changing factories has become a trivial matter. Otherwise, the products will not be sold in the market and the situation will only get worse.
According to statistics, quotations for 12-inch mature process wafer foundry production lines other than TSMC have increased by approximately 70%-80% during the epidemic. Since destocking began in the second half of 2022, the cumulative decline has reached 30% by the third quarter of this year. About %, it can be seen that mature process capacity still has a large room for price reduction.
Wafer foundries are forced to cut prices, and the majority of IC design companies are happy to see this happen. It has been more than a year since the destocking adjustment. Customers of IC design companies have been placing urgent orders to replenish their inventory. With the recovery of the PC and mobile phone markets and the price reduction of wafer foundries, the pressure on IC design companies has been reduced a lot.
An executive from a major driver IC design company said that at this stage, destocking has come to an end, and the company’s wafer production volume has gradually returned to normal. It is currently negotiating with wafer foundries for order requirements in 2024. A new wave of price cuts by foundries has provided these IC design companies with more room for maneuvering.
02. Which chips are holding back?
At present, the demand for chips in some application fields on the market is relatively good, such as automotive. In addition, industrial control chips also performed well in the first half of the year, but the situation in the second half of the year is not optimistic. Since September, the PC and mobile phone chip markets have been picking up, as has the memory chip market. Relatively speaking, the analog chip market is not optimistic, especially power management ICs, TV and mobile phone display panel driver ICs, and image sensors (CIS).
Manufacturers of display panels, especially TV panels, said that demand for panels has been weak since the fourth quarter, but demand for smartphones has been okay. A major display driver IC manufacturer said that in the fourth quarter, due to sluggish market demand for TVs, monitors, VR and automobiles, as well as price cuts for some products, its revenue and profits were weaker than those in the third quarter.
In the first three quarters of this year, due to weak demand for TV and PC display panels, while the overall automotive market is growing, display panel driver IC manufacturers will focus on the automotive market.
The number of in-vehicle displays continues to increase, and the area is also increasing, from the original 10-12 inches to the current 14-16 inches, and the resolution has also been upgraded from FHD to 4K. At the same time, the number of displays in the car is also increasing, including central control, passenger control, rear seats, and in-car TVs. In-car display panels are increasingly adding touch functions, especially for new energy vehicles, where touch control is already standard. The above requirements for display driver ICs and TDDI are increasing.
Another benefit of making automotive display panel driver ICs is that the gross profit margin is higher than that of mobile phones and PCs, and product conversion is easier without having to go to war.
However, there are also phased problems in the automotive market. Especially since 2023, the wave of car price cuts has swept the Chinese market, which will also have an impact on the global market. The general price reduction of automobiles will have an impact on the related chip market. Although the price of TDDI accounts for a very small proportion of the total vehicle cost, it will also be priced down. Therefore, compared with the previous two years, the gross product gross of manufacturers of automotive display driver ICs has been reduced. Interest rates are also falling.
Let’s take a look at the industrial chip market.
Compared with other application markets, the purchase volume of industrial chip customers is relatively small. Moreover, a customer will purchase devices with standard functions from multiple chip manufacturers, and there are fewer customized ASICs. Due to the long life cycle, the relationship between industrial chip manufacturers and customers is very stable. Furthermore, industrial customers do not pursue new technologies; they prefer mature technologies with high reliability.
The application characteristics of industrial chips determine its market status, which is stable, or tepid. This state will show the good development status of the market in the context of the overall market downturn. This will be the case in 2022 and the first half of 2023. However, in the second half of 2023, the situation was somewhat unexpected. The industrial chip market, which was originally thought to be developing steadily, has experienced a significant decline.
The decline in the industrial chip market is reflected in the revenue of industrial chip giant Texas Instruments (TI). The industrial application market is the main source of TI’s revenue. In late October, TI released its financial report. The company’s industrial chip sales in the third quarter fell by more than ten percentage points, with all regions except Japan experiencing declines. TI expects fourth-quarter revenue and profit to be lower than expected, mainly due to worsening demand in the industrial application market and TI being forced to cut some production.
Edward Jones analysts said that TI’s forecast reflects that the industrial application market demand is not as optimistic as thought in the first half of the year, and this situation is likely to continue until the first half of 2024.
Many market signals show that although the semiconductor industry is picking up, the pace is very slow and there are short-term recurrences and oscillations.
In the Chinese mainland market, stockpiling is a perennial phenomenon in the chip component industry. In the current context of sluggish industry demand and oversupply, many types of chips are reducing prices, and stockpiling has become a high-risk activity. Now, many channel merchants have very little inventory and are eager to ship goods and maintain a rolling stocking status to improve liquidity.
Overall, this semiconductor industry cycle is rebounding more slowly than previously thought.
According to Canalys estimates, global smartphone shipments in the third quarter of 2023 will only fall by 1% compared with the same period in 2022. IDC’s forecast data in August showed that smartphone shipments will fall by 4.7% in 2023, a significantly narrower decline compared with 2022.
The PC market is also on an upward trend. According to IDC estimates, global PC shipments fell 7.6% year-on-year in the third quarter of 2023, a significant improvement from the 29% year-on-year decline in the first quarter of 2023. Based on typical fourth-quarter and third-quarter trends, PC shipments in the fourth quarter of 2023 will increase by 5%-9% compared to the fourth quarter of 2022. HP believes that end-user demand will be stronger in the second half of the year than in the first half, and PC market sales in 2023 are expected to be 250 to 260 million units; Dell estimates that the PC market sales in 2023 will be 250 million units; Lenovo said that the PC market will recover year-on-year in the second half of 2023 growth and achieve year-on-year growth throughout 2024.
