In the context of the continuous downturn in the global application market, the utilization rate of wafer foundry capacity has generally declined.
Since the third quarter of 2022, more and more IC design manufacturers have cut orders, and the order cutting effect in the fourth quarter is more obvious. In order to maintain the OEM price, wafer foundries have reduced the capacity utilization rate. In the fourth quarter of 2022, the capacity utilization rate of wafer foundries almost reached the bottom, some even lower than 50%.
In the first quarter of 2023, due to the traditional off-season, IC design manufacturers placed fewer orders, resulting in a decline in the capacity utilization rate of wafer foundries. In the first quarter of 2023, the capacity utilization rate of Liandian fell to 70%, and the capacity utilization rate of Li Jidian is expected to be around 60%. The industry estimates that the average capacity utilization rate of TSMC in the first quarter is 70% – 75%, and the capacity utilization rate of Samsung’s 12-inch wafer foundry is about 70%.
01 Price war starts
In this case, in order to maintain the order volume, in addition to TSMC and Liandian, other major wafer foundries have sent out relatively clear price reduction information, especially Samsung Electronics.https://store.stoneitech.com/
Samsung Electronics said that the industry inventory adjustment led to a decline in the capacity utilization of wafer foundry business. In this case, Samsung not only did not give up the capacity of mature manufacturing process, but also launched a more active strategy of low price order grabbing in the face of the decline in capacity utilization, hoping to remedy the decline.
Supply chain analysis shows that Samsung’s wafer foundry business originally focused on producing its own chips, but the current market is sluggish. Samsung’s demand for its own chips is sluggish, and idle capacity has increased significantly. In order to fill the capacity gap, it is logical to cut prices and scramble for orders. It is reported that Samsung has slashed the price for the mature wafer foundry process by up to 10%, and has won some orders from Taiwan Netcom chip factories.
The quotation of Samsung wafer foundry was lower than that of its friends. At present, the overall market demand is still sluggish. If Samsung cut the price again and cut the quotation by 10%, it will become the basis for IC design manufacturers to negotiate with other wafer foundry factories. “If you don’t cut the price, I will transfer to Samsung production”, which puts pressure on other wafer foundry factories.
Recently, Samsung has also updated the information of the most advanced process chips. The yield of 3nm is stable. The second generation of 3nm process has made rapid progress. It is also developing 4nm process for automotive applications. This year, it will focus on the development of 2nm process.
In the face of the competition of Samsung in the advanced manufacturing process, TSMC actively responded, and its 3nm manufacturing process includes N3, N3E, N3P and N3X. TSMC previously pointed out that although the inventory adjustment is still ongoing, it has been observed that both N3 and N3E have customer participation, and the number of final product designs in the first and second years of mass production will be more than twice that of 5nm.
Although TSMC’s N3 process technology has improved a lot in terms of performance and power consumption, the high cost of the initial N3 node has hindered business expansion. A report from MyDrivers shows that there are rumors that TSMC is preparing to reduce the price of 3nm production to stimulate the interest of IC design enterprises.
The production cost of TSMC’s N3E process may be lower than its original N3. It remains to be seen how much the company will charge for OEM on other N3 nodes (N3P, N3S and N3X). Reducing the price of 3nm production will attract more customers to use these process nodes.
It is said that the original N3 (also known as N3B) of TSMC was only used by Apple. However, the production cost of N3 is expensive. It is reported that N3 uses up to 25 layers of ultra-ultraviolet (EUV) lithography technology, and the cost of each EUV scanner is 150 million to 200 million dollars. In order to depreciate the wafer factory equipped with such production equipment, TSMC must charge more for its N3 process and the production of subsequent products.
Some people say that TSMC charges up to $20000 per N3 wafer (higher than $16000 per N5 wafer). Although these quotations depend on many factors, the key point is that chip production is becoming increasingly expensive. The increase in costs means that the profits of AMD, Broadcom, Mediatech, NVIDIA and Qualcomm are declining, which is why these IC design enterprises are rethinking how to create advanced design and use cutting-edge nodes.
It is reported that in order to stimulate partners to use N3 process technology, TSMC is considering reducing the price of these nodes. In particular, TSMC’s N3E process only uses 19 layers of EUV mask, and has low manufacturing complexity, so the use cost is lower. TSMC can reduce the price of N3E without damaging its profitability.
AMD announced that it plans to use N3 process nodes in some designs based on Zen 5 in 2024. It is expected that Nvidia will use N3 in its next generation of GPUs based on Blackwell architecture. Due to the high cost, the adoption of N3 is expected to be limited to some products. Therefore, lowering the quotation may cause IC design enterprises to reconsider their adoption strategy.
In terms of mature manufacturing process, TSMC’s quotation is competitive. Even though the revenue of mature manufacturing process accounts for nearly 50%, TSMC is still less impacted than its competitors in the face of industry downturn.
For other wafer foundries, the world’s advanced price has been reduced by 5% – 10%, and Huahong Hongli has been reduced by 3% – 8%.
02 Will Liandian continue to be stubborn?
In order to cope with the current market downturn, Liandian has taken strict cost control measures and postponed part of its capital expenditure as much as possible. In the second half of 2022, Liandian will postpone part of its capital expenditure to this year, so last year’s capital expenditure fell to 2.7 billion dollars. In the medium and long term, it is still expected that the structural capacity shortage of mature process will gradually emerge in the second half of this year.
Under the condition of weak market demand, even the price reduction can not stimulate more demand. Manufacturers will choose to lower the capacity utilization rate and control output to maintain prices. This operation is also available for Liandian.
Wang Shi, the joint general manager of Liandian, said that in the fourth quarter of 2022, due to the significant slowdown of demand in most terminal markets and the continuous revision of inventory in the overall industry, the shipment volume of Liandian wafers decreased by 14.8% compared with the same period in 2021, and the overall capacity utilization rate fell to 90%. However, due to continuous efforts to optimize the product mix, the average selling price has slightly increased.
With regard to the sensitive topic of price reduction, Wang Shi said that Liandian would maintain the price stability of wafer foundry this year, and even if the capacity utilization rate in the first quarter dropped sharply, Liandian would not reduce the price.
The strength of Liandian in not reducing prices stems from its rich and mature process products and their market influence. The company’s production lines are mostly mature processes, regardless of whether it is an 8-inch or 12-inch wafer factory, which focuses on various new special process processes, especially for applications such as the Internet of Things, 5G, and automotive electronics, which have great market and development prospects in the future, such as Liandian’s automotive electronics business, The annual growth rate in the past few years has exceeded 30%. Including RF, MEMS, LCD driver chip, OLED driver chip and other fields, Liandian has targeted enhancement technology and has been increasing market share.
In the past, 28nm HKMG was mainly used for the baseband and AP chip manufacturing of mobile phones. With the gradual maturity of advanced processes, such as 14nm, 10nm, and the latest 5nm technology, mobile phone processors are turning to these processes, which leads to the decline of 28nm HKMG capacity utilization. One solution is to introduce the needs of more small and medium-sized customers to the 28nm HKMG. In this regard, Liandian has more than 20 products on this line, and the volume is also increasing steadily.
In addition, the 28nm HPC+and 22nm processes of Liandian have also been mass produced. In this way, new customers continue to add in and improve the capacity utilization.
In addition, in terms of special technology, the market has a large demand for LCD drive chips and OLED drive chips, most of which are 80nm and 40nm processes. On this basis, Liandian has introduced these chips to 28nm.
In 2022, the revenue of the 28nm and 22nm processes of Liandian will increase by more than 56% annually, mainly due to the strong demand of OLED panel drive IC and image signal processor (ISP). In addition, the business volume of automotive IC will increase by 82% year-on-year and reach 9% of the overall business.
However, the bleak market environment seems to have exceeded the estimate of Liandian. In this case, how long can the determination not to reduce the price persist?
For the whole year of 2023, Liandian predicts that the global semiconductor market (excluding memory) will decline by 1% – 3%, and the correction range of wafer foundry industry is larger than that of the overall semiconductor industry, with a decline of about 4% – 6%. Due to the high proportion of mature manufacturing processes, it is estimated that the annual performance of Liandian will be lower than the average of the wafer foundry industry, with a decline of about 11% – 13%.
Wang Shi said that in 2023, the global economy was weak, customer inventory days were higher than the normal level, order visibility was low, and the first quarter would be full of multiple challenges. This wave of boom and decline was expected to reach the bottom in the second half of this year, and he hoped that this quarter could really break out of the bottom and then recover steadily.
Liandian expects that, affected by the inventory adjustment, the capacity utilization rate will drop to 70% in the first quarter of this year, the wafer shipment quarter will decrease by 17% – 19%, and the gross profit rate will be significantly reduced from 42.9% in the last quarter to 34% – 36%, which will be the lowest point in seven quarters since the second quarter of 2021.
Currently, the market for consumer electronics products such as PCs and mobile phones continues to be weak, and inventory adjustments are expected to continue. From the current situation, the OEM prices of Liandian in the first quarter will remain stable, and the performance of the 12-inch wafer production line is expected to be better than the company’s average. The 28nm capacity utilization rate will be higher than the 12-inch average. After inventory adjustments for 28nm/22nm process applications, such as ISP, WiFi, OLED, and driver IC, demand is expected to warm up in the second half of the year.
Although the original pricing can still be maintained in the first quarter, the market situation in the second quarter is probably worse than that in the first quarter. The existing pricing and the order pressure of Liandian will increase. Because many competitors have adopted a price reduction strategy, United Power has lost many orders. In this case, Liandian is unlikely to insist on the stable price of OEM for a long time.
Some insiders have revealed that the price of Liandian will be reduced by about 5% – 10% from the second quarter of this year. It remains to be seen.
