In the context of the continued downturn in the global application market, the utilization rate of foundry capacity has generally declined.
Starting from the third quarter of 2022, more and more IC design manufacturers have cut orders, and the effect of cutting orders in the fourth quarter has become more obvious. In order to maintain foundry prices, wafer foundries have reduced capacity utilization. In the fourth quarter of 2022, the capacity utilization rate of wafer foundries has almost bottomed out, and some are even lower than 50%.
In the first quarter of 2023, due to the traditional off-season, IC design manufacturers place fewer orders, resulting in a lower capacity utilization rate of wafer foundries. UMC’s capacity utilization rate in the first quarter dropped to 70%. Around 60%. According to industry estimates, the average capacity utilization rate of TSMC in the first quarter is 70%-75%, and the capacity utilization rate of Samsung Electronics’ 12-inch wafer foundry is about 70%.
01 The price war begins
In this case, in order to maintain the order volume, in addition to TSMC and UMC, other major wafer foundries have sent out relatively clear price reduction information, especially Samsung Electronics.
Samsung Electronics said frankly that the inventory adjustment in the industry has led to a decline in the capacity utilization rate of the foundry business. Under such circumstances, Samsung not only did not give up the production capacity of mature processes, but also launched a more active strategy of grabbing orders at low prices in the face of the decline in production capacity utilization, hoping to use this to reverse the decline.
According to supply chain analysis, Samsung’s foundry business was originally based on the production of its own chips, but the current market downturn, Samsung’s own chip demand is sluggish, and idle production capacity has increased significantly. In order to fill the capacity gap, it is logical to cut prices and grab orders. It is reported that Samsung has slashed prices for the mature foundry process by as much as 10%, and has won orders from some Taiwan-based Netcom chip factories.
Samsung’s wafer foundry had previously quoted lower prices than its rivals. At present, the overall market demand is still sluggish. If Samsung cuts prices by 10%, it will definitely become the basis for IC design manufacturers to negotiate prices with other wafer foundries. “If you don’t lower the price , I will transfer to Samsung for production”, putting pressure on other foundries.
Recently, Samsung has also updated the most advanced process chip information. The 3nm yield rate is stable. The second-generation 3nm process is progressing rapidly. It is also developing a 4nm process for automotive applications. This year it will focus on 2nm process development.
In the face of Samsung’s competition in advanced manufacturing processes, TSMC is actively challenging. Its 3nm manufacturing processes include N3, N3E, N3P, and N3X. TSMC previously pointed out that although inventory adjustments are still ongoing, it has been observed that both N3 and N3E have customer participation, and the number of finalized 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 commercial expansion. According to a report by MyDrivers, there are rumors that TSMC is preparing to reduce the quotation for 3nm production in order to stimulate the interest of IC design companies.
Production costs for TSMC’s N3E process will likely be lower than for its original N3, and it remains to be seen how much the company will charge foundry fees for the other N3 nodes (N3P, N3S, and N3X). Lower prices for 3nm production will attract more customers to these process nodes.
It is rumored that TSMC’s original N3 (also known as N3B) was only used by Apple. However, N3 is expensive to produce. It is reported that N3 uses up to 25 layers of extreme ultraviolet (EUV) lithography technology. The cost of each EUV scanner 150 million – 200 million US dollars. In order to depreciate the fabs that configure such production equipment, TSMC has to charge more for the production of its N3 process technology and subsequent products.
Some say TSMC charges as much as $20,000 per N3 wafer (up from $16,000 per N5 wafer), and while these quotes depend on many factors, the key one is that chip production is getting more expensive. Higher costs mean lower profits for companies like AMD, Broadcom, MediaTek, Nvidia, and Qualcomm, which is why these IC design houses are rethinking how they create advanced designs and use leading-edge nodes.
It is reported that in order to stimulate partners to use the N3 process technology, TSMC is considering reducing the quotations of these nodes. In particular, TSMC’s N3E process only uses 19 layers of EUV masks and has lower manufacturing complexity, so the cost of use is lower. Low. TSMC can lower N3E’s offer without hurting profitability.
AMD announced plans to use the N3 process node in some Zen 5-based designs in 2024, and Nvidia is expected to use N3 in its next-generation Blackwell-based GPUs. Due to the high cost, the adoption of N3 is expected to be limited to certain products, so lower quotations may cause IC design companies to reconsider their adoption strategies.
In terms of mature manufacturing processes, TSMC’s quotations are competitive. Even though mature manufacturing processes account for nearly 50% of revenue, TSMC is still less impacted than its competitors in the face of the industry downturn.
In terms of other wafer foundries, the world’s advanced prices have decreased by 5%-10%, and Huahong Grace has decreased by 3%-8%.
02 Will UMC continue to be stubborn?
In response to the current downturn in the market, UMC has implemented strict cost control measures and postponed some capital expenditures as much as possible. In the second half of 2022, UMC will postpone some capital expenditures to this year, so last year’s capital expenditures fell to 2.7 billion US dollars. In the medium and long term, it is still expected that the structural capacity shortage of mature manufacturing processes will gradually emerge in the second half of this year.
Under the condition of weak market demand, even price cuts cannot stimulate more demand. Manufacturers will choose to reduce capacity utilization and control output in order to maintain prices. UMC also does this.
Wang Shi, co-general manager of UMC, said that in the fourth quarter of 2022, due to the significant slowdown in the demand of most end markets and the continuous revision of the inventory of the overall industry, UMC’s wafer shipments decreased by 14.8% compared with the same period in 2021. Capacity utilization drops to 90%. However, due to continuous efforts in product mix optimization, the average selling price rose slightly.
Regarding the sensitive topic of price reduction, Wang Shi said that UMC will maintain the price stability of wafer foundry this year. Even if the production capacity utilization rate drops sharply in the first quarter, UMC will not lower prices.
UMC’s confidence in not lowering prices stems from its rich and mature process products and its market influence. Most of the company’s production lines are mature processes. Whether it is an 8-inch or a 12-inch fab, they all focus on various new special processes. In terms of technology, especially for the Internet of Things, 5G and automotive electronics, which have huge market and development prospects in the future, such as UMC’s automotive electronics business, the annual growth rate has exceeded 30% in the past few years. Including RF, MEMS, LCD driver chips, OLED driver chips and other fields, UMC has targeted enhanced technologies and has been increasing its market share.
In the past, 28nm HKMG was mainly used for baseband and AP chip manufacturing of mobile phones. With the gradual maturity of advanced manufacturing processes, such as 14nm, 10nm, and the latest 5nm process, mobile phone processors are turning to these processes, which leads to 28nm HKMG’s capacity utilization rate declined. One solution is to introduce the needs of more small and medium customers to 28nm HKMG. In this regard, UMC has more than 20 products on this line, and the volume is also increasing steadily.
In addition, UMC’s 28nm HPC+ and 22nm processes have also been mass-produced. In this way, new customers are constantly added to improve capacity utilization.
In addition, in terms of special technology, the market has a great demand for LCD driver chips and OLED driver chips, and most of them use 80nm and 40nm technology. On this basis, UMC introduced the manufacturing of these chips to 28nm.
In 2022, UMC’s 28nm and 22nm process revenue will increase by more than 56% annually, mainly from the strong demand for OLED panel driver ICs and image signal processors (ISPs). In addition, the business volume of automotive ICs will increase by 82% year-on-year, reaching the overall 9% of the business.
However, the bleak market environment seems to have exceeded UMC’s estimate. Under such circumstances, how long can the determination not to lower prices last?
As far as the full year of 2023 is concerned, UMC predicts that the global semiconductor market (excluding memory) will decline by 1%-3%, and the correction rate of the 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, UMC estimates that its annual performance will be lower than the average of the foundry industry, with a decline rate of about 11%-13%.
Wang Shi said that the global economy will be weak in 2023, the number of days of customer inventory will be higher than normal, and the visibility of orders will be low. The first quarter will be full of multiple challenges. Get out of the valley and then return to temperature steadily.
UMC expects that due to the inventory adjustment, the capacity utilization rate will drop to 70% in the first quarter of this year, the wafer shipment will decrease by 17%-19%, and the gross profit rate will be greatly reduced from 42.9% in the previous quarter to 34%. -36%, which will be the lowest point in seven quarters since the second quarter of 2021.
At present, the market for consumer electronics products such as PCs and mobile phones continues to be weak, and inventory adjustments are expected to continue. Judging from the current situation, UMC’s foundry prices in the first quarter will remain stable, and the performance of the 12-inch wafer production line is still expected to outperform the company’s On average, the utilization rate of 28nm capacity will be higher than the average level of 12 inches. 28nm/22nm process applications, such as ISP, WiFi, OLED and driver ICs, have been adjusted in inventory, and demand is expected to pick up in the second half of the year.
Although the original pricing can be maintained in the first quarter, the market situation in the second quarter is likely to be worse than that in the first quarter. With the current pricing, UMC’s order pressure will increase. As many competitors have adopted a price reduction strategy, UMC has lost a lot of orders. In this case, UMC is unlikely to insist on stable OEM prices for a long time.
Industry insiders have revealed that UMC will start to cut prices from the second quarter of this year, with a range of about 5%-10%. Let’s wait and see what the specific situation is.