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 low utilization of wafer foundry capacity. In the first quarter, the capacity utilization rate of Liandian fell to 70%, and it is expected that the capacity utilization rate of electromechanical equipment will be around 60%. The industry estimates that the average capacity utilization rate of TSMC in the first quarter was 70% to 75%, while the capacity utilization rate of Samsung’s 12 inch wafer foundry was about 70%.
01 Price war started
In this case, in order to maintain order volume, except for TSMC and Liandian, other major wafer foundries have issued relatively clear price reduction messages, especially Samsung Electronics.
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.
According to the supply chain analysis, Samsung’s wafer foundry business was originally based on the production of its own chips, but the current market is sluggish. The demand for Samsung’s own chips is low, and the idle capacity has increased significantly. In order to fill the capacity gap, it is reasonable to cut prices and grab 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 Samsung’s competition in advanced manufacturing processes, TSMC has actively responded, with its 3nm processes including N3, N3E, N3P, and N3X. TSMC previously stated that although inventory adjustments are still ongoing, it has been observed that both N3 and N3E have customer involvement, and the final product design quantity for the first and second years of mass production will be more than twice that of 5nm
Although TSMC’s N3 process technology has greatly improved in terms of performance and power consumption, the high cost of N3 nodes in the initial stage has hindered business expansion. According to a report from MyDrivers, there are rumors that TSMC is preparing to reduce the price of 3nm production to stimulate interest among IC design companies.
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 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 companies are rethinking how to create advanced designs and use cutting-edge nodes.
It is reported that in order to stimulate partners to use N3 process technology, TSMC is considering reducing the prices of these nodes. In particular, TSMC’s N3E process uses only 19 layers of EUV masks, resulting in low manufacturing complexity and lower usage costs. TSMC can reduce the price of N3E without compromising its profitability. https://www.stoneitech.com/
AMD announced plans to use N3 process nodes in some Zen 5 based designs in 2024. Nvidia is expected to use N3 in its next generation GPU based on Blackwell architecture. Due to high costs, the adoption of N3 is expected to be limited to some products. Therefore, lowering the quotation may cause IC design companies to reconsider their adoption strategies.
In terms of mature manufacturing processes, TSMC’s quotation is competitive. Although the revenue share of mature manufacturing processes is close to 50%, TSMC is still less impacted by the industry downturn than its competitors.
For other wafer foundries, global advanced prices have been reduced by 5% to 10%, and Huahong Hongli has been reduced by 3% to 8%.
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 rose slightly.
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 bottom line for Liandian’s price reduction comes from its rich and mature process products and market influence. Most of the company’s production lines are mature processes. Both 8-inch and 12-inch wafer factories focus on various new special process technologies, especially in areas with huge future markets and development prospects such as the Internet of Things, 5G, and automotive electronics. For example, the automotive electronics business has experienced an annual growth rate of over 30% in the past few years. Including RF, MEMS, LCD driver chips, OLED driver chips, and other fields, Liandian aims at enhancing technology, and its market share continues to increase.
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 processes, the market has a large demand for LCD driver chips and OLED driver chips, most of which are 80nm and 40nm processes. On this basis, Liandian pushed these chips to 28 nm.
In 2022, the annual revenue growth of Liandian’s 28nm and 22nm processes will exceed 56%, mainly due to strong demand for OLED panel driven ICs and image signal processors (ISPs). In addition, the volume of automotive IC business will increase by 82% year-on-year, reaching 9% of the overall business.
However, the dismal market environment seems to have exceeded Liandian’s estimate. Under such circumstances, how long can the determination not to reduce prices persist?
For the entire year of 2023, Liandian expects the global semiconductor market (excluding memory) to decline by 1% to 3%, with the wafer foundry industry experiencing a larger pullback than the overall semiconductor industry, with a decline of about 4% to 6%. Due to the high proportion of mature manufacturing processes, it is expected that Liandian’s annual performance will be lower than the average level of the wafer foundry industry, with a decrease of about 11% to 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.
At present, the market of consumer electronics products such as PCs and mobile phones continues to be weak, and it is expected that the inventory adjustment will continue. From the current situation, the OEM price of Liandian will remain stable in the first quarter, the performance of the 12-inch wafer production line is still expected to be better than the company’s average, and the 28nm capacity utilization rate will be higher than the 12-inch average. The 28nm/22nm process applications, such as ISP, WiFi, OLED and drive IC, are expected to recover in the second half of the year after the inventory adjustment.
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.
