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Analysis of the reasons and industry impact of the latest chip OEM price reduction

Analysis of the reasons and industry impact of the latest chip OEM price reduction

January 17 , 2024 0

Since the second half of 2022, the overall capacity utilization rate of wafer foundries has been running at a low level due to the poor overall market condition of semiconductors, weak terminal demand, and continuous destocking of the supply chain. Recently, due to the lack of continuous fermentation of the peak season pull effect, the shortage of automotive and industrial control chips, and the negative impact of IDM factory's own new production capacity, the wafer foundry industry is facing a new wave of price cuts, and almost all manufacturers in the industry are spared.

Specifically, in the second half of 2023, TSMC has agreed to price negotiations with customers, if the number of wafers reaches a certain level, the offer for 28/22nm and 16/12nm manufacturing processes will be reduced by 10%, and large customers can get preferential treatment on 7/5nm advanced processes. Recently, the industry said that TSMC will restore the price discount for some mature processes in 2024, and the discount range is about 2%; Umc, in order to consolidate customer order momentum, 23Q4 supply chain on its price discount of 5% for large customers, considering 24Q1 demand continued to weaken, in order to attract customers to increase the power of the film, will expand the price drop to double-digit percentage; On the part of LDC, it was reported that the price of the first quarter was slashed by 24, the range reached double-digit percentage, and the project customers fell by 15% to 20%; In terms of the world's advanced, according to the supply chain, 23 in the second half of the quotation fell by about 5%, the large amount of customers are even expected to get 10% discount space, 24 the first quarter quotation fell by a single digit to double digit percentage.

In addition to Taiwan manufacturers in China, among Korean manufacturers, Samsung has been reported to reduce the wafer foundry offer by 5% to 15% in 24Q1, in order to win customers' investment and increase capacity utilization; Eastern High-tech's 8-inch wafer foundry has also begun to cut prices, with a maximum reduction of 10%.

According to Huahong disclosure, due to the decline in prices, its 23Q3 equivalent to 8-inch ASP decreased by 10%;
As the hardest hit area of the price reduction tide, 8-inch wafer foundry mature process manufacturers suffered the most. It is understood that because the overall demand for consumer customers is still low, chip inventory levels such as power management ics, driver ics and microcontrollers (MCUS) still need to be removed, and some products have been converted to 12 inches, so that the capacity utilization rate of 8-inch foundries has been maintained at a low level recently. For the price adjustment, UMC responded that the 8-inch will indeed have a significant reduction, and the 12-inch will not be adjusted; The world's advanced executives mentioned at the meeting that the long-term development of the company is not only to look at the price, but also to look at the application growth. In order to cope with the severe challenges of industry prices, the company will adjust the price elasticity of products in the short term and face market competition with customers.
It is worth noting that in addition to widely affecting the mature processes of various manufacturers, the price cut has now also spread to the field of advanced processes.

For fabs, as the process shrinks, advanced processes need to purchase more advanced equipment, and the capital expenditure of new production lines is huge. Especially for IDM manufacturers, with the evolution of the process, the cost of chip design is also rising rapidly, and the cost side is under double pressure. Previously, TSMC has begun to discount part of the price for the 7nm process with low capacity utilization, and the discount range depends on the volume of customers' orders. Recently, in order to increase the capacity utilization rate, in order to better compete with TSMC in advanced manufacturing processes, Samsung has also adjusted the price, the range is about 10%, and there is a floating of about 5% in different orders from customers.

Reason: To Buy Orders In Exchange For Price

Wafer generation is an important link in the semiconductor industry chain and a bridge connecting upstream design and downstream applications, and its output value performance is highly correlated with the prosperity of the semiconductor industry.

According to TrendForce data, benefiting from the growth of shipments in the traditional peak season of consumer electronics in the third quarter of 2023, the total revenue of the world's top 10 foundry was $28.29 billion in the third quarter of 2023, an increase of 7.9%.

From the perspective of the competitive landscape, among the world's top ten wafer fountainers, TSMC is still the largest, accounting for about 57.9% of the share, and has been ranking first in the wafer foundry industry for many years. In addition, from the perspective of geographical distribution, Taiwan's TSMC, UMC, LSMC, and the world's four advanced manufacturers accounted for a combined market share of 66%, still firmly occupying the world's largest semiconductor foundry market; South Korea's Samsung has 12.4 percent of the market, second only to TSMC in market share; In addition, two companies in the United States, GF and Intel IFS, entered the top 10 global foundry companies, with a combined market share of 7.2%.

When the 23Q3 market is slightly picking up, the above ten wafer foundries intensively cut prices to grab orders, what is the reason?

First of all, from the point of view of the order situation, although in the year-end festival expectations, smart phones, laptops and other consumer electronics supply chains continue to have urgent orders, the market heat is also expected to continue from 23Q3 to 24Q1. However, due to the overall competition of 8-inch production capacity such as display drive and power management, in the case of "more than enough", a certain price discount will be carried out in order to win orders. In addition, although the consumer electronics is obviously picking up now, but because the current automotive and industrial control industry is also in inventory digestion, customers have reduced the proportion of the two major areas to a certain extent, so in the case of the decline and decline, only a greater price discount can barely maintain the daily capacity utilization of the factory.

Secondly, from the perspective of capacity utilization, the global capacity in 2021 is in short supply, and the capacity utilization rate of each fab remains full, among which the capacity utilization rate of SMIC remains near 100% in 2021, and the capacity utilization rate of Huahong Semiconductor is the highest or even more than 110%. In the second half of 2022, with the downturn in the industry cycle, some companies began to decline, such as SMIC in 22Q3 capacity utilization has fallen to 92%.

In 2023, with the design company's "active destocking" superposition of some companies "contrarian expansion", TrendForce expects 2023Q4 8-inch wafer capacity utilization will reach a trough; In terms of 12-inch wafer capacity utilization, the overall utilization rate in 2023 is also low, and only the head of TSMC and SMIC can maintain the current capacity utilization rate of about 80%. Therefore, in the case of the weak overall market recovery, price reduction promotion is a forced measure to improve capacity utilization.
Third, from the revenue point of view, in the third quarter of 23Q3, driven by the recovery of consumer electronics, in addition to UMC, Huahong and LPC, the other seven manufacturers in the top ten manufacturers achieved quarterly revenue growth.

However, from the year-on-year data, the revenue of the top ten manufacturers all declined in the third quarter. Compared with the highs of 2022, this is a long way from recovering the previous lost ground. Therefore, in the case of poor financial performance, sacrificing part of the price in exchange for an increase in shipments, and then improving the data of the entire financial statement, has become one of the adjustment policies that many wafer foundries have to make in the downward cycle.

Finally, from the inventory point of view, wafer foundries previously expected this wave of inventory adjustment will continue to the fourth quarter of 2023, but from the current market situation, the industry inventory adjustment time is significantly more than expected. Specifically, many manufacturers said that the current PC, mobile phone inventory has basically bottomed out, and industrial and vehicle inventory adjustment is advancing, it is expected that this wave of inventory adjustment cycle will be delayed for some time, and it is expected that the entire industry will not be significantly improved until 2024 H2.

It is worth noting that at present, in advanced process manufacturing (below 7nm), only three manufacturers in the entire industry, TSMC, Samsung and Intel, are advancing as planned. In the process route process, TSMC, Samsung, and Intel have entered the 3nm advanced process stage from 2023 to 2024. For TSMC, there are many customers, Nvidia, AMD, Xilinx, Intel, as well as Google, AWS, etc., are TSMC's big customers, among which Apple's A17 chip has been equipped with TSMC's most advanced 3nm process.

Compared with TSMC's pure contract manufacturing model, Samsung and Intel use IDM mode of production, the main orders come from the group and local customers, the price is relatively stable. Although affected by the recovery of consumer electronics, Samsung and Intel in the third quarter of 14.1% and 34.1% of the revenue growth rate than TSMC's 10.2%, but due to the impact of fewer global large customers, resulting in the overall capacity utilization rate is far lower than TSMC.

To sum up, this wave of price reduction of wafer foundries is mainly caused by the reduction of orders under the background of continued weak industry demand, and in order to improve their own capacity utilization and financial performance, they have to make price for volume adjustment measures.

Impact: The Dawn OF Industry Recovery

Semiconductor is a typical cyclical industry, the volatility of the entire market has been a significant cyclical change characteristics, the main reason is because the new investment in semiconductor fabs to mass production often takes about 2 to 4 years, investment decisions when the demand judgment and the actual demand situation in the future may be caused by the gap.
According to SEMI, global semiconductor production capacity has been on a growing trend in recent years, and after a 5.5% growth rate to 29.6 million wafers per month in 2023, it is expected to grow by 6.4% in 2024 to break through the 30 million wafer mark. In terms of capacity planning, from 2022 to 2024, the global semiconductor industry plans to start operating 82 new fabs, including 11 projects in 2023 and 42 projects in 2024, with wafer sizes ranging from 300mm to 100mm (12 inches to 4 inches).
Geographically, China is leading the expansion of the semiconductor industry. Driven by government funding and other incentives, China's share of global semiconductor production is expected to increase. Mainland Chinese chipmakers are expected to start operating 18 projects in 2024, increasing their annual production capacity by 13% year-on-year to 8.6 million wafers per month. Taiwan will continue to rank second with annual capacity growth of 5.6% in 2023 and 4.2% in 2024, increasing monthly capacity from 5.4 million to 5.7 million wafers, with five new fabs expected to come on stream from 2024.
From the product area, due to the weak demand for consumer electronics such as personal computers and smartphones, the expansion of annual production capacity in the memory chip field in 2023 slowed down, and the monthly production capacity increased by only 2% in 2023, reaching 3.8 million wafers per month. It is expected to increase by 5% to 4 million wafers per month in 2024; In discrete components and analog chips, vehicle electrification remains a key driver of capacity expansion. Among them, the capacity of discrete component chips is expected to increase by 10% in 2023 to 4.1 million wafers per month, and will continue to grow by 7% to 4.4 million wafers per month in 2024. Analog chip production is expected to grow 11% to 2.1 million wafers in 2023 and 10% to 2.4 million wafers in 2024.
1. Foundry factories: Expand production against the trend to enhance competitive strength
There is no doubt that in the context of the continuous rise of wafer production capacity and the demand has not been followed up in time, for wafer founders-according to the formula of "fab revenue = capacity * capacity utilization *ASP", each fab in order to maintain performance without a slump, only sacrifice part of the price in exchange for the overall capacity and capacity utilization data. In this way, the production capacity and shipments of wafer foundries will be improved, and the performance will be maintained to a certain extent, and then transition to the next cycle at a lower cost.
Taking SMIC as an example, in the third quarter of 23Q3, the company adjusted the price of some products, although the company's equivalent of 8-inch ASP decreased by 5%, but the overall shipment achieved 9.5% quarter-on-quarter growth. Through this price-for-volume approach, the company increased its revenue by 6.03% quarter-on-quarter in Q3.

2, wafer foundry industry: competition intensifies, pattern differentiation is more obvious
For the foundry industry, the rise of the price war will virtually reshape the industry pattern. On the one hand, for small and medium-sized manufacturers represented by the world's advanced, the price war will cause huge performance pressure on these manufacturers. In order to keep their companies afloat, they have to cut back on capital spending to tide them over. On the other hand, for the large foundries led by TSMC and SMIC, due to their relatively high gross profit margin, there is enough room for price reduction, and the overall price war has relatively little impact on them. In addition, the head manufacturers can generally not reduce capital expenditure when the industry is down, and even some manufacturers will reverse the amount of capital expenditure. Once the industry picks up, the market share and competitiveness of these big factories will gradually be improved.

3. Industrial chain: Accelerate the recovery of the entire industrial chain
For the industrial chain, on the one hand, the increase in shipments of wafer manufacturers is expected to drive the increase in orders from upstream equipment, materials and other manufacturers, among which semiconductor equipment with lithography, etching, and thin film deposition equipment as the core. As well as silicon wafers, photoresist and supporting reagents, photomask, electronic special gas, wet electronic chemicals, sputtering targets, CMP grinding pads and grinding fluids as representatives of the material manufacturers will be benefited to a certain extent.
Taking NaURA as an example, benefiting from the expansion of domestic fab capacity, the company signed more than 30 billion yuan of new orders in 2023, of which the integrated circuit field accounted for more than 70%. Driven by this, NAURA's main business in 2023 shows a good development trend, market recognition continues to improve, and dozens of process equipment applied in the field of high-end integrated circuits such as etching, film, cleaning and furnace tubes have achieved technological breakthroughs and mass production applications, and process coverage and market share have been greatly improved. The company is expected to return to the mother in 2023 net profit of 3.61 billion yuan to 4.115 billion yuan, an increase of 53.44% to 76.39%.
On the other hand, for the downstream industry, the price reduction of wafer manufacturers will allow chip factories such as driver ics, power management ics and microcontrollers (MCUS), which are dominated by mature processes, to gain some breathing space after a long period of inventory adjustment. With the subsequent reduction of wafer foundry costs, the performance of related IC design plants will also be further improved, which will help accelerate the recovery process of the entire industry.
Taking Taiwan manufacturers as an example, MCU giant Sheng Group revealed that the fourth quarter of 2023 film planning reduced by 40%, the amount of film from 2024 onwards gradually picked up, plus the wafer foundry price is expected to fall about 10% by then, is expected to drive gross profit margin in the second quarter to stabilize;
Although starting from the second half of 2023, the major wafer foundries have made price concessions, which can improve their capacity utilization and financial performance to a certain extent in the short term. However, from the feedback of downstream customers, it is still generally conservative to look at the future market conditions, and the stock is relatively cautious.
However, the good news is that with the gradual recovery of terminal demand, according to Jibang's research and judgment, the capacity utilization rate of mature wafer foundry process is expected to slowly rebound around Q3 2024, and the global wafer foundry market size is expected to grow by 5-10% in 2024. After the transition of the price war for 1-2 quarters, it is expected that the wafer foundry industry will gradually return to normal operations in the future.