At present, the life of the wafer foundry industry is not very easy. Even TSMC, as the industry leader, has to adopt a price reduction or disguised price adjustment strategy to alleviate the decline in capacity utilization.
According to recent reports from Taiwanese media, TSMC will lower the price of the 7nm process by about 5% to 10%; Previously, there were reports that TSMC will resume price discounts for some mature processes next year, with a discount of approximately 2%. In addition, a reporter from China Business Daily noticed that mature process manufacturers such as Liandian, World Advanced, and TSMC have also lowered their order quotations for the first quarter of 2024.
As the leader of wafer foundry, TSMC's actions have always been seen as an industry signal: if the above news is true, it means that this wave of wafer foundry price reduction has begun to spread from second tier factories to first tier large factories, from mature processes to advanced processes. Regarding relevant issues, the reporter contacted TSMC for an interview, but as of the time of publication, there has been no response.
"Foundry (wafer foundries) used to offer annual price discounts due to process iterations. As the overall demand outlook for 2024 remains conservative, each foundry will maintain its previous price discount measures or offer preferential prices in some highly competitive processes to ensure wafer production," said Zhong Yingting, an analyst at market research firm TrendForce Jibang Consulting, to reporters.
However, TSMC, which has a big business, may lead its competitors into a difficult situation. An analyst working at a domestic semiconductor consulting firm said, "TSMC's strong reputation and price reduction promotions have hurt its competitors." Currently, mature semiconductor process production lines are mainly distributed in mainland China and Taiwan.
"Foundry in mainland China is actively expanding its mature production capacity, resulting in an overall increase in production capacity supply. Moreover, the high degree of overlap between mature process platforms and products has intensified Foundry competition, causing downward pressure on mature process prices," said Zhong Yingting.
Next year's first quarter contract labor prices may decrease by 10% to 20%
According to previous reports, TSMC will resume price discounts for some mature processes next year, with a discount of about 2%. However, at that time, the OEM prices did not decrease, and the price discounts were mainly offset by the cost of light masks; Subsequently, TSMC's 7nm process was also exposed to have reduced prices, with the magnitude of the reduction determined by the customer's production volume.
According to the South Korean electronics industry media The Elec, the 8-inch wafer foundry industry in South Korea is experiencing a wave of price reductions, and local Fabless companies are requesting wafer foundries to lower prices. Some companies have received a 10% price reduction notice. Not only that, many wafer foundries such as Uni President, World Advanced, and TSMC have also begun to lower prices by about 10% in Q1 next year to improve capacity utilization and seize orders as soon as the industry recovers.
"Foundry OEM prices used to be discounted annually due to process iterations, but during the pandemic, discounts were cancelled and prices increased due to excessive lack of production capacity, which is a special situation." Zhong Yingting pointed out that as shortages eased and market conditions weakened, from the second half of 2022 to the beginning of 2023, various Foundries began offering discounts, offsetting project fees, or free wafers to encourage customers to maintain or increase their wafer production in response to market conditions reversal.
The reporter noticed that unlike previous sales discounts, this time the wafer foundries have proposed a "diversified" new model of offering discounts and accepting orders to IC design companies, including price reductions for large quantities, price reductions for bundled quantities but not bundled quantities, extension of wafer production, flexible bargaining, and wafer banks, among other disguised price adjustment strategies.
For example, bundling quantity without price refers to maintaining a certain scale of order quantity, and with changes in market conditions, there is a slight elasticity in prices; Extension of production refers to the amount of production that can be extended by one year or even longer to reduce the pressure on IC design companies to place orders; Wafer bank is the process of making wafers into semi-finished products and placing them in foundries for packaging when needed.
It is understood that TSMC relies on advanced processes as its main source of revenue, and mature processes are not its operational focus, but they are still one of the focuses of market attention. The latest financial report shows that in the third quarter of this year, TSMC's revenue from 7nm and more advanced processes accounted for 59% of the quarter's wafer sales.
IC design manufacturers estimate that benchmark manufacturers will take the lead in reducing prices, and other manufacturers are highly likely to follow suit. Although different products and processes have different ranges, it is expected that the average drop in wafer foundry prices in the first quarter of next year will be around 10% to 20%.
The recovery momentum of mature processes is limited
"Due to factors such as global economic risks, regional conflicts, and slow market recovery, except for the AI related server sector, all other terminals have conservative attitudes towards the 2024 outlook, which limits the recovery momentum of mature Foundry processes (especially 8-inch ones)," said Zhong Yingting.
During the epidemic, a shortage of chips swept across the world, especially the tight production capacity of 8-inch mature processes, leading to a sudden surge in prices of chips such as battery management chips and display driver chips. In the past year or so, due to the overall economic downturn, many IC design companies have been clearing inventory, and the overall production volume has not been optimistic. Many customer orders have only returned to the pre pandemic level of 40%.
Among them, wafer foundries specializing in 8-inch mature processes have been hit the hardest. On one hand, inventory levels still need to be reduced, and on the other hand, some products have been switched to 12 inches, resulting in a low capacity utilization rate for 8-inch wafer foundries. For example, in the third quarter of this year, the capacity utilization rate of TSMC was only about 60%.
According to TrendForce Consulting, the proportion of global wafer foundry mature processes (28nm and above) and advanced processes (16nm and below) production capacity will remain at approximately 7:3 from 2023 to 2027. TrendForce Consulting believes that China's mature process capacity is gradually expanding, and the trend towards localized production such as Driver IC, CIS/ISP, and Power Discrete will become increasingly clear.
In fact, SMIC (688981. SH, 00981. HK) and Huahong (688347. SH, 01347. HK), as the two giants in the wafer foundry industry in mainland China, are both vigorously expanding their production capacity.
Data shows that in the third quarter of this year, SMIC's capital expenditure increased by about 26% month on month to 15.31 billion yuan, and the company raised its annual capital expenditure to around 7.5 billion US dollars, a year-on-year increase of about 18%. According to SMIC's 2022 semi annual report, the company's capital expenditures are mainly used for capacity expansion and new plant infrastructure.
At the same time, Huahong Company is also committed to improving overall production capacity. In September of this year, Huahong Company used the raised funds to increase its wholly-owned subsidiary Huahong Hongli's capital by 12.632 billion yuan, mainly for Huahong Hongli's capital increase to Huahong Semiconductor Manufacturing (Wuxi) Co., Ltd., the implementation entity of the Huahong Manufacturing (Wuxi) project. The remaining funds will be used for 8-inch factory optimization and upgrading projects, characteristic process technology innovation research and development projects, etc.
"Looking ahead to the coming year, we see that the market has become more stable, and the demand for mature contract manufacturing will increase with decreasing inventory. However, there is no significant growth momentum or bright spots, and we still need to wait for global macroeconomic recovery." Zhao Haijun, the joint CEO of SMIC, stated on the Q3 financial report conference call that the inventory related to automotive products, which has been tight for three years, is also starting to rise, Causing major customers to be alert to market corrections and quickly tightening orders.
On the other hand, the new round of price reductions in wafer foundries is welcomed by IC design companies, which can provide them with more room for maneuver.
The performance of wafer foundries is a barometer for the semiconductor industry, and according to the latest financial reports of the three leading wafer foundries, TSMC, SMIC, and GSC, the overall rebound in performance in the first half of 2024 is worth looking forward to, which is one of the few positive signals.
TSMC's revenue in the third quarter of this year decreased by 10.8% year-on-year, with a month on month increase of 13.7%, and its net profit decreased by 25.0% year-on-year, with a month on month increase of 16.0%. On the side of SMIC, its revenue in the third quarter decreased by 15% year-on-year and increased by 3.9% month on month. In terms of revenue guidance in the fourth quarter, it increased by 1% to 3% month on month. In terms of Gexin, the revenue and profit in the third quarter were better than Wall Street analysts' expectations.
Overall, the revenue of these three major wafer foundries has declined year-on-year and increased month on month, reflecting that although the current industrial situation is still sluggish, it has shown a sustained recovery trend.