The latest study by TrendForce shows that demand for large-size and mobile driver ICs will steadily grow as various applications recover. However, the speed of capacity supply adjustment and competition among different technologies will remain the key focus in the next few quarters.

Another thing worth noting is that the US chip ban has led to a trend of independent development between Chinese and non-Chinese supply chains. While this may increase production time and cost, it also presents opportunities for individual Chinese domestic suppliers and Taiwanese wafer foundries to acquire fresh orders.

Observations by TrendForce on each sector of driver ICs are summarized below-

• Large-size panel driver ICs: demand is expected to recover gradually and stabilize prices, but suppliers are cautious about inventory, which could lead to a supply shortage if demand surges too quickly.
• TDDI for mobile devices: prices and inventory have reached a low point, with a small rebound expected. In the long run, AMOLED panels are expected to dominate, so IC suppliers will need to explore new applications for medium-sized panels.
• AMOLED driver ICs: UMC’s 28nm high-voltage process is producing AMOLED driver ICs. If Apple shifts all 40nm AMOLED driver IC production to 28nm, TSMC’s 28nm capacity availability will be crucial to the market’s supply-demand balance.
• RAM-Less AMOLED driver ICs: RAM-Less AMOLED driver ICs with Chinese flexible AMOLED panels are gradually taking shape due to China’s domestic policy. However, the rapid price drop of Full-Ram AMOLED has caused brands to hesitate on adopting Ram-Less AMOLED.

Market conditions in 2022 are chaotic and demand for chips fluctuate according to application. However, the IC design industry is driven by major manufacturers and the sales performance of high-end product portfolios such as data center, server, networking, industrial computing, automotive, and high performance computing will remain stable The overall market will grow to $182.9 billion, an annual increase of 14.4%.

At present, the overall industry is being negatively affected by weak demand for consumer electronics. In addition, the tightening of financing and the expectation of a wider economic recession further strengthen pessimistic attitudes. There is no opportunity for chip demand to reinvigorate in the short term, not to mention that the supply chain is already dealing with full inventories. A return of the traditional industry peak season in 2H23 will stabilize purchasing power while flat to single-digit growth in the IC design industry would be a relatively good scenario.

R&D expenses positively correlated with manufacturer revenue, AMD posts best performance in 1H22

In 1H22, R&D expenses at major IC design houses were positively related to revenue in general. The use of advanced manufacturing processes requires strong R&D capabilities, accounting for 15-35% of revenue. AMD is the most active among U.S. companies. After acquiring Xilinx and Pensando, AMD has aggressively invested in the research and development of data center-related product portfolios. In 2Q22, R&D expenditures increased by 97.2% YoY. In terms of Asian manufacturers, the impact of the poor consumer electronics market is severe and revenue growth momentum has all but disappeared. Therefore, the synchronization of R&D expenditure with revenue is also more conservative. Novatek, Willsemi, and LX Semicon product portfolios are dominated by mature processes such as DDIC and CIS with R&D/ revenue ratios below 15%.

IC design industry inventory on red alert, inventory adjustment to become a challenge by 2Q23

The IC design industry has accumulated inventory since 3Q21 and the annual growth rate of inventory has climbed to more than 50% in 1H22. Compared with the annual growth rate of revenue, the difference among American manufacturers is 20% and the difference among Asian manufacturers is 46%, indicating that inventory issues among Asian manufacturers is more serious.

The inventory levels of consumer electronics-related industries such as Smartphone, TV, Tablet, PC/notebook, and Panel, are at a 6 month level. The supply chains of IC design houses and distributors/agents are also holding substantial inventory. The inventory-to-revenue ratio of IC design houses has reached a red alert threshold of over 50%. With no improvement in demand, expectations that inventory destocking will be completed by the end of 2022 may be dashed. At present, IC design houses are desperately reducing booked foundry production capacity for high-inventory mid-level AP, DDIC, and Consumer PMIC/GPU products. If the consumer electronics market outlook remains poor in 4Q22, IC design houses could also claim a greater amount of inventory depreciation as losses. In general by 2Q23, IC design houses will continue to test their strategies for new product development, production planning, and product sales during the process of destocking the overall supply chain.

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The U.S. Department of Commerce announced new semiconductor restrictions on October 7 in the United States. In addition to existing restrictions on the logic IC sector, this new update extends to the memory category. In addition to Chinese-funded enterprises, the extent of these restrictions stipulates foreign-owned production centers located in China will also need to apply for approval on a case-by-case basis in order to continue to obtain manufacturing-related equipment. The US ban has far-reaching effects and may extend to the global chip industry.

U.S. ban hobbles China’s semiconductor industry, affecting foundry and memory industries

The U.S. Department of Commerce announced a series of chip export control measures on the 7th, which mainly restrict China’s ability to obtain advanced computing chips, develop supercomputers, and manufacture advanced semiconductors.

However, relevant restrictions also prohibit third-country companies such as TSMC from using US-made equipment to service Chinese customers without U.S. approval in some cases. According to TrendForce, a market research agency, the ban will expand the scope of these restrictions. In the future, it will target American companies, including CPUs, GPUs, and AI accelerators, used in HPC fields such as datacenters, AI, and supercomputers. All of these items will require review before export to China. In addition, foundries may no longer be able to manufacture any of the above-mentioned HPC-related chips for any Chinese IC design house.

TrendForce believes, regardless of whether the client is a Chinese or American IC design house, most HPC-related chips are currently manufactured by TSMC with mainstream processes at the 7nm, 5nm, or certain 12nm nodes. In the future, whether the situation is American factories no longer being able to export to the Chinese market or Chinese factories being unable to initiate projects and mass produce wafer starts, it will all have a negative impact on the future purchase order status of TSMC’s 7nm and 5nm processes.

In terms of memory, according to the new specifications announced by the U.S. Department of Commerce, the DRAM portion of sanctions will be limited to the 18nm process (inclusive) and equipment must be reviewed by the Department before import. This move will greatly restrict or delay the sustainable development of China’s DRAM sector and China’s memory manufacturers will be the first to bear the brunt of these sanctions.

TrendForce indicates that CXMT possesses the largest memory market share for a Chinese company in the domestic Chinese market. Since 2Q22, the company has been committed to moving from the 19nm process into the 17nm process. Although the purchase of machinery to fulfill future needs had been accelerated before the ban, volume is still insufficient. CXMT continues to build new plants, including Phase 2 in Hefei and SMBC (SMIC Jingcheng), which is in discussion with SMIC. All of these projects will face difficulties in obtaining equipment in the future.

The C2 plant of SK hynix’s DRAM production center in Wuxi is also affected by the restriction order. The factory accounts for approximately 13% of the world’s total DRAM production capacity and its process has evolved to 1Ynm and more advanced nodes.

In terms of NAND Flash, TrendForce indicates that the import of NAND production equipment into China will be further restricted in the future, especially for equipment used in the manufacture of product of 128 layers and above (inclusive), requiring prior approval before import. It is estimated that this ban will significantly impact the long-term plans of China’s YMTC to upgrade its factory campuses, restrict YMTC from further expanding its customer base as the ban may will greatly limit non-Chinese customers’ adoption and consideration of YMTC products, and impact Samsung’s Xi’an plant and Solidigm’s process migration plan in Dalian.

U.S. temporarily exempts several suppliers as ban disrupts supply chains

In order to mitigate excessive impact of the U.S. imposed China chip ban on the semiconductor industry, the U.S. recently exempted several semiconductor companies (including in the United States, Taiwan, and South Korea) from certain restrictions.

According to Wall Street Jounal, Intel, SK Hynix, and Samsung have all received one-year exemptions. SK Hynix also issued a statement stating that the company has completed negotiations with the U.S. Department of Commerce and has obtained approval to provide equipment and items required for the development and production of DRAM semiconductors in Chinese manufacturing plants without additional licensing requirements. The authorization period is one year.

In addition, Nikkei Asia News also quoted sources as saying that TSMC has also received a one-year exemption to continue ordering U.S. chip manufacturing equipment to expand its Chinese plant. According to people familiar with the matter, the U.S. government has assured TSMC that the equipment will be shipped to its Nanjing fab, which means the company’s China’s development plan remains unchanged and is progressing smoothly.

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According to TrendForce, as the United States continues to expand the content of various lists, successively pass anti-China bills, and explicitly prohibit the export of certain products to China, the two countries have gradually drifted apart and this antagonistic relationship will continue if no drastic changes occur between the two parties in the next 6-8 years.

In the face of U.S. encroachment, all sectors in China must continue to look for escape routes if the country wishes to tear down the many walls built by the U.S. and move towards industrial autonomy. China’s top priority is to make breakthroughs in the semiconductor field. As far as current development is concerned, there are still many companies in China’s domestic IC design industry moving towards advanced manufacturing processes even after leading manufacturers such as Huawei, Changsha Jingjia Microelectronics, and Goke Microelectronics were placed on the entity list. At the same time, semiconductor manufacturers such as SMIC, CXMT, and Yangtze Memory Technologies have repeatedly developed advanced process technologies while Hua Hong Group has gradually expanded in the field of mature processes. If this trend continues, it will not be difficult for China to realize semiconductor autonomy in processes above 10nm.

If U.S. effectively enforces EDA ban and does not expand controls, impact on China will emerge in 2025

The U.S. Department of Commerce’s export restrictions on Chinese manufacturers are escalating but the autonomy of China’s domestic semiconductor industry is also gradually increasing. As the confrontation between the United States and China intensifies, the United States has launched a new wave of export control measures. On August 12, 2022, the U.S. Department of Commerce announced that it will restrict the export to China of EDA software required to design integrated circuits with GAAFET structure. Since GAAFET is a structure that is used in processes below 3nm, this move is equivalent to setting an advanced threshold for China’s semiconductor development.

Domestic Chinese IC designers who are committed to the development of SoCs, cloud computing chips, and GPUs are destined to move to more advanced manufacturing processes in order to meet the iterative needs of product upgrades and are expected to move toward the 4nm manufacturing process in the next 2 to 4 years. If the U.S. effectively implements the EDA software ban and does not expand the scope of EDA software restrictions, the impact of the ban on China’s semiconductor industry is expected to gradually emerge in 2025, not only delaying the development schedule of some domestic Chinese IC designers but even causing developmental stagnation.

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According to TrendForce research, in general, revenue of Taiwanese IC design companies grew significantly in 2021 with many hitting record highs due to active procurement of various terminal applications and the effect of product price inflation. These companies also performed well in terms of gross profit margin and profitability. The top 10 Taiwanese IC design companies generated revenue of NT$906.16 billion, or 54.3% YoY. In recent years, MediaTek has contributed more than half of the output value of Taiwan’s top ten IC design companies and has become a primary factor in the growth of Taiwan’s IC design industry.

Looking at Taiwan’s top three IC design companies, MediaTek, Novatek, and Realtek, in 1Q22, MediaTek benefited from the increase in 5G penetration and successive shipments of Dimensity 9000. A mobile phone release in March 2022 produced revenue growth which can offset lower demand for certain consumer products due to seasonal factors while the proportion of high-margin products in each revenue category will increase. Thus, annual revenue growth is expected to exceed 20% this year.

As for Novatek, although DDI and TDDI stocking has entered the off-season for traditional industries and demand for consumer electronics has weakened, overall market demand is still greater than supply and Commercial Notebook and Automotive demand remain strong. New products such as OLED FoD, OLED TDDI, FTDDI, and Mini LED will drive continued revenue stability. This year, Novatek will integrate TCON, PMIC, etc. for package sales, so that there is a relative price support, but the company must still dynamically adjust its product mix according to market changes.

In terms of Realtek, positive demand in the enterprise, industrial, and automotive sectors in 2H21 will continue to 1H22. With the pandemic slowing down, purchasing of commercial laptops and equipment has ramped up, wired and wireless network infrastructure is being upgraded, the automotive market continues to grow, and relevant products such as Wi-Fi 6, Wi-Fi 6E, 5G Ethernet, and the new LE Audio Bluetooth IC are being launched successively, which will continue to improve Realtek’s performance. On the consumer market side, demand in the PC and consumer electronics markets will return to normal in 2022 and the TWS Bluetooth headset market will face a price war, which will lead to a suppression of Realtek’s shipments in relevant sectors. Regarding foundry price hikes, some customers have reported that they cannot afford further price inflation and are still in the process of negotiating terms of cooperation. In addition, Realtek has been destocking in 1Q22 due to the customer yearend inventory audits and component mismatching.

Taking a comprehensive look at 2022, TrendForce believes that the benefits of price inflation will gradually fade and demand for consumer electronics will moderate but not weaken significantly, while sustained strong demand for industrial, automotive, and high-speed computing will test the product portfolio optimization and cost pass-through ability of IC design companies.

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