The government of Taiwan is preparing to launch its version of “the CHIPS Act” to support locally operating companies that develop innovative technologies and have a crucial spot within the global supply chain. A highlight of this legislation is a tax credit scheme: a maximum of 25% for R&D in “forward-looking technologies” and another 5% for investments in advanced manufacturing equipment.

According to the draft of this proposed legislation, companies that play an important role in the global supply chain and engage in technological innovation within the jurisdiction of Taiwan (the Republic of China) are eligible for the aforementioned tax credits if they also meet certain other conditions. As for the limit of the two tax credits, neither one of them can exceed 30% of the business income tax for the current year. Together, they cannot exceed 50% of the same annual business income tax.

Companies that will be applying for the tax credits must meet three general conditions. First, applicants must pay an effective tax rate of at least 15% in accordance with OECD’s minimum tax rules for multinationals. Second, applicants must reach a certain scale for the ratio of R&D spending to revenue (R&D intensity) and equipment-related investments. The minimum thresholds for the R&D intensity and equipment-related investments have yet to be determined and will likely be set within the subsections of the legislation later on. Lastly, applicants must not have incurred a major regulatory violation concerning environmental protection, labor protection, food and drug safety, etc. in the past three years.

Taiwan’s Ministry of Economic Affairs stated in a recent announcement that the island’s industries are deeply enmeshed within the global supply chain. They thus have become the backbone of the global economy and international commerce on account of their “uniqueness” and “irreplaceability”. The ministry added that local industries will have to adapt to the changing landscape of cooperation and competition in order to retain their indispensable role.

The ministry also commented that in the wake of a series of major events that have disrupted the operation of the global supply chain, many countries have initiated industry development policies that seek to improve the resiliency of their key economic sectors and strengthen their national security. These policies tend to emphasize the followings: (1) the formation of an autonomous and stable domestic supply chain; (2) the need to achieve dominance in next-generation technologies; and (3) the provisioning of large subsidies and tax incentives so as to raise domestic production and attract investments from multinationals. The ministry further asserted that as international competition gets fiercer, Taiwan must retain its existing advantages while finding other ways to further consolidate and enhance the positions of its key industries in the global supply chain. Therefore, the government finds it necessary to provide new tax incentives to support this kind of development.

Shipments of CPUs, GPUs, and chipsets have been falling due to the weakening demand for PCs, gaming devices, and cryptocurrency mining machines. This recent development has also constrained the growth of the market for ABF substrates. Currently, the demand situation for this material is exhibiting signs of uncertainty.

Regarding the distribution of the demand for ABF substrates, applications that are driving growth are cloud services, AI, and automotive electronics. CPUs, GPUs, FPGAs, and switch ICs are chips that are deployed in servers purposed for a wide range of applications related to cloud services and endpoint AI technologies. Meanwhile, other AI-related applications require high-end ASICs. At the same time, more and more high-end SoCs and MCUs are embedded in vehicles. All in all, these aforementioned applications will spur the demand for ABF substrates. Additionally, package size continues to increase for high-performance ICs. This trend, too, will sustain the demand for ABF substrates over the long haul. By contrast, the PC market has matured, so the related demand is shrinking. From a long-term perspective, the influence of the PC market on the demand for ABF substrates will gradually wane.

TrendForce forecasts that the scale of the global market for ABF substrates will expand from US$9.3 billion in 2022 to US$17.1 billion in 2026, thus showing a CAGR of 16.4%. Due to the influence of the US technology export restrictions against China, the demand for ICs purposed for HPC will be higher than expected for the period from 4Q22 to 3Q23. This, in turn, will also further raise the demand for ABF substrates.

Then, starting from 4Q23, exports of HPC chips to China will start to slow down. However, demand will continue to grow for ASICs, AI chips, SoCs, and MCUs at that time. The growth in these application segments will offset some of the negative effect of the US export restrictions on the market for ABF substrates. In terms of the supply-demand dynamics of ABF substrates, a balance will gradually be attained in 2024. However, demand will get stronger in 2025 and 2026, so supply could tighten during that two-year period.

According to TrendForce, prices for 4Q22 contracts were mostly finalized in October in contract market. The QoQ decline in the overall DRAM ASP has now reached 18~23%. This discrepancy is due to the fact that Samsung maintains a rather aggressive approach for pricing. Regarding 1Q23, TrendForce has revised the QoQ decline in the overall ASP from 5~10% to 15~20% provided that Samsung continues to be this competitive. TrendForce is also not ruling out the possibility that prices could drop by more than 20% for some types of DRAM products.

As for spot market, October saw spot transactions at their lowest level so far for this year. Moving into November, the ongoing decline in DRAM spot prices will unlikely ease anytime soon as China maintains its strict zero-COVID policy and enforces lockdown for local outbreaks. Furthermore, the major DRAM suppliers have made substantial price concessions in their contract negotiations, thereby creating downward pressure on spot prices as well. TrendForce has observed that the average spot price of the mainstream 1Gb DDR4 chips has been falling rapidly since October 24 with the daily decline exceeding 1%.

Until November 9, the sequential drop in the average spot price of 1Gb DDR4 chips has reached 8.36%. At the same time, spot prices of server DRAM modules have now fallen below the lowest point in the previous cyclical downturn and arrived around US$70. This indicates that there is a considerable room for a further drop in contract prices in 1Q23. Regarding weekly change in the spot price trend of the mainstream chips (i.e., DDR4 1Gx8 2666MT/s), the average spot price slid by 2.30% from US$ 2.222 last week to US$2.171 this week.

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According to a Financial Times report on October 24, 2022, as the U.S. Department of Commerce moves to restrict U.S. personnel from supporting semiconductor manufacturing “facilities” located in China to develop or produce chips without Department approval, Yangtze Memory Technologies Co., Ltd. (YMTC) has taken steps to avoid violating the ban and allowed a number of core employees with U.S. citizenship to resign.

YMTC is a domestic NAND flash memory chip manufacturer in China. In 2018, it only possessed the ability to produce 32-layer MLC 64Gb products. At that time, mainstream products offered by international manufacturers were 92-layer/96-layer TLC 256Gb/512Gb. Since then, YMTC has continued to catch up in terms of technology. By 2020, it had the capacity to mass-produce 128-layer TLC 512Gb products. The company’s new X3-9070 product, released in 3Q22, is estimated to have 232 stacked layers, equaling major international manufacturers if only in the amount of layers.

U.S. personnel played a key role in the process of YMTC’s continuous technological breakthroughs including Simon Yang, CEO since 2016. On the eve of the latest U.S. sanctions, Simon Yang resigned as CEO to become managing director. After the ban came into effect, a number of core personnel of U.S. nationality who assisted in the development of process technology resigned in succession. As sanctions continue to roil, technological development at YMTC may be delayed as a result.

Under the influence of the U.S. ban, YMTC not only faces brain drain, but will also experience difficulties expanding mass production of mainstream products and next-generation products. Since the U.S. Department of Commerce not only placed restrictions on equipment utilized to produce 128-layer (or more) NAND flash memory chips, but also maintains a “presumption of refusal” when reviewing the export of such equipment to China, YMTC may be unable to obtain sufficient equipment to produce next-generation 232-layer products or expand the production of mainstream 128-layer products.

As international NAND flash memory chip manufacturers continue to mass-produce products with more than 200 layers and move towards 300+ layers, if YMTC cannot manufacture products over 128 layers because the company continues to be limited by talent and equipment restrictions, the technological divide between YMTC and major international manufacturers will widen again and its recent efforts to keep up with technology will also come to nothing.

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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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