With 32 mature process wafer fabs set to be completed in China by the end of next year, Taiwanese wafer foundries are gearing up early in response to the “red alert.”

Faced with the pricing war, semiconductor insiders reveal that mature process foundries in Taiwan are anticipating a roughly 10% reduction in prices in the first quarter. The aim is to seize orders ahead of the competition and maintain high capacity utilization rates.

In contrast to traditional sales discounts, major semiconductor foundries like TSMC, UMC, and PSMC have recently introduced a “diversified” pricing strategy for IC design, including:

1. Volume Discounts: Significant price reductions are offered for orders exceeding ten thousand units, with pricing flexibility increasing as the order quantity grows.
2. Volume Tied Pricing: Maintaining a certain order volume, pricing has a degree of flexibility based on market conditions.
3. Deferred Wafer Delivery: Allowing the extension of the original wafer delivery timeline by one year or even longer, providing IC design firms with flexibility and reduced pressure when placing orders.
4. Dynamic Pricing: Rapid negotiations for urgent orders, reducing the risk of volume pressure for IC designers, albeit with relatively limited price flexibility.
5. Wafer Bank: Transforming wafers into semi-finished products stored in foundries, facilitating on-demand packaging and delivery when needed.

These initiatives are strategically positioned to capitalize on the anticipated recovery in consumer electronics demand next year.

Insiders reveal that due to the sluggish market conditions in the first quarter and the impact of an upcoming extended holiday, demand for the next quarter may not just be “cool” but could freeze.

Industry experts characterize this downturn as an “L-shaped bottom,” and if orders are taken by Chinese foundries before the recovery, Taiwanese foundries will lose out on the subsequent rebound. Consequently, the three major mature process wafer foundries in Taiwan are compelled to lower prices in advance, with an estimated price reduction of around 10% for the next quarter. However, the foundries refrain from commenting on pricing.

Historically, major domestic mature process fabs maintained stable prices but offered discounts by shipping more wafers than ordered. In an effort to boost high capacity utilization and secure orders early, these fabs will no longer stick to stable pricing in the first quarter of next year.

Instead, they have adopted a direct price reduction of 10% for orders exceeding 10,000 wafers. IC design companies estimate that as benchmark fabs initiate price reductions, other industry players will inevitably follow suit.

While the extent of price reduction varies depending on products and processes, an average price reduction of 10-20% for wafer foundry services in the first quarter of next year is anticipated.

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• TrendForce Foresees China’s Mature Wafer Processes to Expand to 33% by 2027, Japan Secures Advanced Processes

(Photo credit: TSMC)

Recently, the seven major foundries —TSMC, GlobalFoundries, UMC, SMIC, Hua Hong Semiconductor, VIS, and PSMC—have successively released their third-quarter financial reports and held performance briefings to explain the semiconductor industry’s business climate and the outlook for the next stage.

Overall, in the third quarter, both the revenue and net profit of the seven foundries showed a YoY decline compared to the same period last year. From the perspective of capacity utilization and foundry pricing, except for TSMC benefiting from advanced processes, seeing a rebound in capacity utilization and stable pricing, the other six all experienced declines in both data.

Recent news on foundry pricing and capacity utilization has been continuous. This article will take a closer look at the data of the above seven major foundries and the latest market dynamics to glimpse into the fourth quarter of this year and the trends in foundry services next year.

How did the seven foundries perform in Q3, and what about their capacity utilization?

TSMC

In the third quarter, TSMC’s consolidated revenue was TWD 546.73 billion, approximately USD 1.731 billion, a YoY decrease of 10.8% but a QoQ increase of 13.7%. The net profit for the third quarter was TWD 211 billion, approximately  USD 6.677 billion, a YoY decrease of 25.0%, but a QoQ increase of 16.0%. TSMC expects fourth-quarter sales to be USD 18.8~19.6 billion, with a gross profit margin of 51.5% to 53.5%.

In the first and second quarters of this year, it was said that TSMC’s 7nm capacity utilization rate had dropped to below 50%. However, in the second half of the year, benefiting from Apple expanding its new product lineup and companies like Nvidia and Qualcomm entering the 3nm era in the second half of 2024, the industry estimates that TSMC’s 7/6nm capacity utilization will hold at around 70% by the end of this year, and 5/4nm will be close to 80%, with a monthly production capacity of about 60,000~70,000 wafers by the end of this year.

GlobalFoundries

GlobalFoundries’ Q3 revenue decreased by 11% to $1.85 billion, and the net profit was USD 249 million, lower than the USD 337 million in the same period last year. GlobalFoundries CEO Thomas Caulfield stated in the financial report, “although the global economic and geopolitical landscape remains uncertain, we are collaborating closely with our customers to support their efforts to reduce inventory levels.”

UMC

UMC’s consolidated revenue for Q3 was USD 1.77 billion, a 1.37% increase compared to the second quarter but a 24.3% decrease compared to the third quarter of 2022. The gross profit margin for the third quarter was 35.9%, and the net profit was USD 495 million.

UMC’s utilization showed a significant decline during the second and third quarters, with its capacity utilization dropping from 71% in the second quarter to 67% in the third quarter, according to the company.

Looking ahead, UMC Chairman Jason Wang stated that short-term demand in the computer and communication sectors is gradually picking up in the fourth quarter, and the automotive market remains challenging. Customers continue to manage inventory levels cautiously, and the expected utilization in the fourth quarter is about 61% to 63%, with a QoQ decrease of about 5%, average selling prices remaining stable, and a gross profit margin of about 31% to 33%.

SMIC

SMIC’s Q3 revenue was USD 1.62 billion, a YoY decrease of 15.0% but a QoQ increase of 3.9%. Net profit attributable to shareholders of the parent company was CNY 678 million (approximately USD 95 million), a YoY decrease of 78.41% and a QoQ decrease of 51.81%.

In terms of production capacity, SMIC’s Q3 capacity was approximately 795,750 8-inch equivalent wafers (an increase of 41,500 8-inch equivalent wafers compared to the second quarter’s 754,250 wafers), with a capacity utilization rate of 77.1%.

Looking to the fourth quarter, SMIC expects sales revenue to increase by 1% to 3% QoQ, and the gross profit margin will continue to bear the pressure from new capacity depreciation, expected to be between 16% and 18%.

Hua Hong Semiconductor

Hua Hong’s Q3 revenue was s USD 568.5 million, a YoY decrease of 5.13% and a QoQ decrease of 8.08%. Net profit attributable to parent company was USD 95.83 million, a YoY decrease of 86.36% and a QoQ decrease of 82.40%.

Looking ahead to the fourth quarter of 2023, Hua Hong expects sales revenue to be between USD 450~500 million, with a gross profit margin of about 2% to 5%.

In terms of production capacity, as of the end of the third quarter, Hua Hong Semiconductor’s equivalent 8-inch wafer monthly production capacity increased to 358,000 wafers, with an overall capacity utilization rate of 86.8%.

VIS (Vanguard International Semiconductor)

In the third quarter, VIS’s consolidated revenue was TWD 10.557 billion, approximately USD 334 million, an increase of 7.1% QoQ.

VIS’s outlook is relatively conservative. The company expects the semiconductor supply chain to cautiously control inventory in the fourth quarter. Although the adjustment of consumer electronics inventory is nearing completion, adjustments in the automotive and industrial sectors are later. The company expects a significant adjustment in the fourth quarter, with an estimated QoQ decrease of 8% to 10% in wafer shipments, a QoQ decrease in capacity utilization in the mid-single digits, between 55% and 60%. The average selling price (ASP) of products is estimated to decrease by 2% or less per quarter, and the gross profit margin will continue to decline to between 22% and 24%.

In recent information revealed by the supply chain regarding foundry pricing, VIS might experience a pricing decline of up to 5% in the second half of the year. Big clients may even have the opportunity to negotiate a discount of up to 10%. This trend is expected to continue into the first quarter of next year, with a further reduction, possibly moving from single-digit to double-digit percentages.

PSMC

Q3 financial reports from PSMC show that, impacted by the decline in both capacity utilization and selling prices, the third-quarter main business recorded an expanded loss of TWD 1.408 billion (approximately USD 44.59 million)) and the after-tax net profit turned into a net loss of TWD 334 million(approximately USD 10 million).

PSMC General Manager Brian Shieh revealed that the market conditions in the third quarter still faced headwinds. To maintain competitiveness, PSMC has reduced prices to customers by about 4% to 5%.

It is reported that PSMC’s third-quarter capacity utilization is around 60%, and the gross profit margin is also impacted by idle capacity losses, dropping to 9.2%.

Regarding future demand, Shieh stated that the supply chain has now descended to a reasonable level, with market demand appearing in areas such as mobile driver ICs and surveillance camera CIS components. Visibility is expected to extend to around one quarter, so he is optimistic that PSMC’s fourth-quarter operations will grow by around mid-single digits.

The overall market sentiment is gradually clearing in anticipation of inventory corrections.

In general, as the fourth quarter is coming to an end, most companies still hold conservative views. In the consumer electronics field, such as PCs and smartphones, inventory adjustments have gradually reached the end, and some have already enjoyed the benefits of an upturn. However, inventory adjustments for automotive electronics and industrial applications are expected to lag, and this downturn is expected to be extended.

Among them, the views of TSMC and SMIC are worth noting. TSMC stated that customer inventory digestion will continue into the fourth quarter. Regarding the automotive and industrial platforms and AI businesses that TSMC has recently actively sought to expand, TSMC President C.C. Wei warned that the demand for AI is “not enough to offset” the weakening demand for chips in consumer electronic products on its earnings call in October.

Haijun Zhao, co-CEO of SMIC, stated that in the fields of smartphone and industrial control, Chinese customers have basically reached a balanced inventory level. However, European and American customers are still at historically high levels. Secondly, the relevant inventory of automotive products has begun to be on the high side, causing customers to be alert to market corrections, and orders are quickly tightening. Additionally, there are signs of a recovery in the third quarter in the smartphone terminal market, and the industry. As a whole, he believes that there will be a rebound in overall consumer electronics next year.

Regarding whether the global semiconductor foundry industry is slowly recovering from a downturn, TrendForce pointed out that in 2023, terminal demand is gradually recovering, and AI and automotive demand are maintaining growth momentum. AI servers are expected to grow by more than 37% in the next three years, and electric vehicles with the support of autonomous driving will have a compound annual growth rate of 30% to 40% in the next three years. Smartphones are expected to end their downward trend in 2024, with a growth rate of 2.9%, and servers will have a growth rate of 2.3%, overall leading to an increase in demand for foundry.

On the other hand, 8-inch wafer capacity utilization rate of foundries will gradually rise in 2024. The 8-inch production line produces products such as MOSFET, IGBT, and PMIC will still focus on 12-inch wafers capacity expansion in the next few years. In addition to adopting solutions from existing chip suppliers, the trend of customized chips has also emerged, and high-speed computing applications have become the biggest driving force for advanced processes. TrendForce predicts that the global foundry industry will experience a slight increase in 2024, reaching a growth rate of 6.4%.

In recent years, the tech industry has pivoted around two keywords, low carbonization and digitization, marking significant areas of growth. Semiconductor companies are eagerly investing and acquiring ventures, particularly in response to the emerging new energy industry chain driven by the low-carbon trend.

At the recent Infineon OktoberTech™ event, David Poon, Senior Vice President and President of Greater China Region at Infineon, outlined the company’s ambitious goals. By the end of 2030, Infineon aims to secure a 30% market share in the SiC market, targeting an annual revenue exceeding USD 7.6 billion. As per a report from 21jingji, Infineon also holds a positive outlook on the overall market growth of third-generation semiconductors.

The current landscape sees widespread application of third-generation semiconductors like SiC and GaN in new energy vehicles, charging stations, energy storage, and other products. Major industry players are actively entering this dynamic market. As a dominant force in power semiconductors, Infineon not only announced SiC expansion plans earlier this year but also acquired GaN Systems in October.

Speaking of recent GaN acquisition, Poon expressed during an interview that the collaboration between the two companies would significantly propel Infineon’s development. They believe that GaN has reached a turning point, extending its applications beyond chargers to encompass diverse fields like energy storage, heralding a phase of substantial growth. A new round of competition is unfolding within the realms of the new energy field and the industrial ecosystem.

New Energy and Digitization as Growth Drivers

In terms of performance, Infineon achieved remarkable double-digit growth in the past year. According to the full-year financial report for the 2023 fiscal year (ending September 30, 2023), the company’s revenue reached USD 17.868 billion marking a 15% YoY increase, while profits surged by 30% to USD 4.819 billion.

Jochen Hanebeck, CEO of Infineon, acknowledged the company’s record-breaking revenue and profits in the 2023 fiscal year, despite acknowledging the persisting challenges in the operating environment.

On one hand, there’s a persistent structural growth momentum in renewable energy, electric vehicles (particularly in China), and the micro controller sector within the automotive industry. On the other hand, demand for applications in consumer goods, communications, computing, and the IoT is currently experiencing a temporary lull. Infineon anticipates continued revenue growth in the 2024 fiscal year, although the pace of growth is expected to moderate. The company is actively responding to market conditions, seizing opportunities for structural growth.

The new energy and digitization markets emerge as the new growth engines targeted by leading semiconductor companies like Infineon. With China at the forefront of the industry’s new landscape, Infineon is keen on tapping into new opportunities in the Chinese market.

In an interview, Poon remarked, “Looking at low carbonization, firstly, the growth in new energy vehicles is substantial. According to data from the China Association of Automobile Manufacturers (CAAM), from January to September 2023, the production and sales of new energy vehicles reached 6.313 million and 6.278 million units, respectively, with YoY increases of 33.7% and 37.5%. The semiconductor value in an electric vehicle has increased by about USD 950 compared to a traditional fuel vehicle, making this a significant driving force.”

He further emphasized, “The amounts of domestic new energy vehicle shipments and exports are robust. Additionally, the proliferation of charging stations in the country indicates clear prospects for this market. In other areas of new energy, such as photovoltaics, wind power, and energy storage, these are also growth drivers we are closely monitoring.”

New energy vehicles and renewable energy have evolved into the foundational pillars of the burgeoning low-carbon mega-industry. Simultaneously, within the digitization market, Infineon offers solutions related to data centers. “Apart from data centers, in domains like smart factories, smart cities, and smart homes, we provide digitization and low-carbon solutions to enhance efficiency. Digitization serves as a significant driving force,” highlighted Poon.

SiC and GaN Operating in Tandem

In the current landscape of the new energy market, third-generation semiconductors such as SiC and GaN have gained significant traction. Taking the more mature development of SiC as an example, although it is still undergoing iterative development, it has found extensive applications in the automotive field, experiencing rapid growth.

TrendForce predicts that the SiC power component market in the automotive sector will witness substantial growth, from USD 1.09 billion in 2022 to USD 3.98 billion in 2026, with a compound annual growth rate of 38%.

Presently, SiC faces supply shortages, prompting major makers to scale up production. Infineon, for instance, has announced a substantial expansion of its Kulim wafer fab in Malaysia, aiming to establish the world’s largest 8-inch SiC power wafer fab. Poon noted that the first phase is slated to commence production in mid-next year, with the second phase scheduled for production in 2027. This expansion is driven by the broad market demand for SiC across applications like AI, automotive, and new energy photovoltaics.

As per TrendForce, the collective market size of SiC power components in 2023 reached USD 2.28 billion, witnessing a notable 41.4% YoY growth. Projections suggest that by 2026, the SiC power component market could reach an impressive USD 5.33 billion, with the automotive sector’s SiC power component market poised to surge to USD 3.94 billion.

Besides Infineon, major players like Wolfspeed and STMicroelectronics are actively bolstering their production capacities. In June this year, STMicroelectronics announced plans to establish an 8-inch SiC device manufacturing joint venture with Sanan Optoelectronic in China. The commencement of production is anticipated in the fourth quarter of 2025, with full completion scheduled for 2028, involving a total construction cost of approximately USD 3.2 billion. Wolfspeed, in collaboration with the German automotive giant ZF Group, not only established a joint innovation laboratory for SiC but is also in the process of constructing a SiC device factory in Germany.

According to TrendForce, The GaN market is primarily propelled by consumer electronics, with a core emphasis on fast charging. Other consumer applications include audio, wireless charging, power, and consumer products. However, many companies have already shifted their focus to industrial markets such as data centers, renewable energy, and the new energy vehicle market, with numerous companies persistently conducting R&D in this direction.”

Overall, semiconductor giants are strategically navigating both SiC and GaN, intensifying efforts in the realm of third-generation semiconductors and fortifying a more comprehensive industrial chain.
(Image: Infineon)

Amid a two-year recalibration in the smartphone and electronic component supply chain, inventory levels have rebounded to a healthy state. The infusion of new applications like AI and auto driving has fueled a comprehensive replenishment of consumer electronics inventory, propelling IC design with a surge in urgent and short orders.

Although wafer prices surged by over 40% during the pandemic, recent declines in utilization suggest an impending price reduction cycle to maintain operational rates, expected to lead to a reduction in IC design costs. Key players, boasting inventory turnover periods below a hundred days, are well-positioned for a potential upswing in demand, as reported by CTEE.

While most semiconductor companies are anticipated to experience declines in 2023, inventory levels have already tapered off. MediaTek boasts an inventory turnover period of just 89.11 days, with Realtek and ITE Tech at 96.77 and 84.11 days, respectively.

IC design companies emphasize the dominance of rush orders in the latter half of the year. Despite the uncertainty of economic visibility, confidence prevails regarding the new applications like AI, auto driving, and LEO(Low Earth Orbit) satellites, promising an upsurge in demand.

IC design companies also point out that the 3-5 year cycle of device replacement is imminent. The infusion of new AI applications and technological advancements in decision-making and workplace practices is expected to drive business demand. Positive developments, such as Microsoft discontinuing support for Windows 10, are anticipated to gain traction by 2024.

Explore more

• Oversupply or Blue Ocean Shift? China’s Next Step in Specialty Process
• China’s Wafer Fabs Hits 44 with Future Expansion 32, Mainly Targeting on The Mature Process
• TrendForce Foresees China’s Mature Wafer Processes to Expand to 33% by 2027, Japan Secures Advanced Processes

In the previous articles (China Strives to Break Through U.S. Restrictions in Mature Processes, Aiming for Over 30% Global Share by 2027 and China’s Wafer Fabs Hits 44 with Future Expansion 32, Mainly Targeting on The Mature Process) we explored the overall layout of Chinese wafer fab and developments in 12-inch and 8-inch wafer foundries. This article shifts to navigating the challenges of preventing oversupply while strategically pushing forward in the realm of mature processes.

Due to the counterattack of international giants in mature processes leads to fierce competition for orders, the recent surge in mature processes over the past two years in fact has brought pressure to Chinese wafer fabs. From the perspective of the industry chain, it may also cause industry overcapacity.

The popularity of mature processes can be traced back to its extensive application market, research and development of advanced processes approaching the limit of Moore’s Law.

No need to say it also reflects the regular operation of market dynamics. In the current economic downturn, the demand for automotive electronics and industrial control systems(ICS) is booming, with 80% of their demand falling under mature processes. As the AI trend rises, many high-end AI and computing chips in China cannot adopt advanced processes, prompting a reconsideration of design changes to use multiple mature process chips instead of a single high-end process chip. This not only ensures shipments but also indirectly increases the synchronous multiplier of mature process chips.

Can Specialty Processes Become a Blue Ocean for China?

With the emergence of new demands in downstream application scenarios, the variety of semiconductor products continues to increase. Industry insiders state that global foundries are competing to target mature process wafer foundries. In this context, Chinese wafer fabs should focus on creating differentiation.

Therefore, specialty processes are gradually gaining attention in the current development of wafer foundries. In comparison to advanced logic processes, specialty processes particularly emphasize the research, innovation, and application of new materials (SiC and GaN are currently popular), new structures, and new devices. Specialty processes highlight wafer processes with custom capabilities for special IP and diverse technological categories. This is considered an important development branch beyond Moore’s Law, which involves continually reducing the linewidth to enhance chip integration.

Specialty process product categories are extensive and can form a competitive advantage in specific areas. These mainly include embedded/independent non-volatile memory, power devices, analog and power management, sensors, and other process platforms.

Representative enterprises in China’s specialty process industry include SMIC, Huarun Microelectronics, and Huahong Group. These companies attach great importance to the development of specialty processes. To meet the differentiated demands for product functionality and performance in the market, enterprises continually research and innovate wafer manufacturing process technologies, evolving into differentiated manufacturing processes.

For example, Huahong Semiconductor’s specialty processes include power management, radio frequency, power devices, and other platforms, especially in wafer foundry for power devices; Huarun focuses on high-voltage power BCD, high-performance BCD, high-reliability BCD, high-precision analog, MEMS, and six major special power device simulation wafer foundry processes.

Major wafer foundries have always attached great importance to the development of specialty processes. TSMC’s specialty process is leading by far, while GlobalFoundries and UMC are also focusing on mature processes and specialty processes. It is not difficult to predict that there will be fewer and fewer participants chasing advanced processes in the future, and new entrants will compete for the market in specialty processes.
(Image: SMIC)