Artificial intelligence carnival moment, or foundry's darkest moment?

Source: Financial Associated Press

Author: Yu Qi

This year's AI explosion once again pushed the semiconductor industry to the fore. Minsheng Securities recently reported that the current market demand for generative AI chips has exceeded previous assessments**. AMD expects the AI chip market to grow from $30 billion this year to $150 billion in 2027. However, such a grand occasion has not appeared in the field of wafer manufacturing and processing. Although it is the core process of chip manufacturing, the depression has not ended since the previous downturn in the consumer electronics market.

According to the latest research report of IDC, looking forward to this year, consumer electronics purchase will be sluggish in the first half of the year, and market demand has not increased significantly. The inventory adjustment of end products will continue to the second half of the year. Although orders for AI and HPC-related chips are quite abundant, * The demand for stocking is not fully optimistic*. IDC predicts that the global wafer foundry market will decline slightly by 6.5%** this year.

According to the research report of Founder Securities on February 3, the top ten fabs in the world in 2022Q1 are TSMC, Samsung, UMC, GlobalFoundries, SMIC, Huahong Group, PSMC, World Advanced, and Hefei Jinghe Integrated Technology Co., Ltd. And Tower Semiconductor**, of which TSMC occupies 53.6% of the market share. According to ICInsight data, the total global wafer production capacity is showing a rapid upward trend, and major wafer manufacturers continue to expand their production capacity. However, The performance of wafer companies has also reached the worst moment, and the industry is also facing the problem of excess capacity.

## The big model explodes but still can't move the fab? Wafer leader AI received soft orders, but performance was at the most pessimistic moment

Public data shows that since the fourth quarter of last year, the performance of wafer foundries has declined. In the first quarter of this year, the decline appeared to be even more severe. According to the latest report from market research firm TrendForce, The world’s top ten wafer foundries all suffered a significant decline in performance in the first quarter.

(Photo source: TrendForce; Source: Global TMT6.13 article "In the first quarter of 2023, the revenue of the world's top ten wafer foundries all fell quarter-on-quarter, TSMC ranked first, and GF surpassed UMC to rank third")

Specifically, TSMC’s Q1 revenue is approximately NT$508.6 billion, which has increased by more than 15% month-on-month, although it has increased year-on-year. Some analysis articles also mentioned that the revenue did not meet TSMC’s expectations, and the year-on-year growth rate hit a new low since the beginning of 2019**. According to the company, it is mainly affected by the reduction in demand in the terminal market, which leads to the adjustment of orders by customers, and ** expects this impact to continue until Q2**.

Behind it, Samsung suffered even more losses in the first quarter. Its operating profit fell by 95% year-on-year, the worst quarterly performance in 14 years. The old triple united power company suffered a decline in both revenue and net profit in Q1. In addition, the performance of SMIC, GF, and PSMC has also shown a downward trend. The A-share listed SMIC’s first quarterly report showed that its revenue fell by 13.9% year-on-year, and its net profit attributable to the parent company fell by 44% year-on-year.

However, it is worth noting that with the surge in demand for AI this year, according to a previous report by the Chinese Taiwanese media "Digital Times", TSMC has received a large influx of urgent orders for AI chips this year, and the company's 5nm production capacity is close to saturation. In April, there were also rumors that Apple, AMD, and Nvidia were vying for TSMC's AI chip orders.

For such a contradictory situation - on the one hand, there are a large number of urgent orders, but on the other hand, it is the most tragic performance. Industry insiders pointed out that the main reason is that the size of the current AI chip market is not enough to fill the hole under the sluggish consumer electronics market. **. According to the statistics of Precedence Research, a third-party market research organization, the global AI chip market size will be US$16.8 billion in 2022, while Apple's order value from TSMC will be US$17 billion during the same period. It can be seen that compared with the consumer electronics and traditional server markets, the volume of AI-related chips is still too small.

In addition, Liu Deyin, chairman of TSMC, said that even after catching up with the huge trend of AI, chip foundries still consider how to survive this winter safely. After all, there are not many foundries that can produce AI chips. Another analysis pointed out that in the second quarter of this year, although there were sporadic orders for some components in the fab, actually most orders were driven by short-term inventory replenishment, rather than a strong signal of improvement in end market demand .

Overall, this year's foundry market may face a cold winter. The agency predicts that the top ten wafer foundries in the world will continue to decline in revenue in the second quarter**, but the rate of decline will be slower than that in the first quarter. At the same time, according to Huxiu’s analysis article, Liu Deyin, chairman of TSMC, said that he is ready for the next wave of good growth starting next year. This seems to mean that the chip foundry market may not gradually recover until next year in the most optimistic case.

Overcapacity still expanding production? The leading manufacturers are fearless, and their small size becomes a protective umbrella. The industry says that the time for fierce price competition has not yet come

In addition to the more intuitive decline in performance, the plight of the wafer foundry does not stop there. From the past year to now, the key words in the industry have changed from price increase, out of stock, and production expansion to price reduction, order cut, and production reduction, and the crazy capacity expansion under the market share competition has not stopped.

According to statistics from TrendForce, unlike the previous two years when orders were fully loaded, the production line utilization rates of major fabs have not yet reached their peak. Among the 8-inch wafer production lines, the capacity utilization rates of TSMC, UMC, World Advanced, and PSMC are expected to drop to 97%, 80%, 73%, and 86% respectively**. SMIC also disclosed that as the capacity utilization rate fell to 79.5% in the fourth quarter of last year, its annual capacity utilization rate fell to 92%. In this regard, industry analysts said that for fabs, the maximum capacity utilization rate needs to be above 75% to achieve cost-effectiveness**. It can be seen that some manufacturers are currently unable to achieve cost-effectiveness.

At the same time, some people in the industry said that after nearly two years of wafer shortage, the wafer market is now oversupplied and it is no longer a seller's market. The current "wafer price war" has quietly occur**. According to the Taiwan media "Digital Times", UMC has been willing to provide a 10%-15% price discount** to customers** who increase the wafer production in the second quarter of 2023**. At the beginning of this year, there were also rumors in the industry that Samsung and World Advanced planned to cut the price of some mature process chips by 10%.

However, since the beginning of this year, the pace of fab expansion has not slowed down. According to recent news, a number of companies** including Intel, Samsung Foundry, TSMC and Texas Instruments** are building and equipping new fabs** in the United States. At the same time, many leading enterprises in ** are busy launching 300 mm (12 inches) . According to the latest SEMI report, chipmakers expected to increase 300mm fab capacity during the forecast period from 2022 to 2026 to meet demand growth include GlobalFoundries, Hua Hong Semiconductor, Infineon, Intel, Samsung, SMIC, STMicroelectronics, etc. At the same time, according to the research report of Minsheng Securities, only among the major domestic fabs, SMIC, Jinghe Integration, Huahong Semiconductor and other companies have expanded their 12-inch production capacity.

However, it should be noted that according to TrendForce statistics, among the 12-inch wafer production lines, the capacity utilization rates of TSMC, Samsung, and UMC have also** dropped to 96%, 90%, and 92%** respectively. Under such circumstances, why the market expansion still cannot stop?

In this regard, some analysts pointed out that the current large-scale expansion of production in the industry still shows that leading companies are optimistic about the prospects for 12-inch wafers, but among them, there are still leading manufacturers based on their own strong strength, and are not afraid of the current or future. There is a crisis of overcapacity**. This is also the reason why some leading manufacturers in the industry are only revising their expansion plans instead of giving up on the rumors of surplus and chip price drop.

Secondly, manufacturers with small volume and relatively single product structure seem to be "fearless". According to industry analysts, this is mainly due to the relatively easy adjustment of their product structure and their limited impact from capacity expansion* *. For example, Hua Hong Semiconductor, although it was also dragged down by the weakening demand for consumer electronics in the fourth quarter of last year, related revenue fell by nearly 50%, but at the same time, eNVM (mainly used for automotive MCU) revenue increased by 76% year-on-year. Thanks to this, its comprehensive capacity utilization rate in the fourth quarter of last year was as high as 103.2%**, which was significantly higher than the industry average.

Looking forward to the later stage, some insiders said that it is inevitable that the global semiconductor equipment market will encounter a dark moment this year. However, the entire industry is expected to usher in a period of recovery and development in 2024. 12 inches are better than 8 inches, rebound in the second half of the year is expected. However, some analysts pointed out that the industry is currently in a melee of production expansion around 12-inch wafers, and it is expected that the price war in the foundry market has not yet reached the "fierce battle moment"**. For industry leaders like TSMC and Samsung, no matter how sluggish the consumer electronics market is, they will not slacken their efforts to seize advanced process foundries. With the intensification of this round of price cuts, the challenges will only increase and not decrease.