The current semiconductor foundry industry is no longer as glamorous as it was two years ago. Even the seemingly successful large companies are facing unprecedented troubles. Among the top six global manufacturers, each has its own set of challenges.
According to Counterpoint's statistics, in the first quarter of 2024, TSMC continued to maintain its leading position in the semiconductor foundry industry, with a market share of 62% in the first quarter. Samsung, as the second-largest foundry, accounted for 13% of the market share. SMIC delivered a performance that exceeded market expectations in the latest quarter, securing the third position for the first time.
As can be seen from the above chart, TSMC, which controls advanced process technology and the market, is well-fed, while manufacturers without such strength and status can only compete fiercely in a relatively limited market.
01
Advanced Process, a Game for the Gods
In the context of a shortage in the market for advanced process chips, TSMC's 5nm, 4nm, and 3nm processes continue to maintain a leading position in the market, receiving orders from most major global customers.
In the fourth quarter of 2023, the revenue from the 3nm process accounted for 15% of TSMC's total revenue, with a sequential increase of 14.4%. The 5nm and 7nm processes accounted for 35% and 17% of the total revenue, respectively. Overall, advanced process technologies (7nm and below) accounted for 67% of its total revenue. TSMC expects a capital expenditure of $28 billion to $32 billion in 2024, of which 70-80% will be used for advanced process technologies, and 10-20% will be used for specialty and mature processes.
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In 2024, more customers will join TSMC's 3nm camp, including MediaTek, Qualcomm, NVIDIA, AMD, and even Intel.NVIDIA's new product H200 and AMD's MI300 will provide a large number of orders for TSMC's 3nm process. Intel's next-generation low-power architecture Lunar Lake MX (LNL) CPU will use TSMC's N3B process. Recently, TSMC has started to accelerate its progress, and the Arrow Lake H/HX CPU will also adopt the 3nm process, which is expected to further improve TSMC's production capacity utilization.
Due to the continuous growth in demand for advanced processes, TSMC plans to increase the 3nm production capacity utilization to 80% by the end of 2024.
TSMC plans to introduce a 2nm process in 2025. Recently, it has started the preparatory work for the 2nm trial production, with the goal of producing nearly a thousand pieces this year.
Samsung Electronics launched the second-generation 3nm process technology in 2023 and plans to mass-produce 2nm in 2025.
According to South Korean media reports, Samsung has started trial production of the second-generation 3nm process (SF3) chips and is testing the performance and reliability of the chips, with the goal of increasing the yield rate to over 60% within six months. Samsung places great importance on cooperation with Qualcomm and NVIDIA. Qualcomm's new Snapdragon 8 Gen 3 is produced by TSMC, and NVIDIA's H200 and AMD's MI300X are expected to adopt TSMC's 3nm process. If the SF3 output and performance are stable, customers who have switched to TSMC are expected to return.
In 2025, Samsung will launch the 2nm (SF2) process. Subsequently, the company will increase the number of nanosheets of transistors, which can enhance the driving current, improve performance, and reduce power consumption. The company has high expectations for the 2nm process. According to South Korean media reports, Samsung's wafer foundry division is integrating advantageous resources and rapidly advancing its 2nm production plan, striving to improve production capacity utilization when the head-to-head competition with TSMC arrives.
02
Mature process quotes continue to decline
The mature process wafer foundry market continues to face the pressure of oversupply. IC design companies revealed that in the second quarter of 2024, some mature process quotes fell by 1% to 3% again. From the current situation, the third-quarter quotes may still fall, making the overall price continue to decline since the third quarter of 2022.
In the second half of 2023, mature process wafer foundries faced a battle to maintain a capacity utilization rate of 60%. Major manufacturers such as UMC, World Advanced, and Powerchip cut their first-quarter 2024 quotes by 10% to 20% to save capacity utilization. This round of quote adjustments led to the mature process wafer foundry prices falling to a new low after the pandemic, resulting in a decline in the gross profit margin of related manufacturers.IC design companies have revealed that wafer foundries have informed them that the mature process business is not easy to operate, with the utilization rate of production capacity plummeting. In order to ensure the utilization rate and market share, and to maintain a certain economic scale of production, they have no choice but to reduce prices to promote sales.
Even though there have been signs of recovery in the PC and mobile phone markets recently, customers are still conservative in their wafer investment strategies, considering factors such as inventory clearance and inflation, forcing wafer foundries to increase the discount range to prevent orders from flowing to competitors willing to reduce prices.
Due to the low demand for wafer investment from consumer customers, manufacturers specializing in 8-inch wafer foundry have been hit the hardest. Because IDM and IC design companies previously placed a large number of repeated orders, the inventory levels of chips such as power management ICs, driver ICs, and MCUs are still high. Moreover, some products have been transferred to 12-inch production lines, keeping the utilization rate of 8-inch wafer foundries at a low level.
However, some wafer foundries have stated that if customers for specific applications, such as driver ICs, want cheaper foundry prices and therefore transfer orders, they will not follow suit in reducing prices. After all, price competition has no end and will continue to increase other applications, allowing the utilization rate to gradually recover.
Some IC design companies have stated that after experiencing the previous situation of being troubled by high inventory, they will now wait for customers to provide clear demand before investing in wafers. In recent years, considering costs, more and more orders are being placed in Chinese mainland wafer foundries, and the capacity of mature process wafer foundries in mainland China continues to increase, which will lead to a situation of oversupply of capacity for a while.
03
The gross profit margins of the four major wafer foundries are worrying
In May, SMIC, Huahong Semiconductor, GlobalFoundries, and UMC successively announced their financial reports for the first quarter.
In the first quarter of 2024, SMIC's sales revenue was $1.75 billion, a sequential increase of 4.3%, a year-on-year increase of 19.7%, and the gross profit margin was 13.7%, a year-on-year decrease of 7.1 percentage points.
SMIC's monthly production capacity increased from 805,500 8-inch wafer equivalents in the fourth quarter of 2023 to 814,500 8-inch wafer equivalents in the first quarter of 2024, with the utilization rate of production capacity rising to 80.8%.Looking ahead to the second quarter, SMIC's revenue guidance is a sequential increase of 5% to 7%, with a gross margin guidance of 9% to 11%.
In the first quarter of 2024, Huaneng Semiconductor's sales revenue was $460 million, down from $631 million in the same period last year, but it achieved a 1% increase compared to the previous quarter's $455 million. Despite the increase in revenue, the gross margin has decreased from 32.1% in the same period last year to 6.4%.
Huaneng Semiconductor's net profit attributable to the parent company's shareholders was $31.8 million, a year-on-year decrease of 79.1%. The company attributes the decline in net profit to the decrease in average selling price, which directly affects the gross profit level.
In the first quarter of 2024, GlobalFoundries' revenue was $1.549 billion, a decrease of 16% both sequentially and year-on-year, with a net profit of $134 million, a nearly 50% drop both year-on-year and sequentially. The gross profit was $393 million, a 25% decrease sequentially and a 24% decline year-on-year, and the gross margin was 25.4%, slightly lower than the previous level of about 28%.
GlobalFoundries' 12-inch wafer equivalent shipments were 463,000, a 9% decrease year-on-year and a 16% decrease sequentially.
In the first quarter of 2024, UMC's revenue decreased by 0.6% sequentially and increased by 0.8% year-on-year, with a gross margin of 30.9% and a slight decrease in capacity utilization to 65%.
From the latest financial reports of these four major mature process wafer foundries, the gross margin has generally decreased, with some experiencing a significant drop. At the same time, there is a decline in capacity utilization. These can fully reflect the fierce competition in the global mature process wafer foundry market. In order not to let the capacity utilization drop too much, each company is reducing prices to grab orders, resulting in increased costs and reduced profits, and the direct result is that the gross margin data is not very good-looking.
04
Early Prediction
For the current advanced process and mature process wafer foundry market, IC Insights had a prediction in 2020 when it had not yet been acquired. The organization's "Global Wafer Capacity 2020-2024" report pointed out that although facing many challenges, the semiconductor industry has a strong motivation to continue to reduce the geometric size of transistors, as there are many benefits to doing so, such as higher speed, lower power consumption, and lower unit area cost.Under such development trends, according to the statistics and forecasts of IC Insights, the market share of various semiconductor processes is developing towards a relatively more balanced direction.
As shown in the figure above, in 2019, the market share of advanced processes below 10nm was only 4.4%, and by 2024, its proportion will grow to 30%. During this period, the market share of the 10nm-20nm process will decrease from 38.8% to 26.2%; the market share of the 20nm-40nm process will decrease from 13.4% to 6.7%; the proportion of mature processes above 40nm has not changed significantly over the years.
The advanced process below 10nm shows a rapid growth trend, with a market share of 10% in 2020, and the forecast value for 2022 has exceeded 20%, increasing to 30% of the global capacity in 2024.
The market share of the 10nm-20nm process was originally the largest, as shown in the figure, close to 40% in 2019, but with the rise of the advanced process below 10nm, the market share of 10nm-20nm is gradually being eroded. The main processes in this range are 16nm (mainly provided by TSMC), 14nm (mainly provided by Samsung, Intel, and GF), and 12nm (mainly provided by TSMC and GF).
In the 20nm-40nm range, there are mainly 22nm, 28nm, and 32nm.
The mature process above 40nm, whether it is below 180nm or above 180nm, has a stable market share. This is also the reason why many wafer foundries have long been focused on mature processes and have not invested too much capital and effort in advanced processes.
Overall, by 2024, the processes below 10nm, 10nm-40nm, and above 40nm will each account for about one-third of the market, presenting a tripartite situation. In this process, below 10nm is a clear incremental market, and its cost is high, and the requirements for technical accumulation are also high, so there are few players, which is also the main reason why TSMC can control 60% of the global wafer foundry market share. In the 10nm-40nm and above 40nm process fields, there is no increment, the technical content is relatively low, and the competition is fierce, forming the current situation of competition, price reduction, and low gross profit margin is also natural.
05
Seek the next best thingAdvanced processes below 10nm, especially those below 3nm, are extremely challenging to manufacture, requiring substantial technological accumulation and massive financial support. Even leading manufacturers like TSMC must control costs and capital expenditures. At the same time, the market for mature processes above 40nm has long become a red ocean. For well-known wafer foundries in the industry, expanding capacity in the mature process market above 40nm is not cost-effective in terms of investment and output ratio. Therefore, in recent years, the 10nm to 40nm process, especially the 16nm, 22nm, and 28nm process technologies, have been increasingly favored, especially in the newly built wafer fabs in mainland China, Japan, and Europe, which are mostly equipped with these process lines.
In fact, in terms of the current global wafer foundry overall capacity, the proportion of production lines that have achieved mass production in the 12nm, 14nm, and 16nm process fields is not high.
TSMC stated that the 12nm process is in line with advanced processes and extends to mature processes, and will occupy a larger market share for a long time in the future. Therefore, the new wafer fabs built by this wafer foundry leader in Japan and Germany are all focused on the 12nm, 16nm, and 22nm processes, which can achieve a better investment and output ratio.
GlobalFoundries and UMC are also actively expanding their related capacities.
In July 2023, GlobalFoundries' Singapore factory was officially completed and put into operation, with an annual output of more than 400,000 wafers. In the past few years, the company has also been investing in the expansion of its Fab 8 factory in upstate New York. GlobalFoundries invested $2.4 billion in Dresden, Germany, to increase capacity. In 2023, GlobalFoundries announced a partnership with STMicroelectronics to expand capacity. These moves by GlobalFoundries are all aimed at increasing the capacity of the 10nm to 40nm process.
UMC also places great emphasis on the investment and output ratio, rather than advanced process technology. Special processes account for 60% of the company's revenue. In simple terms, special processes refer to those with strong differentiation, which are not available to every company in the market, and are unique mature process technologies and services. In this regard, UMC is good at OLED driver ICs, RF SOI, and BCD, etc.
For Intel, which is determined to expand its wafer foundry business, in the short term, it cannot reach the process technology and market influence of TSMC and Samsung. It must consider the return on investment. At this time, developing 10nm to 40nm process wafer foundry has become the best choice. In this regard, UMC's demands and process technology characteristics are very suitable for Intel, so the two companies have started to cooperate.
Through cooperation, UMC can use Intel's existing FinFET capacity without huge capital expenditure, and can increase the weight in the fierce competition of the mature process market. Intel can gain experience in the wafer foundry market and concentrate resources on the development of more advanced process technologies such as 3nm and 2nm.
06
ConclusionOverall, both advanced and mature process technologies, wafer foundries are trying every means to improve the utilization rate of production capacity. Advanced process plants are not worried about the gross margin, but they need to be prepared in advance. While expanding production, they should improve the return on investment. Mature process production lines should put improving the gross margin in the most important position.
SEMI believes that the global wafer factory utilization rate is still relatively low, especially for mature processes, with no signs of recovery in the first half of 2024.
J.P. Morgan Securities pointed out in the recently released wafer foundry industry report that the inventory reduction will end, and the industry will fully recover in the second half of 2024 and further strengthen in 2025.
J.P. Morgan's head of Taiwan research, Gokul Hariharan, believes that the industry has reached the bottom. Fortunately, the demand for AI is strong, and the demand for non-AI is also recovering. Urgent orders have begun to appear, including large-size display panel driver ICs (LDDIC), power management ICs, WiFi 5 and WiFi 6 chips, etc., all of which are driving the wafer foundry industry towards recovery.
It is worth noting that the recovery speed of the utilization rate of wafer foundries in mainland China is relatively fast. This is because IC design companies have started to adjust their inventory early. After six quarters of inventory reduction, the order volume of wafer foundries has tended to be normal.
