Layoffs Begin
A few days ago, news broke that another major company in the chip industry has disbanded, this time it is the wholly-owned subsidiary of TCL Holdings, MoXing Semiconductor. This follows the dissolution of chip R&D teams at OPPO and Meizu, marking yet another well-known enterprise disbanding its self-developed chip team.
As the year-end approaches, many companies seem eager to avoid dragging things into the new year, and we can expect similar news to emerge soon.
Recently, chip industry bloggers have shared some surreal cases they have witnessed, revealing the various troubles faced by chip companies:
Company A secured a government project worth billions last year and, with abundant funds, began dumping inventory at prices below half of material costs, aiming to eliminate competitors with low prices. However, it is reported that this year’s government projects have significantly shrunk, leaving uncertainty about the sustainability of the price war.
Company B has gone through its sixth or seventh round of financing, but it was recently revealed that after spending a fortune on advanced process tape-out, they discovered errors in product definitions and are now preparing for another round of financing.
Company C has struggled to enter the supply chain of a major overseas manufacturer but is now facing massive claims and fines due to quality issues.
Company D has seen the price of its specialty chips slashed by clients, and payment collection has become difficult.
Company E has been caught packaging overseas wafers as self-controlled products, leading to refunds and potential legal issues.
Company F is losing money to secure a major client, with payment terms extending for months, and is now being asked for further discounts upon maturity.
Recently, I read an article stating that the WiFi FEM market, with a scale of 20 million, has seen ten domestic manufacturers enter, which is quite surreal.
Mature Processes Begin Price Wars
By the end of next year, China will have 32 mature process wafer fabs completed, and Taiwanese wafer foundries are preparing for the “red alert” ahead of time!Under pressure from price wars initiated by mainland manufacturer Hua Hong Semiconductor and Korean manufacturer Key Foundry, semiconductor industry insiders reveal that the first quarter will see a noticeable price drop of about 10% in mature process wafer foundries. They hope to secure orders early amidst the low-price competition from mainland and Korean manufacturers, thereby boosting capacity utilization rates!
Unlike previous sales discounts, including UMC, Vanguard International Semiconductor, and Powerchip Semiconductor Manufacturing Corporation, these foundries have recently introduced a “diversified” discount model for IC design, including binding volume without binding price, extending tape-out quantities, and other strategies to position themselves for the recovery opportunities in consumer electronics next year.
IC design companies indicate that while there has been a slight improvement in end-user demand recently, it has not yet shown strong recovery. However, peers are actively negotiating with foundries for price reductions for the next quarter, clearly feeling that the market conditions have reversed in favor of buyers. Wafer foundries are even offering various indirect pricing strategies, including volume discounts, binding volume without binding price, extending tape-out quantities, flexible pricing, and wafer banks, indicating that there are now many more options available.
Insiders reveal that the main reason is the pessimistic outlook for the first quarter, compounded by the upcoming long holidays, leading to expectations that demand may not just be “cold” but “frozen”. Mainland manufacturer Hua Hong Semiconductor and Korean manufacturer Key Foundry are aggressively competing on price, posing a threat. “This wave is an L-shaped bottom; if the recovery is snatched away by mainland manufacturers before it begins, future recovery will depend on others’ orders,” thus forcing Taiwan’s three major mature process foundries to lower prices first. It is known that the price drop for the next quarter is expected to be around 10%; however, these three foundries have stated that they cannot comment on pricing.
Domestic mature process giants have previously maintained stable prices but offered discounts by shipping more than ordered quantities. However, to boost capacity utilization rates and secure orders early, they will no longer maintain prices in the first quarter of next year, instead opting for a direct 10% discount for orders of over 10,000 wafers. IC design companies estimate that once the leading foundries lower prices, others will inevitably follow suit. Although the extent of price reductions may vary by product and process, it is estimated that the average price drop for wafer foundries in the first quarter of next year will be around 10-20%.
Semiconductor industry insiders indicate that the current strategy of wafer foundries is to offer volume discounts, where orders of over 10,000 wafers have room for negotiation. The larger the order quantity, the greater the price flexibility. Binding volume without binding price means maintaining a certain order quantity, but with slight price flexibility as market conditions change. Extending tape-out quantities allows existing tape-out volumes to be extended for a year or even longer, reducing pressure on IC design companies when placing orders. Flexible pricing is for urgent orders, reducing the risk of pressure on IC design companies, but with relatively small price flexibility. Finally, wafer banks accept wafers to be made into semi-finished products, stored in foundries, and can be pulled for packaging when needed.
Taiwan Semiconductor Manufacturing Company (TSMC) Mature Process Price Cuts Reported
Recently, IC design companies have reported that TSMC, the leading wafer foundry, will resume small price reductions for some mature processes next year after a three-year hiatus. The outside world believes that even TSMC, which has maintained a relatively firm stance, is willing to make slight concessions on prices due to declining capacity utilization rates and increasing pressure from client negotiations.
As the leading wafer foundry, TSMC’s pricing is stable, with few fluctuations, typically offering “single-digit percentage” annual discounts to clients. Regarding the reported small price reductions for some mature processes, IC design companies indicate that it is around 2%. TSMC has declined to comment on pricing-related issues.
Several IC design companies have confirmed that they are indeed negotiating with TSMC for price reductions next year. Another IC design company revealed that TSMC’s discount method involves settling after a full quarter of tape-out, offsetting the costs from the next quarter’s photomask fees, allowing for low single-digit percentage discounts based on tape-out volumes in the second, third, and fourth quarters of next year.
IC design companies believe that other wafer foundries have already started to implement significant order price reductions and measures such as offering additional free tape-out quantities after reaching certain order volumes, in an attempt to increase capacity utilization rates. Mainland manufacturers have been quicker and more aggressive in price reductions than Taiwanese manufacturers, while TSMC’s pricing remains relatively firm. The news of TSMC’s partial price reductions for mature processes, even if not direct price cuts, still holds significant indicative meaning for other peers in the mature process sector, increasing pricing pressure before the peak season arrives in the second half of next year.
A few years ago, there was a significant shortage of ICs, and TSMC initially did not raise prices, while other peers’ quotes rose significantly, making TSMC’s pricing relatively lower, even the lowest. TSMC continued to report cancellations of discounts in 2021 and 2022, and in early 2023, it initiated a rare price increase after many years, with reports of increases ranging from 3% to 6%.
However, with the semiconductor market reversing, the supply chain began inventory adjustments in the second half of 2022. In the first half of this year, TSMC was reported to have introduced a “volume reward program,” where customers who place orders above a certain quantity would receive additional tape-out quantities for mature processes.
TSMC’s advanced processes are the main revenue driver, accounting for over 50% of its revenue, while mature processes are not its operational focus but remain a point of market attention. In the third quarter of this year, TSMC’s revenue from advanced processes, including 7nm and more advanced processes, accounted for 59% of total wafer sales for the quarter.
Chip Companies See a Ray of Hope
Wafer foundries are implementing various pricing incentives to boost production line utilization rates. For IC design companies, lowering tape-out costs is certainly beneficial, but they also face pressure from clients demanding price reductions and competitors actively slashing prices to increase revenue. IC design companies will still have to navigate a mixed environment next year, including a general easing of interest rates and expectations for a rebound in end-user demand, but the New Taiwan Dollar may trend towards appreciation.
IC design companies have largely endured the lowest point, as wafer foundries were initially reluctant to lower prices. However, with a sharp decline in end-user demand, pressure from clients demanding price reductions has emerged. Reluctance to lower prices has directly impacted revenue performance, but conceding on prices would compress gross margins. A review of IC design companies’ financial reports from recent quarters shows that very few have not experienced a decline in gross margins.
With wafer foundries increasingly willing to share the burden, even though price competition will not disappear, IC design companies can at least avoid sacrificing gross margins to fulfill orders. IC design companies welcome TSMC’s resumption of annual price discounts but also point out that even with a 2% discount next year, the tape-out costs will still be higher than before due to a 6% price increase earlier this year.
As the “light at the end of the tunnel” becomes clearer, IC design companies expect that the first quarter of next year will still be in the traditional off-season, gradually warming up in the second quarter, and entering the peak season in the second half of the year. The overall economic environment’s easing of interest rate actions should help boost end-user market demand.
However, IC design companies also acknowledge that as the U.S. interest rate hikes approach their peak, the New Taiwan Dollar has recently seen rapid appreciation, and there may be further U.S. interest rate cuts in the second half of next year, which are variables beyond the control of individual companies. If the New Taiwan Dollar continues to appreciate, it may impact companies’ revenues, gross margins, and non-operating gains and losses.
Source | Deep Technology
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