Chip order cuts are coming, wafer fabs are facing a formidable threat

Latest update time：2022-05-23

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Source: Content from Economic Daily , thank you.

The semiconductor "order cut storm" has officially arrived, with panel driver IC manufacturers firing the first shot. Due to weak panel demand and falling quotations, the industry has heard that some driver IC manufacturers have slashed their wafer foundry output by 20% to 30%. Last year, driver IC manufacturers made a lot of money, but now it's a thing of the past. Some consumer ICs may also be cut due to the pressure of consumption tightening caused by the mainland's blockade and inflation.

Taiwan's listed driver IC manufacturers include Novatek, Silicon Power, Duntech, Tianyu, Raytek, etc. The relevant industry players are unwilling to talk about this. Some industry players privately revealed that the current environment is really bad, "the orders that should be cut should still be cut", and in order to control inventory, "don't place so many orders later."

Before the pandemic, driver ICs were the least popular among foundry manufacturers because of the lowest foundry prices. They were mostly used to "fill capacity". However, the pandemic brought great demand for laptops, monitors, and TVs, which caused driver ICs to be in short supply and became the hottest product in the market. Prices kept rising, and related manufacturers were doing well, earning several billion yuan in capital last year.

Now that the demand boom has subsided, the panel market in particular has undergone a major correction, with prices plummeting, dragging down the driver IC market "from heaven to earth," catching driver IC manufacturers off guard.

Some industry insiders do not deny that "when the tide recedes, we will know who has nothing to wear". Last year, first-tier, second-tier and even third-tier driver IC manufacturers all rushed to jump on the train of surging prices. "ICs are equivalent to cash", which even caused the problem of duplicate orders from wafer foundries.

Now that the market has returned from its splendid state to its ordinary state, manufacturers no longer have the opportunity to make money. What they are competing for is who has a stronger foundation and more competitive products. "Big profits across the industry are a thing of the past."

Some driver IC manufacturers admitted that when supply was in short supply before, there were many orders but limited production capacity, and the order-to-shipment ratio (B/B value) was about 1.7 to 1.8. However, customer demand is not as good as before, so they can only cut some orders to wafer foundries and adjust the numerator and denominator accordingly. Therefore, the order-to-shipment ratio is still maintained at around 1.15 to 1.2 at this stage. If the wafer foundry orders had not been cut, the B/B value would have been less than 1 long ago.

An unnamed driver IC manufacturer said that customer orders have not been cancelled, but there is indeed a delay in the delivery of goods, so it has not yet cut orders to wafer foundries. Another driver IC manufacturer said modestly that orders to wafer foundries will be adjusted according to market conditions.

Driver IC manufacturers fired the first shot in cutting semiconductor orders. The industry believes that some consumer IC manufacturers may also follow suit in cutting orders due to the pressure of consumption tightening caused by the mainland's blockade and inflation.

Some consumer IC design companies pointed out that some of them had originally paid extra for additional production capacity this year, but now that the situation has changed, they will evaluate not placing orders for the time being and leave the capacity for other companies that still need it.

IC design industry operates differently

Although some IC design companies have begun to cut orders, there are also companies that are willing to take the opportunity to gain more foundry capacity. There are two main reasons. One is that there was no production capacity to support new products last year, and now it is just the right time to allocate production capacity to new products to grab market share. The other situation is that applications such as servers and automotive electronics are still in short supply and also need more production capacity support.

IC design companies believe that the market conditions began to correct at the end of last year, and the supply chain has gradually adjusted orders this year. In view of the fact that the demands for wafer foundry capacity from different manufacturers have begun to diverge, it is no longer the case that everyone is frantically scrambling for capacity. It is expected that the second half of this year to the first half of next year will be a critical point. Companies that have the ability to develop new products and the production capacity to support them will still have the opportunity to buck the trend in operating performance even when the market reverses.

The stock king Silicon Power-KY mentioned in a recent earnings conference that the company's products are still in short supply and inventory is very low. It is expected that this situation will remain the same throughout the year. Customers hope to have more supply of automotive, networking and computing-related products, and new production capacity will be opened in the second half of the year.

There are also some IC design companies that are still sitting on their hands at this stage, mainly because they still have expectations for the peak season in the third quarter. Considering the excellent profits the company made last year, they still have the confidence to hold on. If they cut wafer foundry orders due to temporary market fluctuations, if the market rebounds, they will have no goods to sell because the inventory is too low and there is no time to place orders for production, the situation will be even worse.

Semiconductor order cuts hit foundry industry

Panel driver IC manufacturers fired the first shot in cutting semiconductor orders. Foundries with a high proportion of driver IC foundry, such as TSMC and Powerchip, are likely to bear the brunt. UMC, which benefited from the good driver IC market last year and raised its prices, is also likely to be affected. TSMC's driver IC-related orders are generally taken over by its indirect investment TSMC. TSMC is fully committed to advanced processes, so the impact is limited.

Some IC design companies do not deny that "the wind has begun to change now." One or two wafer foundries that had a "big shot" attitude last year have recently taken the initiative to ask, "I still have production capacity, do you need it?" This is very different from the situation in the past when IC design companies had to come to "ask" for production capacity but were not necessarily guaranteed to get it.

The tight supply and demand situation of wafer foundry capacity seems to have begun to ease earlier than expected.

There are also market news that driver IC-related companies have begun to adjust the wafer output of some wafer foundries, and would rather pay liquidated damages to stop the bleeding and reduce wafer output. Regarding the related rumors, World Advanced, UMC, and Powerchip all said they could not comment.

IC design industry insiders mentioned that there are two types of quotes for foundries: one is the price for continuing to receive goods, and the other is the price for not receiving goods, which is a penalty. As for the amount of the penalty, "some of it can be negotiated."

The world admits that the demand for large-size driver ICs is indeed weak at this stage, but the demand for small and medium-sized driver ICs is still strong. The application of 0.18-micron-related small-panel driver ICs is growing steadily, and it is expected that high capacity utilization can be maintained until the third quarter.

UMC reiterated its arguments at the earnings conference, emphasizing that the continued growth in demand for applications such as servers, automotive, industrial, and networks offset the decline in demand for consumer products such as mobile phones, laptops, and PCs.

Powerchip said that the recent demand for driver ICs and CMOS image sensors (CIS) is indeed facing correction. The company has increased the proportion of other products and is also actively cultivating the automotive field.

Changes in market supply and demand are gradually spreading from downstream to upstream. IC design companies estimate that the foundry end will be slower to reflect the real market conditions, with a delay of about two to three quarters, but generally speaking, production capacity has gradually moved towards a balance between supply and demand, and should then return to normal peak and off-season performance.

IC design companies estimate that the production capacity of wafer foundries should have loosened up. Recently, some wafer foundry customers have come to persuade them not to cut orders, so they are negotiating with them to see if there is a chance to lower the price and make the IC output cost lower in the third quarter. Another phenomenon that can be observed in the change of production capacity is that some smaller IC design companies have also begun to receive production capacity.

*Disclaimer: This article is originally written by the author. The content of the article is the author's personal opinion. Semiconductor Industry Observer reprints it only to convey a different point of view. It does not mean that Semiconductor Industry Observer agrees or supports this point of view. If you have any objections, please contact Semiconductor Industry Observer.

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