Analyst: GlobalFoundries’ exit from 7nm may not be a good thing for the industry

Source: Content compiled from Juheng.com and Economic Daily, thank you.

GLOBALFOUNDRIES announced its withdrawal from the 7nm process development, sparking market discussion. In fact, after AMD's 7nm order was reportedly taken by TSMC, the market had rumors that GLOBALFOUNDRIES might no longer spend resources on advanced processes. As GLOBALFOUNDRIES has decided to temporarily suspend the development of 7nm, TSMC's leading advantage in advanced processes is expected to continue to be maintained in the future, and its market share will have the opportunity to grow, and the development of industry giants will be more obvious.

Wafer foundry is a capital-intensive industry. To achieve mass production and reliable yield, each factory needs to invest a lot of money, as well as sufficient talent and process experience. From the perspective of China's SMIC, which entered the market many years ago and began to lay out its strategy, it was not until recent years that the yield of its 28nm process increased significantly, reaching the stage where it can compete with Taiwanese factories. This shows the high entry barrier of the wafer foundry industry.

Looking at high-end advanced processes, TSMC and Samsung currently dominate the market, and it is expected that the two major manufacturers will continue to dominate the market in the future. TSMC has the highest market share. If we look closely at the reasons why TSMC can maintain its advantage, it is nothing more than spending tens of billions of US dollars in capital expenditures each year, investing a lot of money in the research and development of the latest technologies and key factors that can improve the process, thereby maintaining a high level of competitiveness in the industry. As the process becomes more advanced, the threshold becomes higher, and it is expected that TSMC's market share will be able to remain stable at a high level.

TSMC Honorary Chairman Morris Chang said at a recent retirement press conference that TSMC is facing great pressure from industry competition, and many manufacturers are sharpening their knives to enter this market, so TSMC must continue to maintain its competitiveness. However, he is also optimistic that the global electronics industry will need TSMC, and the degree of need will only be higher in the future.

As the demand for the Internet of Things, 5G, artificial intelligence and automotive-related products grows, the demand for technology will also increase. In the future, the required chip size will be smaller, the computing speed must be faster, and the power consumption must be effectively reduced. The demand for advanced processes will continue to increase, giving TSMC great room for growth in the next few years.

Legal persons believe that GlobalFoundries' withdrawal from the advanced process competition will help TSMC increase its market share. In the future, Samsung will be the only competitor in the advanced process field. Although Chinese mainland manufacturers are catching up quickly and investing heavily, due to the learning curve of industrial development and the entry barriers of technology and capital, it is expected that there will still be a gap between them and TSMC, and the short-term impact on TSMC will be relatively limited.

Bloomberg also reported that chip companies including Apple, Qualcomm, and NVIDIA are increasingly dependent on foundry partners. The chips used in smartphones and personal computers by these companies are continuously developed through foundries such as TSMC and GlobalFoundries, which have made breakthroughs in process development, allowing more transistors to be placed in the chips, making the products more powerful and energy-efficient.

In the past, Intel, a processor giant, dominated this field. However, due to the advancement of the 14nm process node to the 10nm process node, Intel delayed the launch, giving AMD and Qualcomm the opportunity to surpass Intel and grab more market share in personal computer or server processors. Although Intel uses its own wafer fabs to produce processor chips, competitors AMD and Qualcomm mainly use TSMC and GlobalFoundries as foundries to help them produce chips.

AMD has always been a major customer of GlobalFoundries. When AMD announced its 7nm process products recently, it announced TSMC as a partner, breaking the past practice of only using GlobalFoundries. At that time, people wondered whether AMD considered GlobalFoundries' related decisions. Now that GlobalFoundries has officially withdrawn from advanced process research and development, TSMC has happily accepted AMD's orders and firmly sat on the throne of global foundry.

According to statistics, TSMC currently has a market share of 56% in the foundry market, while GlobalFoundries, which ranks second, has less than 10%. UMC ranks third, Samsung ranks fourth, and Intel falls outside the top eight. It is estimated that after GlobalFoundries withdraws from the advanced process competition, AMD, which is in a strong position in the processor market, is expected to receive orders for its new generation of 7-nanometer products from TSMC. This will drive TSMC to achieve its goal of eight consecutive years of revenue growth.

GlobalFoundries, a major wafer foundry, announced its withdrawal from the 7nm process. The market interpreted TSMC's future as positive. Yang Yingchao, chief consultant of Yikon Group and Qingxing Capital, pointed out that TSMC is indeed a beneficiary in terms of advanced process competition. However, the withdrawal of major manufacturers from the market also reflects that the high growth of semiconductors is no longer there.

Yang Yingchao has served as managing director and chief analyst of the technology industry at foreign securities firms such as Barclays, Citigroup, and Nomura Securities. Earlier, he worked at IBM's wafer foundry in East Fishkill, New York, which was acquired by GlobalFoundries in 2015 and is currently called Feb 10. Yang Yingchao has a deep understanding of semiconductor theory and practice.

Yang Yingchao said that GlobalFoundries' withdrawal from the 7nm process was interpreted by the outside world as TSMC losing a rival, and from a competitive perspective, this view is not wrong.

However, the incident itself has many meanings that can be interpreted. Yang Yingchao pointed out that the first is that the market rarely interprets GF's strategy. Why did GF withdraw from the market? It is well known that GF's 10nm and 14nm development were lagging behind, so the industry has long been rumored that GF may give up 7nm. This decision may allow GF to develop better, which is not necessarily a bad thing.

Although Moore's Law guides semiconductor manufacturing processes toward 7nm, 5nm, and even 3nm, the number of projects that actually adopt advanced manufacturing processes in terminal applications is limited. The most widely used are PC and mobile phone processors. PC representatives include AMD (Advanced Micron) and Intel, which are all related chip developers. The probability of other terminal applications adopting them is not high. The more advanced the semiconductor process, the more money it burns, and there is also the issue of yield that needs to be solved. Therefore, GlobalFoundries decided not to be the first in advanced manufacturing processes. It can be said that it gave up 20% of the top of the pyramid and embraced 80% of the market. The strategy is very correct.

From a cultural perspective, it also reflects the differences between Americans and Asians. GlobalFoundries has the courage to give up markets that it cannot win, while Asians tend to cut prices when they cannot win, which may end up damaging the market.

Yang Yingchao pointed out that due to GlobalFoundries' withdrawal from advanced processes, other competitors will have more resources and the overall foundry market will be more orderly. Taking the 7nm process as an example, the dominant players will be TSMC, Samsung, and Intel, while GlobalFoundries will focus on mid- and low-end processes, creating a win-win situation.

From a macro perspective, we should be alert to the slowdown in semiconductor growth. Yang Yingchao said that in fact, in addition to GlobalFoundries, UMC and SMIC have also expressed that they will not compete for advanced processes. A blue ocean market should be a competition for everyone. How can they withdraw one by one? That means that demand has slowed down, and the mentality of competitors has changed, and they choose to retreat in order to advance.

We can see the clues from the terminal applications. Semiconductors are mainly used in PCs and mobile phones, and the demand has slowed down significantly. Therefore, although TSMC has won in advanced processes, it also faces economic challenges.

Taking GlobalFoundries' release of 7nm as an example, TSMC has mainly won large orders from AMD, and its growth will have the opportunity to increase in the next two to three years. In the medium and long term, we still need to look at its competitiveness and the overall environment. For example, Foxconn and Apple also need to find the next engine when the iPhone slows down.

Yang Yingchao has been conservative about the technology industry in recent years. From the GlobalFoundries incident, we can see that the overall cycle is downward, not upward. Taiwan happens to have TSMC, so from the perspective of a winner, it is certainly a positive interpretation.

In contrast to the investment layer, Yang Yingchao believes that as the semiconductor industry becomes increasingly large, and as the market matures, for foreign capital, GlobalFoundries' exit from 7nm is in line with expectations, but as the number of profit-making companies decreases, it will not be easy to find good targets. Buying will be concentrated on TSMC, and the stock price will naturally rise.

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