Will TSMC be the “last straw” that breaks the camel’s back for price increases?

As the third quarter entered its last month, the market was still arguing about when the turning point would come. TSMC hit the industry chain with two consecutive blows: on the one hand, it raised prices across the board for downstream companies, with the highest increase reaching 20%, and on the other hand, it put pressure on upstream companies to cut prices, with discounts of at least 10%. Such a two-pronged pressure from upstream and downstream was commented by the outside world as "unprecedented in 20 years."

On the surface, TSMC, which has always valued partnerships and presented itself as a "gentleman", suddenly turned its back on its "capitalist" nature of seeking profits. This was due to obvious reasons such as rising costs, competitors' pressure, and difficulty in explaining gross profit margins to shareholders. But it is worth pondering why TSMC took action at this point?

You know, from the second half of 2020 to the present, the market situation of supply and demand imbalance has not been effectively alleviated. TSMC has always had sufficient reasons to raise prices, but it made such a decision when there are noises in the current terminal demand. Is the reason behind it really as simple as it seems?

"Standing at the top of the food chain" shows off its muscles, but it is difficult to exert pressure on upstream and downstream

Putting aside the impact on the industrial chain, TSMC's move has solidified its position as the "top of the food chain" in the semiconductor industry. A senior executive of a domestic foundry told Jiwei.com, "Only TSMC can do this." Moreover, at this point in time, even for a company like TSMC, it is not easy to get pressure from both upstream and downstream.

On the upstream side, the continuous shortage of equipment and materials is the biggest obstacle for TSMC to cut prices. With the arrival of the expansion wave, the supply tension has not eased, but has intensified, and prices have also risen rapidly. According to a previous report by Jiwei.com, even the price of second-hand equipment has exceeded that of new equipment, which shows the hot market. According to SEMI statistics, global semiconductor equipment shipments hit a new high in the second quarter, up 48% year-on-year and 5% month-on-month.

According to the above-mentioned foundry executives, although TSMC has the ability to lower prices from upstream equipment and material suppliers due to its large purchase volume in the past, it has become somewhat difficult based on recent developments. According to their speculation, TSMC may be using the prices of domestic suppliers to negotiate with foreign suppliers in order to obtain lower prices.

This also coincides with the judgment of some industry analysts. According to TSMC's previous price-cutting tactics, unless it is an exclusive supplier, it will choose to adjust the supply ratio to reduce costs, and domestic suppliers with lower quotes may become TSMC's second choice. But this also means that TSMC's price-cutting is not what it wants, especially in areas such as advanced process equipment and materials that are monopolized by large manufacturers.

On the downstream side, the long-lasting price increase has overdrawn the premium space, and the price is about to peak and fall. It is difficult for TSMC's high price to be fully accepted. Panels, memory chips, etc. have all started to fall. Based on recent views, driver ICs and consumer electronics MCUs, which have previously seen the strongest growth, may become the next price avalanche. The reason is that whether the price increase can continue depends on whether the final recipients of the price increase will buy in.

According to an analysis by Nikkei, the sales costs of many top IC design companies continued to rise in 2021. Although most of the major companies have successfully passed on the costs so far, as terminal demand slows down, the design companies are no longer confident in passing on the costs. Take the price of driver ICs as an example. Due to the lower-than-expected demand for consumer terminals such as TVs, terminal manufacturers have slowed down their demand for panels. There are rumors that panel manufacturers no longer accept price increases for upstream driver ICs.

Smartphones are another area that has been overshadowed by the "avalanche". Market research firm Counterpoint Research pointed out that, except for Apple, the net profit margin of smartphone manufacturers is only around 5% to 10%. At the same time, the demand for mobile phones is showing signs of fatigue, and many institutions have lowered their annual shipments. It is hard to say whether downstream manufacturers can fully accept price increases as in the past.

A senior industry insider pointed out to Jiwei.com that manufacturers on the consumer side cannot afford high-priced chips and are likely to quit in the face of price increases. There are also rumors that TSMC only raised prices for its major customer Apple by 3%, which also indirectly confirms that at this stage, it is much more difficult for TSMC to raise prices downstream than expected.

This is exactly the contradiction. In the previous favorable situation where the industry chain was rising, TSMC withstood the pressure and stuck to the bottom line of "partnership". However, now that the market uncertainty has doubled and the wait-and-see sentiment is strong, TSMC is exerting pressure from both sides, which is puzzling. Because whether it is gross profit margin, threat from competitors or capital demand for factory construction, TSMC could have planned earlier without waiting until now. So, what exactly does TSMC want to do?

Is TSMC going to be the “last straw” that breaks the camel’s back in the price increase chain?

Results-oriented approach may provide a way to understand TSMC’s contradictory behavior. Imagine if TSMC really succeeds in cutting prices upstream and raising prices downstream, what will be the consequences?

From the upstream perspective, the most direct result is that the overheated price increases of equipment and materials are expected to ease. Judging from the response of suppliers to price cuts, there is great hope that this will be achieved.

Some equipment manufacturers said frankly, "At present, only by following TSMC can we avoid being affected by the economic downturn." This also shows that under the cover of the overheated market, it is difficult to see the actual demand, which is not a good thing for suppliers. Instead of betting on the market that may collapse at any time with high prices, it is better to follow the pace of production expansion determined by major customer TSMC at low prices. In addition, some manufacturers had predicted TSMC's price-cutting strategy at the beginning of the year, and had increased bargaining space at that time, so even if they cut prices, they were still within their tolerance range.

From the downstream perspective, some analysts believe that the entire industry chain may launch a new wave of price increases. After all, in most links of the industry chain, supply and demand imbalance is still the main theme.

However, as mentioned above, against the backdrop of slowing terminal demand, it is unlikely that the price increase of the entire industry chain in 2020 will reappear. "The most important factor in determining prices is always demand," said Mark Li, a senior semiconductor analyst at Sanford C. Bernstein. "If demand slows, they have to lower prices to attract more customers and maintain utilization."

The most likely scenario is that downstream manufacturers will try to pass on the costs to downstream customers, which will make it difficult for end consumers to bear the excessively high prices and cause a sharp decline in demand. Downstream manufacturers will then slow down their purchases, and upstream manufacturers' stocking actions will also slow down. This will truly and effectively alleviate the supply and demand imbalance of the entire industry chain and reveal the real demand.

From this perspective, TSMC’s “domineering” purpose has become increasingly clear, which is to become the “last straw” that breaks the camel’s back to break the price increase transmission chain, to clear away the fog of the overheated market, and to reveal the true face of “actual demand”.

Some manufacturers have already realized this. Pua KS, chairman and CEO of Phison Electronics, a NAND flash memory controller chip supplier, said that he was glad that TSMC adjusted the price, which could avoid duplicate orders. In fact, before this, TSMC and several IDMs had repeatedly expressed concerns about duplicate orders.

It should be pointed out that TSMC's combination of measures also virtually protects against possible risks. For example, the multiple price increase strategies for different customers are to protect the "partnership" that it has always insisted on to the greatest extent. Even if it eventually loses some orders due to price increases, the reduction of upstream costs due to price cuts also provides another layer of insurance for its profits.