The iPhone 13 is finally here, just one week after Apple announced the next generation iPhones in its digital only launch event. Pre-orders leading up to the launch seemed strong, especially due to carrier deals and promotions. We hit the streets to get a firsthand look at what the latest launch event can tell us about the demand for these latest iPhones. Here are five key takeaways:
Store traffic is up again in Apple Stores. 2020 was a tough launch year for Apple and the iPhone 12. The launch was staggered over two months, and COVID-19 restrictions made going into stores less appealing. This year however, we have seen people line up again to pick-up orders or reserve an iPhone for a later time. It’s not like the massive lines for the iPhone 6 or iPhone 7 launch events, but it’s still showing a return to brick-and-mortar to an extent. Online sales remain a key driver for Apple however.
Pre-order deals are strong this year. All carriers are offering up to $1000 for the iPhone 13 Pro models with trade-ins and select unlimited plans, while the iPhone 13 models have promotions for $800 with in credit. Verizon was the most aggressive however, offering an extra $500 Prepaid Mastercard for those who switch to its network for the iPhone 13 Pro model. Apple’s own trade-in value offers topped off at $790.
Demand for iPhone 13 Pro and iPhone 13 Pro Max were higher than the regular iPhone 13. This is not unusual, especially for the launch day. Power users and those on Apple’s yearly iPhone Upgrade Program tend to upgrade first, getting both the best performing iPhones, and also going for higher memory configurations such as the 1TB option.
Apple Stores, as well as carrier stores, are already short on inventory. Shipment dates continue to be pushed out. This is especially true due to the high demand for the iPhone 13 Pro Max which Apple.com is estimating being shipped between October 25th and November 1st. Certain colors, such as gold or pink, seem to be lean on inventory as well. Apple continues to limit shipments to carriers during launch periods as it wants to drive customers to its own stores, which creates additional shortages for carriers.
A minority of people are coming in for the iPhone 12 at this time. But this may change. Since the launch of the iPhone 13, the iPhone 12 received a $100 haircut. This is enticing some customers looking to upgrade to a 5G iPhone without needing to spend more money on the iPhone 13. While the iPhone 13 does have a longer battery, and additional camera, it may not be enough to convince some. We will likely see more people going with the iPhone 12 after this launch period as carriers move to update their “N -1” iPhone slot.
Taiwan raised its epidemic warning for the whole country to Level 3 on May 19 in response to a rapid increase in local confirmed cases of COVID-19.
Major semiconductor and component companies in Taiwan announced a series of steps over the weekend to minimize the pandemic risk, including working in separate teams and working from home (WFH).
Counterpoint believes there will be only a limited impact on the semiconductor shortages being faced globally.
After raising its epidemic warning to Level 2 on May 11, the Taiwan Central Epidemic Control Center (CECC) again raised it to Level 3 on May 15 for Taipei City (Taiwan’s capital city) and New Taipei City (Taiwan’s largest city). It further raised the warning level for the rest of the island to Level 3 on May 19, in response to a surge in COVID-19 cases amid an increased risk of community transmission.
The new wave of domestic infections started from an outbreak at a major airline in Taiwan. It has already caused hundreds of local confirmed cases, accounting for over 90% of total local transmitted (and confirmed) cases since the beginning of the pandemic in 2020. That said, before this airline outbreak, Taiwan was only reporting zero or single digit confirmed cases per day entering 2021, and most of them were imported cases.
Restrictions on indoor and outdoor activities
The Level 3 restrictions will remain in force until May 28. Taipei City and New Taipei City reported the most confirmed cases recently. Taipei City accounts for 11% of Taiwan’s population and New Taipei City accounts for 17%. According to Taiwan National Statistics, Taipei City and New Taipei City together contribute 43% of Taiwan’s revenue. Therefore, the restrictions imposed on enterprises under Level 3 could trigger certain concerns over Taiwan’s economic momentum.
In general, Level 3 restrictions bar indoor activities involving more than five people or outdoor activities involving more than 10 people. However, such activities can be allowed if the organizers follow government rules and get approvals from the regulatory authority. For example, the government rules for such gatherings require the participants to sit separated by a vacant seat, to wear masks, to record their name and contact information, and not to have food and beverages.
Non-Taiwanese can’t enter Taiwan
Following the CECC announcement, border restrictions were brought on May 17. Under these, only Taiwanese and people who have a resident certificate are allowed to enter or transit through Taiwan. The border restrictions are subject to adjustments on a rolling basis along with epidemic warning.
What Taiwan companies are doing
Based on our research, 55% of leading-edge (10 nm and below) logic IC capacity and 45% of total logic foundry capacity is located in Taiwan. Combined with other key component vendors and ODMs, Taiwan is a major player in the global supply chain. Therefore, the companies based here are more careful on COVID-19.
TSMC
The company will start working in separate teams and on rotational schedules and WFH from May 19.
TSMC has its major foundry capacities in Hsinchu (Northern Taiwan), Taichung (Central Taiwan) and Tainan (Southern Taiwan).
All non-essential vendors will be restricted from entering TSMC facilities. Face-to-face meetings stand canceled while TSMC staff and vendors have been told to avoid moving across the company’s main production sites.
Mediatek
Mediatek has announced a WFH policy for its employees in Taipei City and New Taipei City for the May 17-May 28 period.
The staff in Hsinchu will begin separate team operations.
Realtek
Realtek’s WFH policy and separate team operations at its Hsinchu office will remain in force from May 17 to June 8.
UMC
UMC announced its separate team operations on May 17. The staff has been asked not to move across its three different operating areas (Taipei, Hsinchu and Tainan) until May 28.
The company says it will follow stricter rules than local governments during epidemic outbreaks. Restrictions have been placed on the entry of non-essential vendors and guests to UMC facilities.
Vanguard
Vanguard’s non-production line employees will enter separate team operations and follow a WFH policy from May 19 to June 15.
Non-essential vendors and guests are not allowed to enter Vanguard’s fab and offices.
Foxconn/Hon Hai
Hon Hai, the major iPhone and other smartphone assembler, has announced a WFH policy for its employees for the May 17-May 28 period.
CECC’s Four-tier Epidemic Warnings
What if Taiwan raises warning to Level 4
If local cases continue to accumulate in the next few days and hit the 100+ cases per day mark for two weeks, with more than half being of unknown origins, Taiwan will need to impose Level 4 restrictions.
Under Level 4, people can leave home only for essential activities (like buying daily necessities). Besides, all in-person school and work is suspended, and companies and schools must implement WFH and remote education. Last but not least, lockdowns will be activated in cities/towns where outbreaks become severe.
However, according to CECC, the possibility of Taiwan entering Level 4 warning is low. The country is comparatively better placed in dealing with this pandemic due to its experience in tackling the SARS outbreak of 2003 and the first wave of COVID-19 last year.
Conclusion
There is no doubt Taiwan is facing a bigger COVID-19 risk this time. However, companies with larger scales (like those listed above) have already raised their pandemic prevention measures to Level 3 and will manage to limit any negative impact. Therefore, unless Taiwan is forced to raise the epidemic warning to Level 4, we do not see any major concern over capacity constraints.
The semiconductor supply chain has been suffering capacity constraints since H2 2020, with both TSMC and Intel guiding more than 18 months of supply tightness ahead.
We believe the shortage will be prominent at relatively mature nodes across 200mm and 300mm foundries due to strong demand from multiple sectors.
Further, we expect the lingering demand-supply imbalance to continue, with prices seeing another round of hikes of at least 10-20% in 2022.
To tackle the shortage, TSMC has revised up its 2021 capex guidance to $30 billion while Intel will work more closely with clients to seek solutions.
The global semiconductor supply chain has been suffering severe capacity constraints since H2 2020 due to pent-up demand in different sectors. Foundry capacity remains largely booked with fully-loaded utilization rates across different process nodes. Our checks suggest some IC design companies have already experienced 30-40% price hikes in certain product categories in 200mm foundries when compared with H2 2020. Therefore, we are looking at a new normal here.
TSMC’s $100-bn plan for capacity expansion
TSMC, the largest foundry vendor in the world with ~55% market share, has revised up its 2021 capex guidance to $30 billion (from the previous guidance of $25-28 billion in January 2021), with 80% of this being meant for advanced node investments (3/5/7 nm), 10% for advanced packaging services and 10% for specialty technologies.
During the Q1 2021 earnings call, TSMC also reaffirmed its $100-billion capex plan for 2021-2023, mainly supported by customers’ promising outlook and commitments, which could translate into 10-15% CAGR of the USD revenue during 2020-2025.
Exhibit 1: TSMC’s Capex and Capital Intensity
However, TSMC and Intel have both highlighted that the overall semiconductor demand-supply mismatch will continue until the end of 2022, with capacity expansion failing to keep up with the skyrocketing demand, especially at certain mature process nodes. In general, the semiconductor industry is going through a significant structural demand shift. Therefore, both foundries and customers are on the same page in maintaining a higher inventory level to deal with uncertainties.
Decelerating capacity expansion and demand rally push up foundry costs
Recently, some foundry companies announced capacity expansion plans. These include TSMC’s 28 nm plant in Nanjing, UMC’s 28 nm in Southern Taiwan and Vanguard’s acquisition of another 200mm fab in Hsinchu. Supported by a few vendors’ de-bottlenecking expansion, we expect major additional capacity to be created at comparatively mature nodes soon.
Migration from 200mm to 300mm in the past few years has been too slow to eliminate supply constraint risks on mature nodes. Now, foundries are getting less support from the 200mm equipment vendors. Therefore, with the capacity failing to fulfill incremental orders and demand popping up in the short term, price hikes will emerge. We have even witnessed 30-40% price hikes on specific process nodes, apart from a generally 10%+ extra cost to design houses.
Unfortunately, this rise in prices will not stop in 2021. In order to secure 2022 capacity, design houses are negotiating with foundries. We foresee at least 10-20% higher costs here.
Intel foresees best days on solid demand
Intel has also shared a robust outlook, seeing its best days around the corner. Betting big on the tremendous demand for computing, the strength of its IDM 2.0 strategy, and ongoing technology investments, Intel expects to restore its leading position in the semiconductor industry. The company has also announced a capex plan of ~$20 billion for 2021, up 35-40% YoY and covering expenditure on two fabs in Arizona ($20 billion in total).
5G phone, HPC and automotive drive foundry capacity expansion
In terms of sales growth drivers, we believe smartphones will continue to play an important role for at least three years due to the 5G smartphone replacement cycle. Nevertheless, smartphone shipments growth has decelerated in recent years and is no longer sufficient to justify an aggressive capex plan and a robust sales growth outlook from foundry vendors.
We believe high-performance computing (HPC) will step forward and consume a lot of new capacity for several years, mostly driven by emerging AI applications, connected devices, virtual reality/augmented reality and intelligent manufacturing. These segments require unprecedented computing power in both communication infrastructures and cloud data centers. Intel says nearly every application is now infused with artificial intelligence and machine learning. Global hyperscale data center vendors and cloud solution providers have put a lot of resources into capacity expansion. We believe this trend will continue to enhance computing power to support the sharp growth in HPC demand.
Exhibit 2:Hyperscale Vendors’ Capex Supports Worldwide Computing Power
Among the other sectors, automotive-related categories (electric vehicles, autonomous driving, charging devices) are expected to gradually become semiconductor-consuming giants on increasing semi content per car and the V2X (vehicles to everything) ecosystem. TSMC has already marked the automotive market to be its top priority in the upcoming years though it only accounted for 4% of its total revenue in Q1 2021 (against 45% from smartphones and 35% from HPC).
Conclusion:
Foundry cost hike in 2021 has largely settled down while another price increase for 2022 is already around the corner. Design houses are in the process of negotiating foundry costs and capacity quota with chipmakers. We expect the demand-supply imbalance to last for another year, along with another round of price hikes of at least 10-20% in 2022.
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