Yet to see strong recovery signs in PC, smartphone, and consumer applications due to a slower pace of inventory digestion.
Automotive application remains on a growth trajectory but may have peaked in Q1 2023.
28nm continues as one of the key bright spots within the expected utilization rate back to 90% higher by the end of 2023.
United Microelectronics (UMC) reported $1.78 billion in revenue for Q1 2023, down 14.5% YoY and 20.1% QoQ, constrained by sluggish wafer demand and the continuing customer inventory digestion. Despite the utilization rate dropping to 70%, the average selling price (ASP) was still stable. The gross profit margin remained firm at 35.5% due to cost reduction and product mix optimization. The management indicated that demand recovery has not been strong in PCs, smartphones and consumer applications, and customer inventory digestion has been slower than expected.
Automotive stood out but might not be sustainable in coming quarters
The automotive business was one of the key drivers that posted growth in Q1 2023, contributing to 17% of total revenue in the quarter. Revenue from integrated device manufacturer (IDM) customers also increased to 23% in Q1 2023 from 19% in Q4 2022 helped by growth in the automotive business. However, management pointed out that revenue from automotive applications may have peaked in Q1 2023 because it has been strong for three consecutive quarters since H2 2022. Nevertheless, the automotive segment is still a long-term growth driver for UMC.
Remains positive in 28nm outlook
The utilization rate of 28nm node in Q1 2023 was relatively higher compared to other nodes despite inventory correction in the communication segment. The management guided 28nm’s utilization rate to gradually improve and exceed 90% level by the end of 2023, supported by the demand for OLED display driver ICs, digital TVs and Wi-Fi 6/6E. UMC 28nm delivers better power consumption and performance versus competitors, which strengthens the company’s value proposition to customers. The management believes the technology leadership will reflect on its 28nm market share.
2023 capital spending guidance unchanged
UMC reiterated its capital spending guidance of $3 billion for 2023. As for allocation, 90% will be used for 12-inch wafers and 10% for 8-inch wafers. Most of the capital spending will be on 12A P6 for the 28nm capacity. The capacity will reach 12kwpm by the end of 2023 with customer commitments on track, echoing the management’s positive demand outlook for OLED display driver ICs, digital TVs and Wi-Fi 6/6E. The remaining capital will be spent on 12i P3 in Singapore.
UMC has forecasted wafer shipment and ASP to be flat QoQ in Q2 2023 with utilization rate guided at low 70% and gross margin at mid-30%. The management pointed out that customer inventory digestion in semiconductors will continue to linger in Q2 2023 with limited visibility into H2 2023. However, the management is still positive on the 28nm demand outlook and the structural long-term growth trend in automotive applications driven by electrification and digitalization. The company will continue to work on cost control and product mix optimization to improve profitability during the semiconductor down cycle.
• TSMC has joined other semiconductor companies in giving conservative guidance due to the expected industry downturn in the next few quarters. This includes declining the capacity utilization rate from Q4 2022, capex cuts in 2022 and 7/6nm order adjustment.
• TSMC’s 7/6nm contributed 26% to the total revenue in Q3 2022. Based on our analysis, smartphone and HPC-Computing (PC and server CPUs, and GPUs) are the two largest segments in this technology node, accounting for 32% and 38%, respectively, of the total wafer shipment volume for 2022.
• TSMC has blamed the 7/6nm softness on cyclical inventory adjustment and product delays from smartphone and PC clients. It looks the inventory cycle will persist into 2023, mainly from AP/SoCs for mainstream 5G smartphones.
• We agree with TSMC’s view on positive drivers of new product migration on the 7/6nm node, like Wi-Fi, RF and SSD controller ICs, after the inventory cycle in 2023.
Although TSMC is still confident about its business growth in 2023, the company admitted during its investor conference for Q3 2022 that inventory headwinds would hit its near-term sales outlook with declining utilization rates in certain geometry nodes. The full-year capital expense revision for 2022 from $40 billion to $36 billion echoed its conservative views on delaying new capacity builds amid the global semiconductor downturn, including the withdrawal of the new 7/6nm line in Fab 22 due to uncertain market demand.
While TSMC expected solid demand for its current 5/4nm nodes with a high utilization rate in Q4 2022 too, it gave conservative guidance for 7/6nm on projections of a declining utilization rate in the next few quarters. TSMC attributed this to smartphone weakness, as well as product delays in PC-related chipsets. The company expects the inventory adjustment cycle for all TSMC technology nodes and chip productions to likely persist into 2023.
TSMC’s 7/6nm node was its largest revenue component before Q3 2022, contributing to nearly 30% of its business during the first three quarters of 2022. TSMC owned a total of 145-150 KWPM (thousands of wafers per month) installed capacity on 7/6nm during H1 2022 but will adjust the production plan for some equipment tools in H2 2022, partially taking into account the deteriorating market demand for smartphones and PCs.
By breaking down TSMC’s wafer shipments for 7/6nm products, we found HPC-related products (including PC and server CPUs, discrete GPU, data center accelerator and ASIC/FPGA) accounted for 38% in 2022, followed by smartphone-related (mainly on AP/SoCs) chipsets at 32%. MediaTek, AMD and Qualcomm appeared to be the top three clients in this category.
Supply chain inventory to remain high at 2022 end
Reviewing the inventory level for smartphone AP/SoCs, which is the major application of advanced foundry nodes (10nm and below), we believe the order corrections to chipset vendors will be under greater pressure from H2 2022 amid weakening end-market (sell-through) data point. The chip production lead time is as long as over four months in advanced nodes, leading to a lagged effect of wafer output reductions earliest from Q4 2022 in smartphone AP/SoCs, CPU/GPU and AI processors. Accordingly, the chipset-level inventory cycle appears to have just started from H2 2022 and will persist into the remainder of the year or into the first half of 2023, as TSMC commented during the investor conference call.
More of a cyclical adjustment issue in 7/6nm
As the global foundry industry’s utilization rate has reached its peak level in mid-2022, the downtick will bring down business in all aspects in the next few quarters before any signs of improvement emerge in inventory levels across the semi supply chain. All of TSMC’s technology nodes will be inevitably impacted, particularly 7/6nm with its higher concentration of smartphones and consumer PCs. The utilization rate here will drop to 80%-90% in the next two to three quarters prior to the demand recovery driven by mainstream 5G smartphone AP/SoCs and Intel’s acceleration of its Meteor Lake CPU tile orders on TSMC. Besides, we agree with TSMC’s view on positive drivers of new product migration on the 7/6nm node, such as Wi-Fi, RF and SSD controller ICs, after the inventory cycle in 2023.
Counterpoint estimates a 21% increase (CAGR) in the average annual wafer capacity of leading-edge logic (non-memory) IC nodes (defined by 10nm and below) for worldwide foundries and IDMs during 2021-2027.
The US is expected to increase its capacity share from 18% to 24% between 2021 and 2027, compared to Taiwan’s 40%, supported by the US government’s funding under the CHIPS for America Act.
From a regional perspective, Taiwan and South Korea combined are projected to account for a majority (57%) of capacity globally in 2027. China will be far behind at 6% after 3-5 years from now, due to lack of manufacturing equipment on intensified levels of geopolitical competitions.
From a demand perspective, the leading-edge monthly wafer consumption for each long/big node (such as 14/12nm and 7/6nm) is about 250,000-270,000 in 2021. We estimate this to increase to 300,000-320,000 by 2025, driven by mainstream 5G smartphones and data centre processors besides longer production lead time. We do not see major oversupply risks after three years despite massive capacity expansion plans.
In this note, we deal with two most asked questions from supply chains amid a global IC chipset shortage and new capacity expansion announcements during the past 3-4 months:
Will the global logic IC fab landscape get altered in terms of geographical locations after the massive capex increase planned by industry leaders is implemented?
Will we encounter capacity oversupply after these new leading-edge fabs enter mass production?
The questions raised above could be looked at in the context of TSMC’s statement in March which warned of possible double-booking of wafer orders. The bullwhip effect could eventually lead to an inflection point of demand/supply reverse in the next few months. Furthermore, the political uncertainties and climate concerns surrounding Taiwan raise the risk of a global industrial disruption due to the concentration of global chip manufacturing in the country.
Most of the capex plans of industry leaders, including TSMC, Samsung and Intel, aim to build greenfield fabs in the next few years. The leading-edge nodes are the focus of their capacity expansion plans, which start at $15-20 billion as the minimum investment to reach the production scale.
Fab capacity by regions
Counterpoint’s Foundry Service data provides current capacity/production shares across all regions. In the light of recent developments, we update our forecast for a complete analysis of the logic (non-memory) IC industry. For 2021, we see 55% of wafer capacity below 10nm (including all current nodes in N10, N7, N5 and N3/N2 in the future) located in Taiwan, followed by South Korea (20%) and the US (18%). TSMC and Samsung Foundry (LSI) represent all the lines in Taiwan and South Korea respectively, while Intel is the major one in the US to ramp up its 10nm CPU lines during the two years.
Moving ahead, the total built-in wafer capacity in the leading-edge nodes in 2025 is estimated to increase by more than two times, primarily at the companies based in Taiwan (TSMC’s 3/2nm), South Korea and the US, when Intel, TSMC and (likely) Samsung start to ramp up their new facilities in Arizona and Texas. We believe that under the CHIPS for America Act, both local and foreign players will be pushed to follow production schedules to avail government support. Therefore, we forecast that the US’ capacity share will get boosted to 21%, surpassing South Korea’s, with the majority of nodes in the US on 5nm and in Intel on 7nm. We also notice that Intel’s expanded overseas fab production, including in Ireland and Israel, will help the EMEA region grow capacity shares in leading-edge technologies. However, our forecast excludes the possibility of Europe introducing subsidies to lure investments in new fabs.
Predicting the regional shift in the long term (2027) based on current visibility, TSMC is likely to add more phases in Arizona after the initial 20Kwpm (wafer per month) investment to reach the mega fab scales it has in Taiwan. Intel too may take its US capacity more seriously during the period. However, compared to the large global expansion cycle forecast for 2021-2025, there will be a modest addition in the capacity during 2025-2027, with Taiwan, South Korea and the US accounting for 40%, 17% and 24% shares respectively.
In contrast, China is forecast to take just 5-6% share in leading-edge fabs in the next 3-5 years. We expect the import restrictions on equipment for 10nm nodes (and below) to persist for a considerable period, forcing local foundry/IDM makers like SMIC to increase capacities in matured nodes.
Wafer demand-supply outlook for advanced nodes
We estimate a 21% increase (CAGR) in the average annual wafer capacity of leading-edge logic (non-memory) IC nodes (defined by 10nm and below) for worldwide foundries and IDMs during 2021-2027.
Our forecast indicates an aggressive build-up in capacity after a multi-year under-investment which became the root cause of the current IC component crunch. We estimate that a capacity of 160Kwpm (wafer per month) at 7nm and 100Kwpm at 5nm will be added globally in 2025. It includes Intel’s expanded 7nm in its global fabs, and TSMC and Samsung’s new fabs in the US.
From a demand perspective, the mega trend of digital transformation will drive more new applications in mainstream 5G smartphones, data centre processors and autonomous driving (L4/5) in the next few years. In 2021, the total monthly wafer demand of each big/long node generation, such as 16/14nm and 7/6nm in logic IC fabs, is expected to be 250,000-270,000. In 2025, the monthly wafer demand is projected to increase to 300,000-320,000 for each leading-edge node. We expect the global wafer demand and supply for N5 and N7 nodes to be more balanced in 2025, after the massive new line constructions in the next 2-3 years. However, we do not expect any oversupply situation without a serious decline in global semiconductor demand.
The semiconductor industry’s foundry sector delivered above-expectation revenue growth in 2020. With tightening supplies from most global vendors, we expect 2021 to continue this momentum.
In addition to a favorable macro environment, such as COVID-19 leading to logistical challenges and trade tensions prompting increase in wafer bookings, the technology migrations in leading-edge nodes (7-nanometer and 5-nanometer) appear to be accelerating to meet the demand from 5G smartphones, game consoles and AI/GPU in cloud servers. On the other hand, new capacity additions across the industry remain rational, with the second-tier foundry vendors preferring to raise wafer prices against building greenfield fabs.
Here we highlight our four predictions for the global foundry industry in 2021, based on our bottom-up analysis and surveys:
Double-digit YoY sales growth again in 2021
In 2020, the foundry industry revenue reached about $82 billion, representing a 23% YoY growth. Despite this high base of 2020, the double-digit growth will persist in 2021. We forecast a 12% YoY growth with a total revenue of $92 billion.
We expect TSMC, Taiwan’s leading foundry service company, to keep outperforming the industry by posting 13%-16% YoY sales growth in 2021. TSMC is scheduled to hold its quarterly result conference in mid-January.
To be consistent with Samsung’s public information, our foundry forecast includes Samsung Foundry’s internal business (to LSI). We expect Samsung Foundry, driven by more order wins from external customers such as Qualcomm and Nvidia, to post a 20% YoY revenue increase in 2021.
For the overall industry, the double-digit growth in 2021 consists of both wafer shipment increase and like-to-like wafer price (ASP) increases, something which we rarely saw in previous cycles. In particular, 8-inch foundries, which have been reporting supply shortages from H2 2020, are acting as a catalyst in convincing some suppliers to raise their average wafer price by 10% in 2021.
Significant ramp-ups in 7/5nm by largely adopting more EUV layers
Both TSMC and Samsung will beat the average industry growth rate due to their accelerating production ramp-ups of EUV-enabled nodes (7-nanometer and 5-nanometer, or 7/5nm) after passing through the initial stage of learning in 2019 and 2020. The EUV (extreme ultraviolet lithography) adoption is a critical factor in extending the Moore’s Law to consistently increase the transistor density of chips to enable the development of both 5G smartphones and HPC (high performance computing) applications.
5nm: TSMC started its 5nm mass production from Q1 2020, and Samsung followed after 6-9 months. 5nm is considered a fully adopted EUV node for both foundries as Intel’s equivalent 7nm announced another delay in production last year. Based on our estimates, the total wafer shipment volume of 5nm will account for 5% of 12-inch wafers in the global foundry industry in 2021, up from less than 1% in 2020. Apple is the top customer (with all orders to TSMC) in 5nm this year (see Exhibit 1), including both for iPhones (A14/A15) and the newly released Apple Silicon. Qualcomm will be the second-largest 5nm customer as the iPhone 13 may adopt its X60 modem. TSMC is expected to book $10-billion revenue from 5nm in 2021. Samsung Foundry will also gain good traction from 5nm order wins, including its in-house (Exynos) SoC and Qualcomm. In our view, the capacity utilization rate will reach an average of 90% for TSMC and Samsung in 2021, with the upside from stronger flagship 5G smartphone models.
Exhibit 1: 5-nanomater Wafer Shipment Breakdown by Customer, 2021
7nm: Different from 5nm, with over 80% wafers used in smartphones, the 7nm applications are more diversified into AI/GPUs, CPUs, networking and automotive processors. TSMC has a variety of 7nm (DUV only), 7nm plus (with EUV) and 6nm (with EUV) in its 7-nm family, while Samsung has introduced 7nm/6nm with both adopting EUV production. Based on our estimates, the total wafer shipment volume of 7nm will account for 11% of 12-inch wafers in the global foundry industry in 2021. In this geometry, smartphones will only consume 35% of wafers (see Exhibit 2) and the majority will ship to AMD (27% of 7nm shipment volume) and Nvidia (21%). In the light of stronger demand for game consoles, cloud server/AI processors and mainstream 5G smartphones, the capacity for 7nm looks extremely tight through the whole of 2021, with the average utilization rate at 95-100% based on our calculations. Therefore, for emerging demand such as crypto-mining ASIC and ARM-based processors (in server and auto), the chipset vendors and OEMs will find it difficult to get allocation for extra capacities in the near term.
A high level of chip inventory becomes normal through the year
Although the foundry industry is less cyclical than that for IC memory, we still consider inventory level as one of the major factors to predict growth. However, we need to reset the expectations for 2021 or even for early 2022 as long as COVID-19 and global trade tensions persist. Global OEMs, as well as their IC vendors, are willing to prepare for extra levels of components. The procurement lead time of some standard ICs in the channel, according to the component supply chain, has lengthened to 26 weeks (6 months) and above from late 2020. In other words, we might see an ascending wave of double-booking pattern in matured nodes not only on TSMC but also more seriously on the second-tier foundry vendors.
By the end of Q3 2020, based on the financial reports from major global IC fabless companies, the inventory was about 79 days compared to the industry average of 70 days since 2016. If we see recent comments from AMD, Nvidia, Qualcomm, or even smaller players like Dialog Semi (analog ICs), the prospects of 2021 are generally upbeat on 5G smartphones, WFH devices and cloud server spending. The momentum supports high inventory levels. As long as the concern of supply chain disruptions persists, chip vendors would maintain a high level of inventory from Q4 2020. The argument indicates a better-than-normal seasonality in H1 2021, since foundry customers would choose to place wafer orders earlier to avoid capacity risks in the second half. We expect the industry inventory to hit the peak during the middle of this year.
Capital intensity also maintains high level, given upside from wining IDM shares
While we will wait for ASML’s EUV shipment forecast and TSMC’s capital expenditure (Capex) guidance for 2021 (both expected in mid-January) as the key bellwethers of global semi outlook, the market expectation of TSMC’s record-high (over $20 billion) number in 2021 looks reasonable to us. In our view, it will be a crossover year for TSMC’s sales between its two growth pillars – smartphone and HPC.
We see Intel going in for CPU outsourcing soon for its long-term survival. Both TSMC and Samsung are ready for the opportunity by potentially starting to expand their 5nm/3nm capacities during the year. It looks like the capex-to-sales ratio, as an indicator of future revenue growth confidence for chipmakers, will maintain peak levels in 2021 – 40% for TSMC and 70% for Samsung Foundry. Aside from the strong demand of end applications, which we discussed above, IDM outsourcing trends are accelerating for global IC vendors pursuing profitability. Not only from Intel, TSMC is likely to see growing orders from Japanese customers including Sony’s CIS (48MP) and Renesas’ MPU (at 28nm) during late 2021.
The upcycle in foundry industry during 2020-21 contains both multiple cyclical and structural positive drivers, which we have not seen since the tech bubble years (1998 -2000). The incremental demand of foundry industry will come from most sub-sectors, including automotive, to support its double-digit growth in 2021. Moreover, by factoring in IDM outsourcing, we expect the industry to reach and exceed $100 billion of market size during 2022-23.
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