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How tight is 8-inch production capacity in an unprecedented seller market scenario?

The shortage of production capacity is transmitted from foundry to packaging and testing, design, wafers, module suppliers, downstream terminal manufacturers, etc., with 6-inch and 12-inch wafers, all the way out of stock until next year.

Not long ago, it was reported in the market that MediaTek, the leading IC design company in Taiwan, decided to purchase equipment for lease to Power Semiconductor Corporation. Recently, it has been reported in the industry that an established wafer foundry will bid in advance to sell 8-inch production capacity in the second quarter of next year in units of "chips".

The 8-inch capacity shortage is no longer a new topic, but this year it has really triggered a lot of spectacles. No wonder people in the industry have called it out-it's unbelievable.

Sound up

Overall, the 8-inch wafer foundry capacity supply is about 90%. Tight production capacity naturally triggers successive price increases. At present, many foundries have raised their quotations, and companies such as UMC and World Advanced Technologies have increased their prices by about 10% to 15% in the fourth quarter. It is reported that in 2021 the increase will start at 20%, and urgent orders will reach 40%.

According to data from TrendForce Consulting, the price of 8-inch wafers in 2020 will increase significantly in the fourth quarter, rising by about 5% to 10%, and it is expected to increase by about 5% in 2021.

The shortage of foundry capacity has driven wafer, packaging and testing and IC design manufacturers to increase prices.

From an upstream perspective, strong wafer manufacturing demand will also drive upstream silicon wafer shipments. Because of the high manufacturing cost, IC design manufacturers also need to adjust prices to deal with it.

In order to cope with the rising cost of substrates and other materials and the influx of a large number of orders, ASE Semiconductor, a major packaging and testing manufacturer, ASE Investment Controls notified its customers at the end of November that it will increase the average order price of packaging and testing in the first quarter of 2021 by 5-10%. It is expected that Huatai, Lingsheng and Chaofeng will follow up. According to reports, domestic packaging and testing plants have also been adjusting their prices.

Downstream MOSFETs, driver ICs, and power management ICs have also reported price increases. At the same time, the tight production capacity has also extended the production cycle of downstream end products due to the shortage of components.

The most obvious is the impact on Apple's supply chain. Bloomberg quoted sources as saying that Apple’s iPhone and other products are facing a shortage of power management chips, or are therefore unable to meet consumer market demand.

Unexpectedly, under the strong overall demand for semiconductors, the shortage of 8-inch wafers has expanded to 12 inches and 6 inches. The 12-inch is already fully loaded, and the 6-inch was originally used at only 70%. Due to the warming of the automotive market, the production capacity is close to full.

An unsolved problem

8-inch wafer chip products are widely used, almost reflected in all consumer electronic products, and their applications continue to expand. It is especially important that many semiconductor products are currently produced with the help of 8-inch wafers to achieve the most suitable cost sweet spot.

Chips are cut through wafers. The larger the wafer area, the greater the number of cuts and the higher the cost-effectiveness. Wafers are evolving toward larger areas, and 12 inches has become the current mainstream wafer size. Around 8-inch wafers, there are fewer new investments.

Data show that the number of 8-inch factories in the world reached a peak in 2017, after which many factories were closed or converted to 12-inch factories. From the perspective of investment expenditure, since 2014, 8-inch wafer manufacturing equipment expenditure reached 2.682 billion US dollars, and then showed a year-on-year decline.

Taking into account that most of the 8-inch plants have completed depreciation, the construction of a new plant no longer has a cost advantage. At present, purchasing second-hand equipment, mergers and acquisitions, and improving production efficiency have become the current manufacturers' priority expansion methods.

Many equipment manufacturers have stopped producing 8-inch machines, and the shortage of equipment has also restricted manufacturers from further expansion. At present, there are about 700 second-hand 8-inch wafer manufacturing equipment for sale in the global market, and the market demand for 8-inch wafer manufacturing equipment is at least about 1,000. In the stock market, a considerable part is not suitable for procurement due to reasons such as being too old.

A variety of factors hindered the progress of expansion and the pace of demand growth. As a manifestation of the long-term contradiction between supply and demand, the 8-inch capacity shortage has caused multiple rounds of price increases and shortages.

In 2015, 8-inch wafers ushered in IoT demand. Focusing on the market opportunity of 8-inch foundry, SMIC negotiated mergers and acquisitions with South Korean semiconductor foundry company Dongbu Hi-Tech in the same year.

From 2017 to 2018, driven by the demand for the Internet of Things and automotive electronics, the 8-inch wafer foundry market has once again emerged. In 2018, major international manufacturers such as TSMC, SMIC, and Samsung have all expanded production.

Affected by the Sino-US trade war, the semiconductor market was weak and showed a recovery in the second half of 2019. At the end of 2019, CLSA released a report that pointed out that the supply of 8-inch wafer foundries in Asia was in short supply.

CLSA also predicted that the shortage will increase in 2020. By 2020, 8-inch production capacity is really scarce. In addition to the relatively clear catalytic elements such as 5G, many new variables have been added.

The first is the more clear 5G trend this year, which has increased the demand for power management, driver IC, MOSFET and other related applications several times. At the same time, the amount of semiconductors used in stand-alone devices has also increased significantly. For example, the power management ICs required for mobile phones originally only needed 1-2, but in the 5G mobile phone phase, the amount increased to 3~4.

The epidemic is naturally one of the important variables. Global home office and online education have led to significant growth in the shipments of notebook computers and tablet products, driving demand for medium and large-size panel display driver ICs. In the second half of the year, with the gradual recovery of automotive electronics, the consumption of IGBTs and MOSFETs has increased significantly. After the epidemic was brought under control, the market began to replenish inventory, again pushing up demand for 8-inch wafer capacity.

Entering 2020, changes in the political and economic situation have also become an incentive for tight 8-inch production capacity. Some IC design manufacturers once stockpiled a large amount of goods, which also exacerbated the shortage of 8-inch wafer manufacturing.

On the supply side, due to the impact of the epidemic, major global suppliers have suspended shipments. According to SMIC, even if the equipment enters the factory, there is no team to install it, which directly leads to delays in the expansion of production capacity. In the second half of the year, the peak season for 8-inch wafer manufacturing is approaching, which intensifies the shortage of capacity, and the industry has begun to experience price increases and extended delivery.

The market originally predicted that under the influence of the Sino-US trade war, China's medium and low-end wafer capacity expansion would increase significantly, but the actual progress was not as expected. The chairman of Power Semiconductor Manufacturing Co., Ltd. pointed out that in the past three years, there has been almost no new production capacity for 40-20 nanometers in mainland China, which is one of the reasons for the shortage of 8-inch production capacity.

According to sources from SMIC, some manufacturers are still afraid to expand production easily because of concerns that demand is not as good as expected.

How to solve the long-standing problem of 8-inch production capacity? In a recent interview, Power Semiconductor’s chairman Huang Chongren said bluntly: The 8-inch production capacity shortage cannot be solved.

UMC counterattack

Around this wave of 8-inch production capacity shortages, the biggest cake is naturally divided by wafer foundries. The continued high price competition between all walks of life has also allowed TSMC, UMC and the world's advanced manufacturers to increase their gross profit margins.

In the third quarter of 2020, UMC delivered good revenue results, with its capacity utilization rate approaching full capacity, and its single-quarter revenue hit a record high. The 8-inch production capacity is in short supply, and the 12-inch expansion, driven by bullish news, UMC set a record high in 18 years on November 23, and its share price has risen by more than 177% since 2020.

Many people in the industry believe that UMC’s performance counterattack this time is due on the one hand to the decision to abandon advanced processes below 12 nanometers and switch to mature and special processes; on the other hand, the demand for 8-inches has greatly increased, making UMC a further step. An important opportunity for counterattack.

Another player who has achieved counterattack is Power Semiconductor. It used to be the largest DRAM factory in Taiwan. After being hit by the fall in DRAM prices in 2012, it began to transform into a foundry factory. After transforming into a foundry factory, Power Semiconductor Manufacturing Co., Ltd. quickly turned losses into profits.

In addition, World Advanced’s performance this year is also exceptionally dazzling and is closely related to mergers and acquisitions. In the past six years, Advanced World has successively purchased two 8-inch wafer fabs. First, it started with Nanya's 8-inch wafer fab in Taoyuan in 2014. At the beginning of last year, it acquired Singapore’s 3E 8-inch fab for US$236 million.

According to a survey released by TrendForce, benefiting from the new normal life of remote office and teaching, coupled with the increase in the penetration rate of 5G smartphones, and the strong demand for related infrastructure, the annual growth of the global foundry production value in 2020 will be As high as 23.8%, breaking through the peak of the past ten years.

This year's foundry market is unprecedentedly prosperous, and under the structural changes in semiconductor industry demand, it shows the characteristics of advanced and mature processes. In addition to the advanced process wars between TSMC, Samsung and Intel, the world's advanced and power semiconductor manufacturers have also performed very well in mature process and special process markets.

It is worth mentioning that the 8-inch wafer foundries in mainland China have also eaten this wave of market dividends. SMIC has reported price increases. China Resources Micro's 8-inch production line has been fully loaded since the third quarter. The capacity utilization rate of Hua Hong Semiconductor's three 8-inch fabs in the third quarter has exceeded 100%.

Where does the design manufacturer go?

Compared with foundries that share opportunities in the food industry, fabless IC designers face numerous challenges.

At present, the foundry delivery period has been continuously extended to more than 3 months, and getting the goods as soon as possible has become an urgent problem for many design manufacturers. The recent 8-inch wafer capacity of newly cast wafers may not be able to keep up with the gold shipment deadline at the end of the year, and I am afraid that it will not be available until the first quarter of 2021 at the earliest.

The most critical issue naturally relates to the ability to grab production capacity. In order to ensure sufficient production capacity, many IC design manufacturers have already begun to actively book production capacity for next year, and some long-term orders have even been placed in the second quarter of 2021.

To win the battle for production capacity, the most direct way is naturally to increase prices. However, this method is only suitable for large companies such as Qualcomm with strong capital and close relationships with suppliers. Small IC design companies and startups will face higher risks.

Under the scramble for production capacity, orders crowding out of each other began to appear. Many foundries will screen orders and adjust product portfolios, prioritizing the production of high-margin products. Among them, LCD driver IC and MOSFET chip orders with relatively low gross profit margins are likely to be unable to grab due production capacity.

Transfer orders are also one of the outlets for design manufacturers, but it is not so easy to operate. SMIC is the main force of local 8-inch production capacity. Although its total production capacity accounts for less than 5% of the world, it is still a very important supplier of foundry capacity. Under the changing political and economic situation, design manufacturers need to consider the issue of transfer orders. But the global production capacity is tight, I am afraid there is nowhere to go.

According to Wei Shaojun, vice chairman of the China Semiconductor Industry Association, China's IC design industry will achieve a rapid growth of 23.8% in 2020. There are currently 1,698 design companies nationwide, an increase of 23% over last year. With the current shortage of foundry production capacity, the booming local design industry may be hindered.

Some analysts pointed out that the shortage of stock prices will continue until 2021, when many local IC design plants in China may be unable to grab production capacity and shut down, which will completely shuffle the market.

The tighter the supply, the more design manufacturers want to grab stocks and stock up on chip inventory. At the same time, in order to ensure production capacity, IC designers are likely to place repeated orders, making the market more unstable. According to market estimates, the shortage of 8-inch wafer capacity in short supply should be difficult to alleviate in the first half of 2021.

The positive side is that, compared to short-term strategies such as transfer orders, which are difficult to achieve, some manufacturers have already considered switching to the process. At present, commercial 5nm and 7nm chips are mostly produced by foundries with 12-inch wafers.

Qiao An, an analyst at TrendForce, said that some 8-inch products have already been transferred to 12-inch plants, and the 8-inch capacity shortage will be eased in the medium and long term.