In 2023, the global chip market was sluggish with lackluster demand, leading to low capacity utilization rates for major wafer fabs (including foundries and IDMs), which restrained investment in wafer fabs. According to SEMI statistics, in 2023, global wafer fab equipment spending decreased by 22% year-on-year.
In the past two years, advanced process technologies (5nm and below) are still in the investment phase, and the overall development situation is quite good, but it is only limited to the top two or three companies. The mature process market, which involves more wafer fabs and a broader industrial chain, is very bleak, with overall low capacity utilization rates. This is very unfavorable for the entire semiconductor industry, whether it is equipment or materials, and it comprehensively affects the industry's investment and capital expenditure.
01
Low Budget in 2023
According to TrendForce statistics, in the first three quarters of 2023, the capacity utilization rates of various wafer foundries were not ideal, and the annual output value decreased by about 4% year-on-year. As a result, each wafer foundry has reduced its capital expenditure for equipment procurement and other purposes in 2023, and the pace of capacity expansion has slowed down.
Taking TSMC as an example, the leading wafer foundry lowered its annual capital expenditure forecast in the second quarter of 2023 and adjusted it again in the second half of the year, bringing its annual expenditure to around 30 billion US dollars, lower than the 36.3 billion US dollars in 2022. This is the first time in nearly 8 years that the company has experienced a decline in annual capital expenditure.
In terms of factory construction and expansion, TSMC has slowed down several expansion projects in Kaohsiung, Hsinchu Science Park, Central Taiwan Science Park, and Hsinchu, and reallocated capacity. The original plan was to build two new factories in Kaohsiung, including 7nm and 28nm process production lines. However, due to weak demand for smartphones and PC markets, the 7nm factory in Kaohsiung was postponed, and the related electromechanical engineering bids were postponed by 1 year, followed by the delay of cleanroom and equipment installation work. In addition, the 3nm process has also shifted from a fast expansion mode to a slow expansion mode. The Fab 18 factory P7, which was originally planned to be mass-produced in 2023, has been postponed to 2024.
Samsung's advanced process customers such as Qualcomm and Nvidia have shifted orders for flagship new products below 7nm, and there are no new customers with a comparable scale to fill the capacity, resulting in Samsung's advanced process capacity utilization rate remaining at a low level of about 60% throughout 2023.United Microelectronics Corporation (UMC) General Manager Wang Shi stated that in 2023, as customers continued to digest inventory, UMC's business was affected by the weak demand for wafers. The first quarter saw a sequential decline of 17.5% in wafer shipments, with the utilization rate of production capacity dropping to 70%. In the second quarter, due to the overall demand remaining sluggish, customers continued to adjust their inventory, with wafer shipments remaining flat. Looking at the whole year, UMC adopted strict cost control measures and postponed some capital expenditures as much as possible to ensure profitability.
In 2023, GlobalFoundries laid off more than 800 employees, accounting for 5.3% of the company's 15,000 global employees. As the global semiconductor industry is in a downcycle, GlobalFoundries began to cut capital expenditures and slow down the expansion process.
02
Glimmer of Hope in the First Half of 2024
In the fourth quarter of 2023, the situation began to improve. In particular, the release of Huawei's new flagship smartphone sparked a wave of purchases, stimulating all segments of the semiconductor industry chain. Coupled with the hot sales of AI servers and related chips, the industry generally believed that in 2024, the capital expenditure of the electronic semiconductor industry would significantly increase, and the industry development would enter an upward cycle.
According to IDC statistics, in the first quarter of 2024, global PC shipments grew by 1.5% compared to the first quarter of 2023, marking the first year-on-year increase since the fourth quarter of 2021. The smartphone market rebounded earlier, turning positive in the fourth quarter of 2023, with an increase of 8.5%, the first year-on-year increase since the second quarter of 2021. In the first quarter of 2024, the growth continued, with an increase of 7.8%. Although the first quarter of 2024 showed a positive trend, IDC expects that the growth of the PC and smartphone markets for the whole year of 2024 will not be significant, at 2.4% and 2.8% respectively. The second half of 2024 is expected to perform better than the first half, with the first half still showing some weakness, resulting in unobvious annual growth.
03
(Note: The original text ends abruptly, so the translation for section 03 is not provided.)Wafer Foundry and Memory Chip Industries Take the Lead
From the current development perspective, among various sectors of the global chip manufacturing industry, the signs of recovery in the wafer foundry and memory chip industries are the most evident and representative.
Let's start with wafer foundry.
A report on the wafer foundry industry by JPMorgan Chase (Little JP) Securities indicates that the destocking of wafer foundries will come to an end. Gokul Hariharan, the head of research for JPMorgan's Taiwan region, analyzed that the first quarter has reached the bottom. Due to the continuous rise in AI demand, non-AI demand is also gradually recovering, and urgent orders have begun to emerge. The demand for large-size panel driver ICs (LDDIC), power management ICs (PMIC), and WiFi 5 and WiFi 6 chips is heating up, showing that the wafer foundry industry is beginning to turn towards recovery.
In terms of non-AI demand, consumer, communication, and computing vertical markets hit bottom in the first quarter of this year. However, the demand in the automotive and industrial sectors may not recover until the end of 2024 or the beginning of 2025.
It is worth noting that the recovery speed of the utilization rate of wafer foundry factories in mainland China is very fast. This is mainly because domestic IC design companies started adjusting their inventories earlier, and the inventory is gradually normalizing.
However, SEMI frankly stated that at present, the utilization rate of wafer foundry factories is still relatively low, especially in mature processes, with no signs of recovery in the first half of 2024.
The capital expenditure of wafer factories is highly correlated with the utilization rate. Overall, the expenditure decreased by 17% year-on-year in the fourth quarter of 2023, and also declined by 11% in the first quarter of 2024. It is expected to return to the growth track in the second quarter, but it is only a slight increase of 0.7%. It is expected that the capital expenditure related to memory will grow by 8%, which is higher than the non-memory field.
Let's take a look at memory chips next.According to TrendForce statistics, in the just-concluded second quarter, there was no significant change in the inventory levels of memory suppliers and buyers. In the third quarter, the demand for smartphones and CSP manufacturers still has room for restocking, and will enter the peak production season. It is expected that smartphones and servers will drive a further increase in memory shipments.
In the third quarter, the demand for general-purpose servers is recovering, coupled with memory suppliers further increasing the production ratio of HBM, it is estimated that the price of PC DRAM will continue to rise, with an average price increase of 3%-8% per quarter. The general-purpose server benefits from the peak season stocking demand, which increases the contract price increase of DDR5 to 8%-13%.
In terms of NAND Flash, in the third quarter, companies will continue to invest in server construction, and SSDs will benefit from the expansion of AI applications, and related orders will continue to grow. However, the demand in the consumer electronics market continues to be sluggish, coupled with the active increase in production by the original factories in the second half of the year, it is expected that the oversupply ratio of NAND Flash will rise to 2.3%, and the average price increase of NAND Flash will converge to a quarterly increase of 5%-10%.
Looking at the price trend of NAND Flash this year, due to the original factory controlling the increase in production in the first half of the year, the price rebounded rapidly, but as major manufacturers began to expand production in the second half of the year, the retail market has not yet recovered, and the wafer spot price will fall.
The above is about digital and logic chips, in comparison, the market situation of analog chips is much worse, mainly due to the industrial and automotive application markets, as mentioned earlier, it is likely to recover by the end of this year. The performance of Texas Instruments, the leading company in analog chips, can reflect the market situation from one side.
In the first quarter of 2024, Texas Instruments' revenue decreased by 16% year-on-year (10% quarter-on-quarter) to $3.661 billion, and the operating profit decreased by 34% year-on-year. Texas Instruments has the longest customer list and the most diversified product categories in the chip industry, making it a barometer for the entire analog chip industry.
04
Prepare for 2025, major wafer factories increase capital expenditure
At present, the semiconductor industry has entered a new upward cycle, major wafer factories have finally waited for a new growth window period, and have begun to increase capital expenditure and expand production capacity. Typical representatives are TSMC, Samsung, SK Hynix, Micron, as well as SMIC and Huahong Semiconductor.TSMC has stated that due to the continuous increase in R&D and production of the most advanced processes such as 2nm, its capital expenditure is expected to reach between $32 billion and $36 billion by 2025 (compared to $28 billion to $32 billion in 2024), marking the second-highest in history with an annual growth of 12.5% to 14.3%.
It is reported that customer demand for TSMC's 2nm process capacity is stronger than expected. In addition to Apple's early commitment to TSMC's first batch of 2nm capacity, non-Apple application customers are also actively planning to adopt it due to the booming development of AI. As a result, TSMC continues to advance its 2nm mass production target for 2025. Previously, the 2nm production line at the Baoshan No. 1 factory was scheduled to move in equipment in April 2024, with the Baoshan No. 2 factory following suit. The Kaohsiung factory plans to expand its 2nm capacity, with the earliest equipment move-in expected in the third quarter of 2025. The Southern Taiwan Science Park will also join the production, continuously expanding the related capacity from the end of 2025 to 2026.
South Korea's two giants, Samsung and SK Hynix, are also raising funds in preparation for a significant expansion in production in 2025.
On July 1st, according to the Korean Economic Daily, Samsung Electronics and SK Hynix are considering applying for loans from the Korea Development Bank to further promote their business expansion. It is reported that Samsung Electronics plans to apply for a loan amount of up to 50 trillion won, while SK Hynix aims for 30 trillion won, equivalent to 263.8 billion yuan and 158.28 billion yuan, respectively.
It is known that the main purpose of SK Hynix's loan this time is to fill the gap between its huge investment plan and existing capital reserves. The company plans to make a huge investment of over 120 trillion won in the Gyeonggi-do Yongin semiconductor cluster and invest $4 billion in building an AI server storage chip packaging factory in Indiana, USA. However, its cash reserves at the end of the first quarter were only 8.2 trillion won.
SK Hynix will start construction of its large wafer factory complex named the Yongin Semiconductor Cluster in March 2025. The complex includes four independent wafer factories, and once completed, it may become the world's largest wafer factory complex.
Micron's capital expenditure plan for the fiscal year 2024 is about $8 billion. In the fourth quarter of the fiscal year 2024, the company will spend about $3 billion on wafer factory construction, new wafer factory equipment, and various expansions and upgrades.
In the fiscal year 2025, Micron plans to significantly increase capital expenditure, targeting about 30% of revenue, totaling about $12 billion, to support updates in various technologies and facilities. The company's significantly increased expenditure in the fiscal year 2025 will be used to build new wafer factories in Idaho and New York, as well as to fund the assembly and testing of high-bandwidth memory (HBM), and the construction of manufacturing and backend facilities, including investment in technological transformation.
Micron started using EUV technology later than Samsung and SK Hynix. To achieve mass production of EUV DRAM by 2025, increased investment is also necessary.
Sanjay Mehrotra, President and CEO of Micron, said that although Micron is slightly behind in the use of EUV lithography equipment, the trial production of DRAM chips using the 1γ process with EUV is progressing smoothly and is expected to achieve mass production by 2025.Micron pins high hopes on the 1γ process DRAM, aiming to manufacture cheaper and more energy-efficient memory chips within the industry. Currently, the relevant pilot production is taking place at Micron's factory in Hiroshima, Japan, and as part of the pilot plan, the first batch of DRAMs using the 1γ process will also be manufactured here.
Intel plans to increase its capital expenditure by 2% in 2024, reaching $26.2 billion, as the company will increase the production capacity for both foundry customers and internal products.
Let's take a look at the performance of the two leading wafer foundries in Mainland China.
In the first quarter of 2024, SMIC's sales revenue was $1.75 billion, a sequential increase of 4.3% and a year-on-year increase of 19.7%. The monthly production capacity increased from approximately 805,500 8-inch wafer equivalents in the fourth quarter of 2023 to 814,500, and the utilization rate of production capacity was improved to 80.8%. During this quarter, SMIC's capital expenditure was 15.873 billion yuan, compared to 16.708 billion yuan in the previous quarter. Looking ahead to the second quarter, SMIC plans to keep the capital expenditure flat.
In the first quarter of 2024, Hua Hong Semiconductor's sales revenue was $460 million, a decrease from $631 million in the same period last year, but it achieved a 1% increase compared to $455 million in the previous quarter. Hua Hong Semiconductor's net profit attributable to the parent company's shareholders was $31.8 million, a year-on-year decrease of 79.1%. The company attributes the decline in net profit to the decrease in average selling price. During this quarter, Hua Hong Semiconductor's capital expenditure was $302.6 million, compared to $331 million in the previous quarter.
Overall, within the next year or so, large manufacturers, especially those focused on advanced processes, generally increase their capital expenditure, while the capital expenditure of wafer foundries focused on mature processes does not change much.
05
Semiconductor Equipment Prices Rise with the Tide
The increase in capital expenditure by major wafer foundries directly benefits the semiconductor equipment industry.The forecast data released by SEMI shows that in 2023, the global wafer fab equipment spending is expected to decrease by 22% year-on-year from a record high of $98 billion in 2022 to $76 billion. In 2024, it is expected to grow by 21% year-on-year to reach $92 billion.
The SEMI data indicates that Taiwan's wafer fab equipment spending will reach $24.9 billion in 2024, continuing to lead the world, followed by South Korea with approximately $21 billion. Mainland China is expected to have about $16 billion, roughly equivalent to 2023, ranking third globally. It is anticipated that the Americas will remain the fourth largest spending region, with an investment of a record $11 billion in 2024, a year-on-year increase of 23.9%. Investments in Europe and the Middle East are also expected to set a record, with a potential growth of 36% to reach $8.2 billion. In 2024, Japan and Southeast Asia's wafer fab equipment spending are projected to increase to $7 billion and $3 billion, respectively.
Among all semiconductor equipment, the EUV lithography machines continue to attract the most attention.
The supply chain points out that ASML's production plan for 2025 is: 90 EUV units, 600 DUV units, and 20 High-NA EUV units.
With the ongoing expansion of production capacity, the number of deliveries by ASML in 2025 is expected to increase by 30% compared to the original plan. Supply chain manufacturers have revealed that the supply of EUV equipment remains tight, with delivery times extending up to 16 to 20 months, and most orders for 2024 will have to wait until 2026 for delivery.
It is reported that TSMC's EUV order this year has reached 30 units, and 35 units are expected for 2025.
TSMC's advanced process capacity is gradually being released. Taking the 3nm fab in Tainan as an example, it will enter the mass production phase in the third quarter, and in 2025, the P8 fab will also gradually introduce EUV equipment. The 2nm production line in Hsinchu's Baoshan has been continuously procuring EUV for three years, and the 2nm production line in Kaohsiung is also progressing in parallel.
It is reported that the additional funds for TSMC's P1A project in the United States are expected to be in place in the third quarter of this year, and the construction of the fab site has entered its final stages. Coupled with TSMC's construction needs in other fab sites both domestically and internationally, such as Hsinchu's Baoshan, Kumamoto in Japan, Nanzi in Kaohsiung, and packaging and testing factories, the demand for semiconductor equipment is considerable.Conclusion
In 2024, major wafer fabs have already begun to increase their capital expenditures, but this is merely a warm-up; the real climax will not arrive until 2025. Therefore, 2024 is a transitional period, and it is difficult to see any particularly significant impacts in the short term, which will only occur after 2025.
Following an 8.2% decline in the global semiconductor market in 2023, many companies are adopting a cautious attitude towards capital expenditures in 2024. According to statistics from Semiconductor Intelligence, the total global semiconductor capital expenditure in 2023 was $169 billion, a 7% decrease from 2022, and it is expected that the capital expenditure in 2024 will still be negative growth, with a decline of 2%.
Due to the significant market share held by analog chips and mature process wafer foundries, and the market conditions for these two segments remaining sluggish, related manufacturers will find it difficult to expand their capital expenditures in 2024. For instance, GlobalFoundries is expected to cut its capital expenditure by 61%, STMicroelectronics by 39%, and Infineon by 3%. This significantly weakens the capital expenditure level of the entire industry.
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