In today's highly digitalized and intelligent era, the importance of semiconductors as the cornerstone of information technology is self-evident. The semiconductor industry encompasses various stages from raw material supply, design, manufacturing to packaging and testing, forming a complex and sophisticated value chain.
01
Chip Design, Dominating Half the Landscape
According to Nuvama data, in the entire semiconductor value chain, chip design accounts for 50%, wafer manufacturing for 36%, and packaging and materials for 9% and 5% respectively.
It can be seen that chip design and wafer manufacturing are the most core links in the semiconductor industry chain.
Chip design is the upstream link of the semiconductor industry chain and is the most valuable and creative part of the entire chain. According to the 2023 global Top 25 semiconductor companies list released by TechInsights, the first to twenty-fifth are ranked as follows: TSMC 1, Intel 2, Samsung 3, Nvidia 4, Qualcomm 5, Broadcom 6, SK Hynix 7, AMD 8, Infineon 9, STMicroelectronics 10, Micron 11, Texas Instruments 12, Apple 13, MediaTek 14, NXP 15, ADI 16, Sony 17, Renesas 18, Microchip 19, ON Semiconductor 20, GlobalFoundries 21, UMC 22, Kioxia 23, SMIC 24, Western Digital 25.
Among them, Nvidia, Qualcomm, Broadcom, AMD and other international giants are chip design companies, and they do not directly participate in chip production. Under the background of globalization, in the development process of the chip industry, leading companies often have a huge incentive to outsource parts of the industry with lower added value, thereby cultivating a huge global ecosystem. This system allows each chip company to focus on its own specialty.
At the same time, several other companies on the list also hold a pivotal position in the field of chip design. Overall, the global chip design industry shows a general trend dominated by a few giant companies with the United States leading.Let's take a look at chip manufacturing. Chip manufacturing typically refers to enterprises in the industry chain that mainly undertake the front-end wafer manufacturing, which is also the most sophisticated and complex part of the entire manufacturing chain, as well as the field with the most concentrated technology and capital.
Chip companies such as Intel and Texas Instruments are engaged in both chip research and development design and manufacture wafers through their own factories. These types of companies are called IDM (Integrated Device Manufacturing) companies. The IDM model was the mainstream model for the early development of the integrated circuit industry. However, with the development of industrial division of labor, the influence of wafer foundries (a model that provides manufacturing services for pure chip design companies) represented by TSMC in the field of chip manufacturing is increasing, becoming the mainstream model.
Next, let's study the profitability of different companies at each link.
02
Profitability Analysis of Companies at Different Links
The following table shows the financial overview of several major global semiconductor companies, as well as their different roles in the semiconductor industry chain, such as Integrated Device Manufacturers IDM - Intel; Fabless Design Companies - Nvidia, Qualcomm; Foundries - TSMC, UMC; and Outsourced Semiconductor Assembly and Test (OSAT) companies - ASE Technology, Amkor Technology.
Comparing the EBITDA profit margins of several companies, it can be seen that the profit margins of chip design company Nvidia and wafer manufacturing company TSMC both exceeded 50%, and the profit margins of Qualcomm and UMC also exceeded the other three companies in the table.
Looking at the Return on Invested Capital (ROIC), Nvidia's ROIC is the highest at 72%, followed by Qualcomm at 23%, TSMC at 19%, UMC at 12%, Amkor at 7%, and ASE Technology at 6%, with Intel at 1%.
In addition, according to research by TrendForce, the total revenue of the top ten global IC design manufacturers in 2023 is about $167.7 billion, with a year-on-year increase of 12%. Affected by high supply chain inventory, weak global economy, and slow market recovery, the wafer foundry industry is in a downcycle, with the top ten wafer foundry revenues decreasing by about 13.6% year-on-year, to $111.54 billion. However, according to the statistical data released by ChipInsights Research Institute, the total revenue of global semiconductor outsourcing packaging and testing (OSAT) in 2023 is only 285.9 billion yuan.Revisiting the actual revenue of major semiconductor companies in each link and their performance in other performance indicators.
03
Industry Profitability Competition
Major domestic and foreign chip design companies include NVIDIA, Qualcomm, Broadcom, CR Micro, GigaDevice, and Jotrin Microelectronics, etc. Major domestic and foreign wafer foundry companies include TSMC, UMC, SMIC, and Huahong, etc. Major domestic and foreign packaging and testing companies include ASE, Amkor, Jiangsu Changjiang Technology, Tongfu Microelectronics, and Huatian Technology, etc.
The following table presents the business income, net profit attributable to the parent company, and gross profit margin of the above semiconductor companies.
Chip design companies have the strongest profitability
First look at IC design. IC design is a light asset enterprise, so the gross profit margin is also one of the standards to measure the company's ability. The calculation data of the Semiconductor Industry Association (SIA) shows that the typical IC design company's R&D investment accounts for 20% of sales, and the gross profit margin is 50%.
The information revealed in the above table also confirmed this data. NVIDIA, which has made a fortune in the wave of artificial intelligence, had a gross profit margin as high as 72.7% in 2023; the net profit of the two major American technology giants, Qualcomm and Broadcom, also exceeded 50% in 2023, at 55.7% and 68.93% respectively.
For China's chip design industry, a 40% gross profit margin is actually a watershed. Because the profits of traditional chip design companies are mostly eaten by wafer foundry and packaging and testing foundry, even if there is a high gross profit, competitors and domestic replacement manufacturers will rush into this field, further compressing the profit space. Therefore, the gross profit margin of IC design companies is generally not high.Compared to the OEM and packaging and testing industries, the gross profit margins of chip design companies are relatively higher, mostly exceeding 30%. For instance, CR Micro's gross profit margin in 2023 was 32.22%, GigaDevice 34.42%, ZTE 46.45%, and Beijing Junzheng 37.1%. However, the gross profit margin of Weier Shares is relatively lower, at only 21.76%, which may be related to the positioning of Weier Shares' products and market competition.
Wafer Foundry Next
When it comes to wafer foundry, TSMC is an indispensable topic. For the chip manufacturing industry, several main factors that determine a high gross profit margin are: high technological content, high production capacity, high capacity utilization rate, and relatively high foundry prices, all of which TSMC possesses.
It is important to know that the profit from advanced process chip foundry is much greater than that from mature process chip foundry. TSMC, which has a large number of orders for Apple processors and Nvidia GPU chips, has seen a decline in revenue. For other wafer foundry manufacturers, the market situation will be even more difficult. It is important to note that there are more than a dozen wafer foundries competing in the less than half of the market left by TSMC.
Chinese wafer foundry companies mainly focus on the mature process field. As shown in the figure, TSMC and UMC, two wafer foundry companies located in Taiwan, China, have relatively high gross profit margins, with TSMC at 54.36% and UMC at 34.94%. The gross profit margins of the top two wafer foundry companies in mainland China are both maintained between 20%-30%.
Packaging and Testing Industry and Materials Space is Smaller
According to the semiconductor material sub-segment, some domestic semiconductor material industry listed companies are divided into silicon wafers, photo masks, photoresists, electronic special gases, wet chemicals, CMP materials, and target materials, etc.
At present, the global semiconductor material market concentration is relatively high. From the perspective of the sub-segment industry, more than 90% of the global semiconductor silicon wafer market is controlled by the top five international manufacturers (Shin-Etsu Chemical, SUMCO, GlobalWafers, Siltronic, SK Siltron); at present, China's high-end photoresist products are mainly monopolized by the global photoresist industry leader, due to the highest technical content of semiconductor photoresist, the market is mainly monopolized by international giants such as JSR, Tokyo Ohka, Shin-Etsu, DuPont, and Fujifilm.
However, there are also many sub-segments with high gross profit margins in the semiconductor material field, such as CMP materials, which is a sub-segment with a high gross profit margin. Dinglong Shares, with a gross profit margin close to 40%, is the only supplier of domestic CMP polishing pads. In addition, the wet electronic chemical market is also a track with a good gross profit margin performance.
Semiconductor upstream materials include manufacturing materials and packaging materials. In the field of strong technical barriers, the localization capability has just started, and the market opportunity is huge.Let's take a look at the final inspection industry. The packaging industry itself is in the middle of the industrial chain, with companies in the industry having low gross profit margins and weak bargaining power, and companies with high net profit margins are rare. As shown in the figure, even the gross profit of the final inspection giant ASE is only 15.8%, and the gross profits of Jiangsu Changdian Technology, Tongfu Microelectronics, and Huatian Technology are all less than 15%, at 13.65%, 11.7%, and 8.91% respectively.
The reasons for this were expressed by final inspection manufacturers, including a decline in demand for terminal market products, a downturn in the prosperity of the integrated circuit industry, insufficient orders, and low utilization of production capacity.
In addition, due to the high prosperity of the industry in previous years, global semiconductor final inspection manufacturers have announced large-scale expansions. So far, the capacity of the above-mentioned expansions is still being continuously released. At the same time, more and more Fabless manufacturers or manufacturers from other links in the industry chain have begun to enter the final inspection field. There are more than 30 domestic semiconductor companies on the A-share market that have announced that they will build their own final inspection production lines or testing production lines on the basis of the original Fabless model.
Under the dual pressures of market downturn and the continuous influx of new capacity to the market, the gross profit margins of domestic final inspection manufacturers have continued to decline.
Now, with the recovery of market prosperity, the revenue and gross profit margins of final inspection factories have shown signs of recovery. When the industry's prosperity is not high, due to fierce competition, the gross profit margins of final inspection factories will be under downward pressure. However, since the second half of 2023, the gross profit margins of final inspection factories have generally increased on a quarter-over-quarter basis. In the first quarter of 2024, the gross profit margin has increased compared to the same period last year, and the upward trend in demand can basically be confirmed. In addition, with the current market's hot concept of advanced packaging, backend final inspection manufacturers are expected to benefit simultaneously.
04
In 2023, which semiconductor company made the most money?
According to the latest report released by Omdia's "Semiconductor General Competitive Analysis Tool" (Omdia CLT), the semiconductor industry was in a downward trend from 2022 to 2023. The revenue in 2023 was $544.8 billion, a decrease of 9% compared to $597.7 billion in 2022. This decline ended two consecutive years (2020-2021) of record growth, highlighting the cyclical characteristics of the semiconductor market.
In terms of changes in revenue, NVIDIA, Broadcom, Apple, Infineon, STMicroelectronics, NXP, Sony Semiconductor, and Microchip, eight companies, all saw an increase in revenue.From the perspective of ranking changes, Intel, Nvidia, Apple, Infineon, STMicroelectronics, Sony Semiconductor, and Microchip have all seen an increase in their rankings, while Broadcom, AMD, Analog Devices, Renesas Electronics, NXP, and ON Semiconductor have maintained their positions.
Despite the overall decline in the semiconductor industry in 2023, artificial intelligence has become an important growth driver for the sector. Companies that focus on this field have seized the opportunity and achieved fruitful results.
Nvidia has emerged as the biggest winner in this domain, with its semiconductor revenue doubling from the previous year to $49 billion in 2023. This achievement highlights Nvidia's development trajectory, as its semiconductor revenue was less than $10 billion before the pandemic in 2019. In the fiscal year of 2024, Nvidia's net profit reached $29.76 billion, a 581% increase compared to $4.368 billion in the fiscal year of 2023.
While Nvidia is the biggest beneficiary of AI, it is worth noting that there are other companies in the market that have also seized the AI trend.
With the development of AI, the demand for high-bandwidth memory (HBM) integrated with graphics processing units (GPUs) is strong. Among them, SK Hynix is leading in this field, and other major memory manufacturers are also entering this domain. Although the memory market showed an overall decline in 2023, the HBM market performed well, with a 127% increase in revenue for the year, calculated in 1Gb equivalent units. Omdia predicts that HBM may achieve a record growth rate of 150-200% in 2024, which is expected to drive the growth of the memory market.
Looking at the Chinese market, in May of this year, the list of the top ten most profitable chip design companies (fabless semiconductor companies) in China for 2023, ranked by net profit data of listed companies, was released.
Compared to 2022, the net profit threshold for entering the top ten list has decreased from over 800 million yuan to 450 million yuan; at the same time, the total net profit of these ten companies in 2023 was 9.223 billion yuan, a slight decrease of 6.62% compared to their total net profit of 9.877 billion yuan in 2022.
Amidst the market environment where net profits are generally declining, a few chip design companies that have long dominated the list have fallen out of the top ten rankings due to significant performance declines. Therefore, if calculated based on the total net profit of the top ten most profitable chip design companies in 2022, the decline in the total net profit of the new top ten in 2023 is higher than 10%.
The list of the top ten most profitable chip design companies in 2023 and their related data can be seen in the table above. Most of the companies on the list have been regulars in the top rankings in recent years, reflecting some patterns in China's integrated circuit design industry. The listed companies and their net profit figures are as follows: Unisoc (2.531 billion yuan), Hygon Information (1.273 billion yuan), Zhuorui Micro (1.122 billion yuan), Star Semiconductor (911 million yuan), Fudan Microelectronics (H share) / Fudan Wei Dian (A share, 719 million yuan), China Electronics HuaDa Technology (Hong Kong stock, 625 million yuan), Weier Semiconductor (556 million yuan), Beijing Junzheng (537 million yuan), Jingchen Semiconductor (498 million yuan), and Lanti Technology (451 million yuan).It is worth noting that due to HiSilicon not disclosing its operating results, an additional 10 listed chip companies were selected for ranking outside of it in the table above.
The profitability of the semiconductor industry is not static. With rapid technological iterations, continuous changes in the market environment, and the restructuring of the global supply chain, the profitability of companies will also fluctuate accordingly. However, those companies that can continuously innovate, flexibly respond to market changes, continuously optimize cost structures, and enhance product competitiveness will undoubtedly stand out in fierce market competition and become the most profitable leaders in the industry.
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