According to TrendForce’s latest investigation, Chinese foundries have already suspended plans to expand production capacity for advanced processes after the US government began restricting the exportation of equipment and technical support for processes related to non-planar architectures. TrendForce believes that a further tightening of the restrictions on lithography equipment will mainly affect mature processes, especially the 28nm. Chinese foundries might proceed more slowly in adding new production capacity or raising output for the 28nm process due to the prolonged reviews on their equipment purchases.

TrendForce semiconductor analyst, Joanne Chiao, said that Chinese semiconductor companies have already suspended the development of chips featuring the GAA architecture (i.e., nodes that are generally ≤3nm) after the US government began restricting the exportation of EDA tools and related technical support. If we talk about the FinFET architecture that Chinese foundries are able to produce for now, it is possible to achieve the faster computing speed of the more advanced chips by combining multiple lower-end chips. However, it might also be very challenging to raise the production yield rate of a solution that integrates multiple chips, not to mention that the power consumption of such solution might be very high as well.

Seeing the US export control, for now, US government has not imposed restrictions on the exportation of technical support for processes related to planar architectures. On the other hand, Chinese foundries might halt their advanced chip (14nm) production at any time if they encounter an equipment malfunction or another problem that requires technical support from US equipment providers.

At last, Chiao emphasized that the US sanction has definitely accelerated the development of an “all-China” semiconductor manufacturing supply chain. Nevertheless, the world’s top eight semiconductor equipment providers all come from Japan or the US. From the perspective of the foundry industry, it will be hard for China to realize a wholly or mostly native semiconductor supply chain within the foreseeable future.

The market started worrying about the oversupply in semiconductor 2023, when the demand will start growing again depends on two factors: the situation of the macroeconomy and the inventory status.

Since foundries’ capacity utilization rates started drop in 3Q22, chip supply as a whole has decreased significantly. This, in turn, has helped limit inventory growth across the supply chain. However, the global economy is still at risk of a mild recession, so consumers may allocate more of their spending to daily necessities. They may also spend more on tourism due to easing of the pandemic. This could lead to weak sales for consumer electronic products.

Not to mention that most consumers already purchased the electronic products that they need for working or studying at home during the pandemic. Assuming that the overall inventory level of the supply chain will return to a healthier level, TrendForce believes that chip demand will begin to rebound to a certain extent in 2Q23. Then, the demand growth will become more obvious from 3Q23 onward. Nevertheless, this demand growth may not be too strong due to uncertainties in the global economy.

If we observe the situation from the perspective of the foundry industry, smartphones represent the largest application segment in terms of wafer consumption. The smartphone supply chain started inventory correction earlier, so demand rebound might be more obvious initially for smartphone-related chips compared with chips used in other consumer devices. On the other hand, with different benchmarks, the demand for HPC chips will show more significant growth compared with the demand for smartphone chips.

In recent years, China’s IC sales have been increasing year over year. Although sales have been suppressed by the United States and the impact of the pandemic, China’s IC sales still increased by 17% in 2020. Benefiting from the development of terminal applications such as 5G, online office, and smart cars, China’s IC sales grew by 18.2% in 2021 and it is expected to rise by 11.21% in 2022.

Currently, China’s 12-inch foundries are primarily owned by SMIC and Hua Hong Semiconductor. SMIC’s 12-inch fabs are located in Beijing and Shanghai while Hua Hong’s 12-inch fab is located in Wuxi. SMIC’s annual sales revenue in 2021 was US$5.44 billion, growing 39% YoY, and it posted net profit of US$1.775 billion, growing 147.76% YoY. From the perspective of revenue structure, 12-inch products contributed approximately 60% of SMIC’s revenue in the past year.

From the perspective of production capacity, SMIC’s capacity utilization rate has hovered around 100% in the past year. In 1Q22, SMIC’s capacity utilization rate was 100.4%, with a monthly production capacity of 613,400 units of 8-inch equivalent. . In 2021, new production capacity was 100,000 units/month (converted to 8 inches), of which 45,000 units/month was added as 8-inch wafers. At present, SMIC is still accelerating production expansion. Its project in Lingang, Shanghai has broken ground and its two projects in Beijing and Shenzhen are progressing steadily. Production is expected at these fabs by the end of 2022, mainly as 12-inch capacity.

Hua Hong Semiconductor posted operating income of US$1.631 billion in 2021, a YoY increase of 69.64%. From the perspective of revenue structure, Hua Hong Group primarily focused on 8-inch production capacity before 2020. As production commenced at Hua Hong Wuxi’s 12-inch project, Hua Hong completed the leap from 8 inches to 12 inch wafers. In the past year, Hua Hong’s average monthly production capacity of 8-inch wafers was 194,000 units and revenue was US$1.15 billion, accounting for 70.55% of total revenue. The average monthly production capacity of 12-inch wafers was 56,000 wafers and revenue was US$480 million, accounting for 29.45% of revenue, and the proportion of 12-inch revenue is increasing. In 1Q22, Hua Hong Semiconductor’s 12-inch revenue accounted for 44.1% of total revenue, an increase of 5 percentage points from the previous quarter. With the completion of the second phase of the Wuxi project, 12-inch revenue is expected to, once again, achieve substantial growth.

It is worth noting that since the Sino-US trade war, China’s substitution of domestic products has become mainstream, especially in the foundry and packaging and testing portions of the manufacturing process. In addition, the tense relationship between supply and demand and hobbled logistics caused by the pandemic has also catalyzed an increase in the proportion of fab revenue coming from China. From the perspective of wafer foundries, Hua Hong Semiconductor’s China revenue will account for 76% of total revenue in 1Q22. In terms of SMIC, although 4Q20 was categorized by an inability to manufacture Huawei orders and the proportion of revenue from China and Hong Kong fell from 69.7% in 3Q20 to 56.1% in 4Q20, as tension rose between supply and demand, lost Huawei orders have been taken up by other Chinese IC designers. In 1Q22, SMIC’s revenue from China and Hong Kong accounted for 68.4% of total revenue, a return to its peak level in 3Q20.

Behind record high sales of semiconductors is an unrelenting spike in demand. In order to alleviate the imbalance between supply and demand, the world’s major fabs are accelerating new production capacity and China’s fabs represented by SMIC and Hua Hong are also stepping up production expansion. From the perspective of the expansion structure, the current focus of fabs is still on the expansion of 12-inch wafers. The primary reason for this is that 12-inch wafers are characterized by higher production efficiency and lower unit consumables, with a comprehensive equipment supply chain. In the past two years, China has built a total of 11 projects involving 12-inch wafers. However, due to factors such as the pandemic, tide of production expansion, and lack of chips for equipment, the lead time of semiconductor equipment has been continuously drawn out, resulting in a slowdown in fab expansion. In addition, 8-inch capacity expansion is relatively slow due to equipment constraints. From the perspective of China’s foundry market, among new wafer production capacity (8 inch equivalent) from 2020 to 2021, 12 inch capacity accounted for 58.17%, 8 inch capacity accounted for 22%, and 6 inch capacity accounted for 19.83%.

The output value of the world’s top 10 foundries in 4Q21 reached US$29.55 billion, or 8.3% growth QoQ, according to TrendForce’s research. This is due to the interaction of two major factors. One is limited growth in overall production capacity. At present, the shortage of certain components for TVs and laptops has eased but there are other peripheral materials derived from mature process such as PMIC, Wi-Fi, and MCU that are still in short supply, precipitating continued fully loaded foundry capacity. Second is rising average selling price (ASP). In the fourth quarter, more expensive wafers were produced in succession led by TSMC and foundries continued to adjust their product mix to increase ASP. In terms of changes in this quarter’s top 10 ranking, Nexchip overtook incumbent DB Hitek to clinch 10th place.

TrendForce believes that the output value of the world’s top ten foundries will maintain a growth trend in 1Q22 but appreciation in ASP will still be the primary driver of said growth. However, since there are fewer first quarter working days in the Greater China Area due to the Lunar New Year holiday and this is the time when some foundries schedule an annual maintenance period, 1Q22 growth rate will be down slightly compared to 4Q21.

Top 5 foundries account for nearly 90% of global market share, Samsung recovers share with advanced processes

Looking at the top five industry players, TSMC’s 4Q21 revenue reached US$15.75 billion, a QoQ increase of 5.8%. Although 5nm revenue spiked thanks to the new iPhone, 7/6nm revenue dropped due to a weak Chinese smartphone market, becoming the only TSMC node in decline in 4Q21, and inducing a contraction in TSMC revenue growth in 4Q21, though TSMC still accounts for more than 50% of global market share. As one of TSMC’s few competitors in advanced processes below 7nm, Samsung strengthened 4Q21 revenue to US$5.54 billion, a quarterly increase of 15.3% owing to the gradual completion of new advanced 5/4nm process capacity and the mass production of new flagship products from major client Qualcomm. Although Samsung’s foundry business has posted record revenue, the slower ramp-up of advanced process capacity continues to erode overall profitability. Therefore, TrendForce believes that improving advanced process capacity and yield in 1Q22 is one of Samsung’s top priorities.

Constrained by limited growth in new production capacity and the fact that the new wave of wafers contracted at the latest pricing has yet to be produced, UMC’s revenue stalled slightly in 4Q21, to US$2.12 billion, up 5.8% QoQ. GlobalFoundries benefited from the release of new production capacity, product mix optimization, and new long-term agreement (LTA) pricing, pushing up ASP performance. Revenue in 4Q22 hit US$1.85 billion, up 8.6% QoQ. SMIC posted 4Q21 revenue of US$1.58 billion, 11.6% QoQ, due to mounting demand for products such as HV, MCU, Ultra Low Power Logic, and Specialty Memory as well as factors such as product mix adjustment and appreciating ASP.

Surpassing DB Hitek, Nexchip officially breaks into the top 10 in 4Q21

The foundries ranked 6th to 9th are HuaHong Group, PSMC, Vanguard International Semiconductor (VIS), and Tower Semiconductor (Tower), respectively. Each has benefiting from factors such as a utilization rate uniformly at full capacity, release of new production capacity, and adjustment of ASP and product mix, sustaining the growth of revenue performance. It is worth mentioning, the acquisition of Tower by Intel netted Intel mature process technologies and a customer base and expanded the diversity and production capacity of its foundry business. However, before this transaction is officially completed, Tower is still considered an independent entity in terms of the accounting process. TrendForce states, after Intel’s foundry business is properly integrated with Tower, Intel will officially enter the ranking of top ten foundries.

Coming in 10th on the top 10 foundry ranking is Nexchip with revenue of US$352 million and a quarterly growth rate of 44.2%, the fastest growth rate among the top ten, and officially surpassed DB Hitek. According to TrendForce investigations, the primary reason Nexchip was able to break into the top 10 in 4Q21 was the company’s diligent production expansion. Nexchip also plans to develop more advanced processes such as the 55/40/28nm nodes and multiple product lines including TDDI, CIS, and MCU, to compensate for its current single product line and limited customer base. Since Nexchip is currently ramping-up operations quickly, its growth performance in 2022 should not be underestimated.

From 2020 to 2025, the compound annual growth rate (CAGR) of 12-inch equivalent wafer capacity at the world’s top ten foundries will be approximately 10% with the majority of these companies focusing on 12-inch capacity expansion, which will see a CAGR of approximately 13.2%, according to TrendForce’s research. In terms of 8-inch wafers, due to factors such as difficult to obtain equipment and whether capacity expansion is cost-effective, most fabs can only expand production slightly by means of capacity optimization, equating to a CAGR of only 3.3%. In terms of demand, the products primarily derived from 8-inch wafers, PMIC and Power Discrete, are driven by demand for electric vehicles, 5G smartphones, and servers. Stocking momentum has not fallen off, resulting in a serious shortage of 8-inch wafer production capacity that has festered since 2H19. Therefore, in order to mitigate competition for 8-inch capacity, a trend of shifting certain products to 12-inch production has gradually emerged. However, if shortages in overall 8-inch capacity is to be effectively alleviated, it is still necessary to wait for a large number of mainstream products to migrate to 12-inch production. The timeframe for this migration is estimated to be close to 2H23 into 2024.

PMIC and Audio Codec gradually transferred to 12-inch production, alleviating shortage of 8-inch production capacity

At present, mainstream products produced using 8-inch wafers include large-sized panel Driver IC, CIS, MCU, PMIC, Power Discrete (including MOSFET, IGBT), Fingerprint, Touch IC, and Audio Codec. Among them, there are plans to gradually migrate Audio Codec and some more severely backordered PMICs to the 12-inch process.

In terms of PMICs, other than certain PMICs used in Apple iPhones already manufactured at 12-inch 55nm, most mainstream PMIC processes are still at 8-inch 0.18-0.11μm. Burdened with the long-term supply shortage, IC design companies including Mediatek, Qualcomm, and Richtek have successively planned to transfer some PMICs to 12-inch 90/55nm production. However, since product process conversion requires time-consuming development and verification and total current production capacity of the 90/55nm BCD process is limited, short term relief to 8-inch production capacity remains small. Effective relief is expected in 2024 when large swathes of mainstream products migrate to 12-inch production.

In terms of Audio Codec, Audio Codecs for laptops are primarily manufactured on 8-inch wafers, and Realtek is the main supplier. In the 1H21, the squeeze on capacity delayed lead times which affected notebook computers shipments. Although the stocking efforts of certain tier1 customers proceeded smoothly in the second half of the year, these products remained difficult to obtain for some small and medium-sized customers. At present, Realtek has partnered with Semiconductor Manufacturing International Corporation (SMIC) to transfer the process development of laptop Audio Codecs from 8-inch to 12-inch 55nm. Mass production is forecast for mid-2022 and is expected to improve Audio Codec supply.

In addition to PMIC/Power Discrete, another mainstream product derived from 8-inch manufacturers is the large-sized panel Driver IC. Although most fabs still manufacture 8-inch wafers, Nexchip provides a 12-inch 0.11-0.15μm process technology used to produce large-sized Driver ICs. As production capacity at Nexchip grows rapidly, the supply of this product has been quite smooth. However, TrendForce believes that this is a special case. Mainstream large-sized Driver ICs are still manufactured on 8-inch wafers and there is no trend to switch to 12-inch wafers.

For more information on reports and market data from TrendForce’s Department of Semiconductor Research, please click here, or email Ms. Latte Chung from the Sales Department at lattechung@trendforce.com