In the shadows of the AI boom
Life in the Semiconductor Foundry Suburbs
With just a few smaller companies needing to report Q4-24, it is evident that the Semiconductor market is at another record high if you count Nvidia as “Semiconductors” and accept the double counting of high bandwidth memories (The 500 Pound GPU Gorilla is Roaming the Server Savannah).
While it is not new that price increases drive the upcycle, this cycle is more extreme, impacted by Nvidia's and, to a lesser extent, the memory companies' incredibly high profits.
This is not your grandmother's semiconductor cycle, which can be seen when analysing revenue growth by business model. The companies using the hybrid manufacturing model (own fabs plus foundries) are still deep in the downcycle with no immediate recovery in sight ( The Semiconductor tide is not lifting all boats).
While the traditional IDMs (Integrated Device Manufacturers) are well into the upturn driven by the memory manufacturers, the conventional Semiconductor companies have yet to reach record territory.
This semiconductor cycle is undergoing systemic change, as seen by the rapid growth of the fabless semiconductor companies dominated by Nvidia. None of this is visible when you follow traditional market analysis companies, which are busy selling happy forecasts to hungry management teams trying to survive another investor call.
The happy forecast market is much bigger than the Semiconductor Analysis market, as people are looking for numbers that can support their already-made decisions.
Are you looking for facts to support your decisions or decisions backed by facts?
The problem with happy data. While it makes you feel good, it makes you draw the wrong conclusions and invest when you should hunker down.
Most semiconductor supply chain companies are not situated in downtown skyscraper land beside Nvidia and SK Hynix but in the Semiconductor suburbs, where the rules and growth rates are entirely different.
While it might be easier to meet the unrealistic expectations of hungry stakeholders in the short term, there will be a bill to pay if you don’t get it right. If you don’t like the story the data supports, maybe it is time to write a new story that takes advantage of the uncovered situation.
The Manufacturing perspective
It is worth analysing the Semiconductor market from a manufacturing perspective, as seen below, to better understand the current market situation.
While I often get told that I cannot compare foundry and semiconductor companies in the same chart, my reply is, as always: “I just did!”
The aim is not to compare but to uncover insights that can help tell the current story of the semiconductor market and enable strategic responses.
Excluding the memory revenue confirms that the fabless companies and their foundry manufacturing partners drive the current market. It also reveals that the non-memory IDMs have been in a more prolonged depression than the 10-quarter dip the hybrid companies are in.
From a manufacturing perspective, only the memory companies and the foundries benefit from the current market upturn, and everybody else risks making wrong decisions if they listen to the broad and happy market analysis readily available.
It is time to examine the foundry market and discover what is hidden about the current situation.
The state of the Semiconductor Foundries
Even my hairdresser knows that all Semiconductor chips are made in Taiwan by TSMC (well, not entirely, but reasonably close), and the Taiwanese giant certainly has earned its reputation. So, it is unsurprising that TSMC drives a substantial proportion of the foundry market growth.
In Q3 and Q4 of 2024, the foundry market broke new revenue records, and gross profit is at an all-time high. Operating and Net profits are also approaching record territory.
The exclusion of TSMC shows what life is like in the foundry suburbs, which is entirely different from downtown.
Not only are the other foundries far from record revenue territory, but the Surbubian foundries, like the hybrid semiconductor companies, are also in a 10-quarter depression. The semiconductor celebration is purely a downtown event.
Not only is the depression prolonged, but it has also recently worsened from a profitability perspective, threatening to drive the foundries into red again.
While the growth mainly comes from TSMC, the foundry leader is not the only company that has invested substantially in new capacity.
Also, Samsung and SMIC of China have made significant investments in new manufacturing capacities that might be timed wrong given the current market situation.
The Chinese foundries have been punching well above their weight in the race for mature node supremacy.
The CapEx investments have given the following Property, Plant, and Equipment (PPE) growth until the end of 2022, when PPE levelled out.
The main reason is that TSMC’s CapEx investments were at a similar level as the depreciations that increased as the 3nm investment progressed. With the current increase in CapEx, the PPE will begin to grow again.
While PPE does not translate directly into capacity, it will do so over time. The capacity of the individual foundries can be seen below.
The current capacity of the Foundries is at approximately 12M 12” Equivalent wafers per quarter, demonstrating that it requires about 4K$ worth of PPE to manufacture a 12-inch wafer per year.
The current CapEx is about 2x above depreciation, so the foundry industry will continue to add capacity.
From a capacity standpoint, this can become a problem. The current utilisation rate is 75%, and only the Chinese foundries SMIC and Hua Hong are at healthy capacity levels. TSMC is currently at 73% and single-handedly carries the weight of the entire AI revolution. TSMC's 3nm capacity is fully utilised, but 5nm and 7nm capacity are available. The current pricing trends impact the situation for the mature nodes.
The overall ASP shown in price per 12” equivalent wafers shows that everybody except TSMC is experiencing a decline in ASP’s. As TSMC 3nm wafers are sold at around 20K$ a piece, this is having a dramatic effect on the ASP’s