The semiconductor manufacturing industry, which had been grappling with declining capacity utilization and customers aggressively "bargaining," experienced an "unexpected" recovery during the traditionally slow first quarter of this year. Recently, a joint report released by the Semiconductor Equipment Materials International (SEMI) highlighted that, driven by rising sales in the electronics sector, stable inventory levels, and increased fab capacity, the global semiconductor manufacturing industry showed signs of improvement in the first quarter of 2024. The report also forecasts that the industry’s growth will gain further momentum in the second half of the year. Notably, reporters from Securities Times·eCompany observed that several leading domestic wafer foundry firms have confirmed the industry’s rebound, adding that surging demand—stemming from the recovery of consumer electronics and supply chain restocking—could help wafer-fabrication prices stabilize and even begin to rebound. As a result, these companies are already ramping up their expansion plans to meet growing market needs.

Consumer electronics demand rebounds beyond expectations

“Our production lines are already running at full capacity, and as soon as the new equipment arrives at the factory, we’ll need to complete the debugging quickly. Lately, everyone has been working overtime to keep up with the demand,” a leading domestic wafer foundry told eCompany reporter.

On May 14, a report jointly compiled by SEMI and TechInsights revealed that with rising sales in the electronics sector, stable inventory levels, and increased fab capacity, the global semiconductor manufacturing industry showed signs of improvement in the first quarter of 2024. Industry growth is expected to gain further momentum in the second half of the year. Notably, the surge in shipments of high-performance computing (HPC) chips, coupled with the continued recovery in memory prices, has emerged as the key driving force behind this positive trend.

According to data from the General Administration of Customs, in the first four months of this year, both the quantity and value of China's imported integrated circuits saw double-digit growth, increasing by 14.8% and 15.9% year-on-year, respectively. For domestic wafer foundries, the recovery in consumer electronics has generally emerged as a key driving force.

"This quarter, we received several urgent orders. However, some of our production lines are already operating near full capacity, making it impossible to fulfill all orders. As a result, we’ve prioritized urgent orders tied to our market share—specifically those from the consumer electronics sector." During the recent earnings call, executives from SMIC explained that in the second quarter, Chinese smartphone manufacturers have been actively placing orders, leading to a significant surge in demand that outstrips current production capacity. Additionally, with parts of the global consumer market gradually recovering, there’s growing need for new product launches, prompting increased inventory replenishment for items like low-power Bluetooth chips and MCUs.

Compared to last November's earnings call, SMIC executives anticipated that the so-called "mini spring recovery" in the smartphone market would unlikely spur an immediate market rebound. Instead, they emphasized that 2024 will continue to be dominated by a recovery trend, with the overall market expected to follow a "double-U" trajectory. At this week's earnings conference, company executives expressed a "cautiously optimistic" outlook for this year, while closely monitoring the sustainability of incoming orders. Specifically, regarding pricing, the company noted that demand for its 8-inch production lines remains at a low point—but warned that sustained price declines are no longer expected. Meanwhile, utilization rates on the 12-inch lines are now approaching bottleneck capacity, leading to stable pricing in this segment.

In the first quarter of this year, SMIC’s capacity utilization rate reached 80.8%, an increase of 4 percentage points from the previous quarter. Meanwhile, sales revenue came in at $1.75 billion, up 4.3% quarter-over-quarter, marking the company’s fourth consecutive quarter of growth. Gross margin stood at 13.7%, exceeding earlier guidance across the board.

This year in the first quarter, Huahong, another major domestic wafer foundry giant, achieved nearly 3.3 billion yuan in revenue—though this represents a nearly 25% year-on-year decline. Nevertheless, the company’s capacity utilization rate has continued to rebound. During a recent earnings call, senior executives noted that demand for CIS, BCD, embedded non-volatile memory, and certain power devices has been driving strong utilization of the company’s 12-inch production lines. Looking ahead, the company plans to optimize its product portfolio and adjust prices appropriately as market conditions warrant. According to its second-quarter guidance, Huahong expects sales revenue to fall within the range of $470 million to $500 million, with gross margins projected between 6% and 10%.

This year in the first quarter, Xinlian Integrated-U saw its operating revenue increase by approximately 17% year-on-year. According to reports, driven by the continued recovery of the consumer market, the company's consumer business revenue doubled compared to the same period last year. Additionally, the company's high-performance MEMS microphone products have successfully obtained certification from leading international end customers, while its lithium-battery protection chips have achieved large-scale domestic substitution. Meanwhile, the entire lineup of smart power module products has already begun mass production.

Mapping out the automotive electronics market and AI opportunities

Despite the relatively sluggish overall automotive electronics market, domestic wafer foundries are actively making strategic moves.

"Currently, the automotive electronics industry is facing some temporary adjustments, but we believe overall demand in the automotive electronics market remains strong. At present, the company’s share of automotive electronic products is still limited, yet there is ample room for further development and growth in our specialized processes within this sector. We are also committed to continuously enhancing our overall capabilities in automotive electronics-related technologies." A senior executive from HuaHong stated that there is significant demand in the IGBT and super-junction segments, adding that the company boasts a robust technology platform and holds the largest domestic market share in these areas.

Xinlian Integration-U continues to actively onboard new energy customers. According to reports, the company has already onboarded more than 50 (automotive) customers in the first quarter and is already collaborating with several leading automakers. Moving forward, the company will further expand its partnerships with more major automakers and component suppliers in the new energy vehicle sector. Additionally, the company’s products have successfully entered key application areas in new energy vehicles, including main drive inverters, on-board chargers, DC/DC systems, and auxiliary systems.

“As product validation progresses and production capacity continues to expand, the number of vehicles equipped with SiC MOSFET products will rapidly increase, driving a significant surge in revenue while further solidifying the company’s leading position in China’s automotive-grade chip foundry and module packaging/testing sectors,” predicted a senior executive from CoreConnect-U. This year, the company expects its SiC products to generate revenues exceeding 1 billion yuan, and it also plans to complete construction of China’s first 8-inch SiC MOSFET pilot production line by the end of the year.

On the other hand, AI-related products have also become a key focus for wafer foundries. Last year, CoreLink Integrated-U unveiled its 55-nanometer high-efficiency power management chip platform technology—designed specifically for AI servers and data centers—and secured a major project designation. The company is now fully committed to accelerating product adoption and expanding market penetration.

Overall, high-performance computing chips are predominantly dominated by the world's leading wafer foundries that master advanced manufacturing processes. However, industry analysts point out that AI chips don't necessarily mean only advanced processes will benefit—mature processes also hold promising opportunities, particularly in areas like power management, where they are poised to play a critical role.

Additionally, new opportunities continue to emerge in segmented market segments.

"This year is the 'Year of Sports,' and sales of set-top boxes and TV-related products are on the rise—clearly higher than last year," noted a senior executive from SMIC.

Jinghe Integrated primarily engages in the foundry business for panel display driver chips. Last year, the company's operating revenue declined year-on-year; however, in the first quarter of this year, revenue doubled compared to the same period last year, and net profit attributable to shareholders turned sharply from loss to profit, reaching RMB 79.26 million—a growth rate that ranked first among listed semiconductor manufacturing companies. Meanwhile, the company’s capacity utilization rate has remained robust. It is reported that the company has already entered mass production of its 55nm single-chip, high-pixel backside-illuminated (BSI) image sensors. Additionally, its 40nm high-voltage OLED technology has successfully lit up a full-fledged panel, with small-batch production expected to begin in the second quarter of this year. Looking ahead, the company plans to further deepen its focus on the 12-inch wafer foundry business, maintaining its leading position in the display driver chip sector while expanding its offerings to include wafer fabrication services across multiple process nodes and diverse technology platforms.

Under the wave of capacity expansion, price and depreciation pressures intensify.

According to the latest report from SEMI, wafer fab capacity continues to grow, increasing by 1.2% in the first quarter of this year and set to rise by 1.4% in the second quarter. Notably, China has emerged as the region with the highest capacity growth rate among all areas. Meanwhile, as previously forecasted by TrendForce, mainland China is expected to see its market share in the mature process segment of the foundry industry rise from 29% in 2022 to 33% by 2027, while the U.S. and Japan are projected to significantly boost their shares in advanced process technologies over the same period.

For wafer foundries, expanding production capacity is a "double-edged sword"—while boosting competitiveness, it also means facing intense price competition and ongoing depreciation pressures.

As the leading domestic wafer foundry, SMIC is maintaining its capital expenditure at US$7.5 billion this year. Addressing market concerns about overcapacity in wafer fabrication, SMIC executives acknowledged that with China's growing domestic production capacity continuously coming online, industry competition will intensify further. They also noted that bulk product prices are expected to fluctuate according to market conditions. However, currently, SMIC holds around 5% of the global foundry market share. While the company is steadily adding incremental capacity each year, it doesn’t anticipate causing either supply shortages or oversupply issues across the industry. Moreover, thanks to its "China for China" strategy, robust customer base, and diversified platforms built through R&D efforts, SMIC remains confident that it won’t face a lack of orders. Currently, the company’s existing 28-nanometer production capacity has already reached full utilization, consistently operating at a level of high demand and limited supply.

The depreciation pressure from continued capacity expansion is widely eroding the business performance of wafer foundries.

In the first quarter of this year, SMIC's net profit attributable to shareholders fell by approximately 68% year-on-year, primarily due to shifts in product mix, increased depreciation expenses, and reduced investment income. According to forecasts, SMIC's annual depreciation is expected to rise by around 20% to 30%, with depreciation increasing sequentially in the second quarter as capacity expansion progresses and new equipment is added.

HuaHong Company is also building its second 12-inch production line, which will require approximately $2 billion and is expected to be completed and put into operation by the end of the year. Company executives anticipate that the market could recover by 2025, as the company’s new production line—featuring process platforms across various technology nodes—will gain strong recognition from key customers. This will enable the company to maintain a highly efficient capacity utilization rate, ensuring a steady and optimal pace for releasing its expanded production capabilities.

Xinlian Integrated-U is also moving forward with capacity expansion, yet it too faces depreciation pressures. Currently, the company’s SiC MOS production capacity stands at 5,000 wafers per month, with output already running at full capacity; the company plans to ramp up production to 10,000 wafers per month this year. Meanwhile, the company’s 12-inch fab achieved a monthly capacity of 10,000 wafers by the end of 2023 and now aims to further expand its output to 30,000 wafers per month this year.

Regarding the company's profitability outlook, executives from Chipone Integrated-U stated that due to the company's currently high depreciation expenses, its gross margin is currently negative. However, in the first quarter of this year, thanks to revenue growth, cost control measures, and the implementation of cost-improvement initiatives, the company achieved a net profit attributable to shareholders of 242 million yuan, representing a year-on-year reduction in losses by 257 million yuan. Moving forward, as the company continues to strengthen innovation in technology, refine manufacturing processes, and enhance cost-efficiency while actively driving sustained and stable revenue growth, it remains confident that its full-year net profit in 2024 will see a significant improvement in reducing losses.