Electronics

In recent years, the domestic integrated circuit industry has maintained rapid growth in production, especially in 2021, China's integrated circuit production reached 359.4 billion pieces, a year-on-year increase of 33.3%, which is the highest year-on-year growth in the past 10 years. However, what was unexpected was that in the first half of 2022, the domestic integrated circuit production was only 166.1 billion pieces, a year-on-year decrease of 6.3%, and also the first negative growth since 2009.

From a specific month perspective, since 1997, the domestic integrated circuit production has maintained a high-speed growth trend, even though the epidemic in early 2020 did not affect its rapid growth. But since the beginning of this year, the monthly growth rate of China's integrated circuit production has shown a downward trend throughout the first half of the year, with an average decrease of over 10%.

On the contrary, domestic integrated circuits have shown a "thriving" trend in the import and export market, with import and export growth rates of 5.5% and 16.4% in the first half of the year, respectively. Among them, the high growth of export volume in the integrated circuit market is particularly noticeable under the current decline in production.

The recent shortage of chips caused by various factors such as trade disputes, supply-demand imbalances, and the epidemic is gradually returning to rationality. Is the current decline in domestic integrated circuit production and the surge in international trade exports related to this?

Core reason: Requirements are the key

To analyze the root cause of this problem, we need to separate the production of integrated circuits and international trade exports. In terms of the decrease in domestic integrated circuit production, the following two reasons cannot be ignored:

In the short term, the Shanghai epidemic at the beginning of the year has to some extent affected the operation of the supply chain.

As is well known, Shanghai, as the core production base of the domestic integrated circuit industry, has a batch of wafer foundries such as SMIC International, TSMC, and Huahong. Since the expansion of the Shanghai epidemic in April, it has had a significant impact on the production and operation of integrated circuit manufacturing, testing, and downstream automotive supply chain.

In the long run, the root cause of the reduction in production is the sluggish demand for downstream home appliances, consumer products, and other terminal products. Domestic wafer foundry is mainly concentrated in this field, with a relatively large impact.

Starting from the beginning of 2021, due to the repeated epidemic, poor economic situation, and sluggish demand, the demand for consumer products and home appliance industries represented by smartphones has shown a significant downward trend, leading to a number of upstream chip suppliers including Qualcomm, MediaTek, and Qorvo cutting orders.

It is reported that the current trend of consumer order cutting has further spread to the OEM end, and in the first half of the year, information about order defaults has been exposed, including from Liandian, Li Jidian, and world-class companies. Overall, domestic subsidiaries such as Liandian and TSMC, as well as SMIC International and Huahong, have a relatively large proportion of consumer products and are subject to significant fluctuations.

Long term customers of consumer products are facing inventory adjustment pressure, and have already defaulted or given up on receiving goods. The Q3 production capacity utilization rate will decline by 5% to 10%.

From the perspective of the increase in international trade imports and exports, there are also two reasons:

Firstly, from the overall background of the semiconductor industry, the chip market has remained positive in the past two years.

Unlike the sluggish demand for household appliances and consumer goods, the incremental demand for automotive, industrial control, and new energy (such as energy storage and photovoltaic) remains relatively high. According to WSTS prediction, the global semiconductor market size will reach $646 billion in 2022, an increase of 16.3%.

Secondly, the resumption of work and production due to the domestic epidemic is relatively good, and the competitiveness of integrated circuits is constantly strengthening.

Taking Shanghai as an example, the period from the outbreak of the pandemic to the resumption of production is less than a month, which is relatively beneficial for restoring confidence in the industry. In addition, with a group of manufacturing and testing enterprises represented by SMIC International, Huahong, and Changdian Technology continuously strengthening their competitiveness, relying on a stable supply chain, their competitiveness in the international trade export market continues to strengthen.

From the data, it can be seen that the average unit price of China's integrated circuit exports has shown a stable upward trend since 2015, with an average price of approximately 0.55 US dollars per unit in 2022H1, an increase of 46% compared to 2015; From the perspective of the import market, the average unit price of integrated circuit imports in China has fluctuated since 2015, and there is still a certain downward trend in prices before the epidemic. By comparison, the competitiveness of the domestic integrated circuit industry has been making progress.

In summary, the domestic integrated circuit industry is mainly concentrated in mid to low-end fields such as home appliances and consumer goods. Due to the sluggish demand and repeated impact of the epidemic, short-term production is inevitably declining. In the long run, driven by the new incremental demand for automobiles, industrial control, and new energy, the domestic and foreign semiconductor markets still maintain high development expectations, but the turbulence brought about by the traditional market downturn cannot be ignored.

Some Opinions on the Future Development of the Semiconductor Industry: Increment is the Core

Overall, as chip manufacturers increase their production capacity, the surplus production capacity in the consumer/home appliance category shifts to the shortage areas of automobiles, industrial control, and other industries. The previous shortage of cores caused by various reasons such as supply and demand imbalance, trade disputes, and repeated epidemics is returning to rationality, and the problem of shortage of cores is gradually being alleviated.

In the short term, from the perspective of various semiconductor segments, the trend of chip supply and demand differentiation is obvious. Specifically, the differentiation of demand for automobiles/industrial control/new energy (expansion) and consumer electronics (mobile phones, PCs, tablets, etc.)/home appliances (reduction) - slowdown in distribution growth rate/structural shortage of original factories - alleviation/decline of OEM production capacity - decline in packaging testing "is gradually transmitted to upstream chip original factories/distribution and manufacturing links (packaging/packaging testing), and the second half of the year will be the turning point of this round of chip market" from prosperity to stability ".

In the long run, as smart cars, cloud computing, and new energy enter a rapid development stage, potential incremental demand will be the key to supporting the high visibility of chips in the coming years. Meanwhile, due to geopolitical disputes and repeated outbreaks, the future direction and impact of the semiconductor industry are still unknown. The support policies of various countries for the local chip industry will also be an uncertain factor affecting international trade in the coming years, and cooperation and gaming will become the "main theme" of the global semiconductor industry.