A summary of the recent price increases: AI dominates the IC cycle, benefiting the high net worth sector greatly

The destocking process has been going on for a long time, and it is on the eve of the traditional peak season. This year's situation has some more changes than in previous years. Generally speaking, opportunities and challenges coexist.At present, AI-related applications are the main force in recovery, and the advanced process capacity and packaging used to produce computing chips are expected to increase in price. In terms of storage, HBM memory remains in short supply, which will also affect the supply of general-purpose DRAM.In contrast to AI applications, the general consumer and car core markets are still in the adjustment stage, and demand is still the core issue.

Wafer foundry prices rise: Advanced processes remain strong, mature processes bid farewell to involution

Currently, AI is at the forefront, and TSMC is at the core.Customers such as NVIDIA, AMD, Qualcomm, and Apple can bring a steady stream of orders to TSMC for 3-nanometer and future advanced processes. However, on the other hand, the rising cost of wafers, the high consumption caused by building factories in the United States, and the increasing energy shortage in Taiwan and other practical factors will eventually turn into real costs for TSMC, which must be resolved.

In this case, large customers who are in urgent need of production capacity are bound to help TSMC share the burden.Chairman Wei Zhejia had previously hinted to Nvidia CEO Huang Jenxun, and Nvidia accepted it.Investment bank Morgan Stanley estimates that other AI customers will follow suit.Almost at the same time, news came out that TSMC may increase the price of 3 nanometers by more than 5%, and the annual quotation of advanced packaging will increase by 10%-20% next year.

The most direct impact of the implementation of the price increase is that chip products have also risen with the tide. Qualcomm is rumored to have a 25% price increase for the 3-nanometer Snapdragon 8 Gen 4 to be launched in the second half of the year compared with the previous generation, and the price is expected to reach a maximum of US$260.If the costs continue to be transmitted downward, the costs of mobile phone companies will also increase, but it is unrealistic to continue to pass this on to consumers.Generally speaking, as upstream chips rise, the involution of downstream terminals will intensify.

On the other hand, advanced technology has raised the overall ceiling, and the involution of mature processes has also been alleviated.Morgan Stanley recently released a report that the current capacity utilization rate of local wafer foundry Huahong Semiconductor has exceeded 100%, and it is expected to increase wafer prices by 10% in the second half of the year.SMIC's previous financial report revealed that its revenue in the first quarter has jumped to second place among pure wafer foundries, and its production capacity has remained at a high level of 90%, showing signs of recovery in the IC industry.

The reason why local mature processes maintain high production capacity is that the macro factor is the acceleration of domestic substitution, which directly brings more IC design companies into production. Specifically, in terms of cycle operation, the long destocking cycle in 2023 has already shown results, just in time to welcome the new peak season of stocking.As time progresses, the current cycle position is likely to be the end of passive inventory reduction and the beginning of active inventory increase.

Product cycle and inventory patterns compiled by SDIC Anxin Futures

According to Zhao Qi, CEO of Xinlian Integration, the basic law of change in the entire semiconductor industry is to start from the storage field, then to digital circuits, and then to analog circuits. This is true whether it is declining or recovering.Looking back at the storage market, it started to rise in the third quarter of last year. The main reason was the supply reduction and price guarantee by original manufacturers.Entering this year, the demand for HBM high-bandwidth memory, which is complementary to the GPU core, has increased sharply. In addition, there is also a new demand for QLC flash memory for data storage. This is equivalent to actual demand plus original factory control. These two factors have driven up storage prices.At present, consumer electronics is not yet clear, but the demand for AI can also make the market go further.

The memory market driven by AI affects memory and flash memory

The memory market is divided into two parts. In terms of DRAM, HBM is in short supply, and Samsung, SK Hynix and Micron are all stepping up to expand production capacity.At the structural level, HBM is essentially a multi-layer stack of advanced process DRAM, so the consumption of wafers is greatly increased, and the production capacity of general-purpose DRAM such as DDR5 will be affected.

Under the influence of this crowding-out effect, there are reports that module manufacturers believe that DDR5 prices will continue to rise and are expected to increase by 10%-20% by the end of the year.Investment bank Morgan Stanley also pointed out that due to the combined effect of HBM's capacity squeeze and original factory control, DRAM will usher in a super cycle. Next year, the standard DRAM supply gap will be as high as 23%, which will be even more scarce than HBM's, and prices will rise all the way.As a result, Morgan Stanley has raised its forecast for DRAM and NAND flash memory price increases in the third quarter of this year from the original expectations of 8% and 10% to 13% and 20%, an increase of more than 60%.

For NAND flash memory, Morgan Stanley gave the same price increase expectation. Previously, module manufacturer ADATA and main control manufacturer Huirong were also optimistic about price increases.In terms of terminals, PC giant Dell believes that the prices of DRAM and solid-state drives (SSD) will increase by 15% to 20% in the second half of 2024.

For NAND flash memory and SSD, the price increase is expected to come from original factory control and demand from applications such as PCs and AI servers.Judging from existing statistics, SSD bulk transaction prices from April to June were about 15% higher than the previous quarter, and have increased for three consecutive quarters.However, there is no capacity squeeze in the NAND flash memory field like DRAM. When original manufacturers see demand improving, they will be more inclined to occupy shares.

Recent reports have revealed that Kioxia has ended production cuts, and its two existing factories in Japan have reached 100% operating rate, and has received loans from a consortium to update equipment and build new production lines.Based on reports in April that the overall capacity utilization rate of Samsung's NAND flash memory has climbed to 90%, the main goal of each original manufacturer in the NAND flash memory field in the next stage should be to expand its share in the AI and consumer markets as much as possible. The pace of price increases will slow down, and the main profit creation will come from high-net-worth products such as HBM and DDR5 in DRAM.

The backside of AI is the continuation of adjustments in other fields

As this cycle picks up, AI applications dominate. The stock price trends of companies such as Nvidia, TSMC, Broadcom and SK Hynix far exceed the industry average, which fully demonstrates that these companies focus on core areas such as GPU core production, server Netcom IC, HBM memory, etc., and have taken the lead in the AI market.Behind AI, general consumer electronics, industrial and automotive applications are still continuing to adjust.Relevant IC original manufacturers, including TI, ST, Infineon, etc., have experienced a decline in performance, and their stock price performance is obviously not as good as that of AI-related companies.

As far as the general materials market is concerned, the price of the iconic STM32 series continues to fall, and the pressure to destock is still high. Only some specific demand areas such as optocoupler/isolation/interface materials, network communication materials and sensor components are still relatively hot, representing strong demand in some areas such as drones and industrial intelligence.For the recent market trend of the general market, you can refer to the "May 2024 Chuangxin Index Analysis Report" for detailed information.

On the other hand, automotive electronics also continues its adjustment cycle.Earlier, the industry hoped that the increase in bicycle chip usage would bring about growth and replace the downturn in consumer electronics.However, cars are also linked to consumption conditions, and car companies have to start price wars to compete for share, especially in the new energy market.But up to now, it has become a common phenomenon that incremental growth does not increase prices, and it is difficult to form economies of scale in profit growth.Coupled with the EU imposing additional tariffs on domestically produced electric vehicles, the price pressure on automotive chips may be even greater.

The profit margins of general car cores have narrowed significantly, and original manufacturers such as Infineon and ON Semiconductor have begun to deploy in the direction of compound semiconductors such as SiC and GaN with higher added value. The layout is vertically integrated and continues to enhance economies of scale.Compound semiconductors are not only used in new energy vehicles, but can also find a niche in the AI market. They are committed to improving the energy efficiency of servers and thereby reducing the overall cost of operating large models.There is no doubt that AI will be the main driving force of this cycle and the driver of the comprehensive renewal of the industrial chain. The future industrial chain layout will fully revolve around AI.