The government of Taiwan is preparing to launch its version of “the CHIPS Act” to support locally operating companies that develop innovative technologies and have a crucial spot within the global supply chain. A highlight of this legislation is a tax credit scheme: a maximum of 25% for R&D in “forward-looking technologies” and another 5% for investments in advanced manufacturing equipment.
According to the draft of this proposed legislation, companies that play an important role in the global supply chain and engage in technological innovation within the jurisdiction of Taiwan (the Republic of China) are eligible for the aforementioned tax credits if they also meet certain other conditions. As for the limit of the two tax credits, neither one of them can exceed 30% of the business income tax for the current year. Together, they cannot exceed 50% of the same annual business income tax.
Companies that will be applying for the tax credits must meet three general conditions. First, applicants must pay an effective tax rate of at least 15% in accordance with OECD’s minimum tax rules for multinationals. Second, applicants must reach a certain scale for the ratio of R&D spending to revenue (R&D intensity) and equipment-related investments. The minimum thresholds for the R&D intensity and equipment-related investments have yet to be determined and will likely be set within the subsections of the legislation later on. Lastly, applicants must not have incurred a major regulatory violation concerning environmental protection, labor protection, food and drug safety, etc. in the past three years.
Taiwan’s Ministry of Economic Affairs stated in a recent announcement that the island’s industries are deeply enmeshed within the global supply chain. They thus have become the backbone of the global economy and international commerce on account of their “uniqueness” and “irreplaceability”. The ministry added that local industries will have to adapt to the changing landscape of cooperation and competition in order to retain their indispensable role.
The ministry also commented that in the wake of a series of major events that have disrupted the operation of the global supply chain, many countries have initiated industry development policies that seek to improve the resiliency of their key economic sectors and strengthen their national security. These policies tend to emphasize the followings: (1) the formation of an autonomous and stable domestic supply chain; (2) the need to achieve dominance in next-generation technologies; and (3) the provisioning of large subsidies and tax incentives so as to raise domestic production and attract investments from multinationals. The ministry further asserted that as international competition gets fiercer, Taiwan must retain its existing advantages while finding other ways to further consolidate and enhance the positions of its key industries in the global supply chain. Therefore, the government finds it necessary to provide new tax incentives to support this kind of development.
According to TrendForce, Taiwan is crucial to the global semiconductor supply chain, accounting for a 26% market share of semiconductor revenue in 2021, ranking second in the world. Its IC design and packaging & testing industries also account for a 27% and 20% global market share, ranking second and first in the world, respectively. Firmly in the pole position, Taiwan accounts for 64% of the foundry market. In addition to TSMC possessing the most advanced process technology at this stage, foundries including UMC, Vanguard, and PSMC also have their own process advantages. Under the looming shadow of chip shortages caused by the pandemic and geopolitical turmoil in the past two years, various governments have quickly awakened to the fact that localization of chip manufacturing is necessary to avoid being cut off from chip acquisition due to logistics difficulties or cross-border shipment bans. Taiwanese companies have ridden this wave to become partners that governments around the world are eager to invite to set up factories in various locales.
Currently, 8-inch and 12-inch foundries are dominated by 24 fabs in Taiwan, followed by China, South Korea, and the United States. Looking at new factories plans post 2021, Taiwan still accounts for the largest number of new fabs, including six new plants in progress, followed in activity by China and the United States, with plans for four and three new fabs, respectively. Due to the advantages and uniqueness of Taiwanese fabs in terms of advanced processes and certain special processes, they accepted invitations to set up plants in various countries, unlike non-Taiwanese foundries who largely still build fabs locally. Therefore, Taiwanese manufacturers have successively announced factory expansions at locations including the United States, China, Japan, and Singapore in addition to Taiwan in consideration of local client needs and technical cooperation.
The focus of Taiwan’s key technologies and production expansion remains in Taiwan, accounting for 44% of global wafer production capacity by 2025
In 2022, Taiwan will account for approximately 48% of global 12-inch equivalent wafer foundry production capacity. Only looking at 12-inch wafer production capacity with more than 50% market share, the market share of advanced processes below 16nm (inclusive) will be as high as 61%. However, as Taiwanese manufacturers expand their production globally, TrendForce estimates that the market share held by Taiwan’s local foundry capacity will drop slightly to 44% in 2025, of which the market share of 12-inch wafer capacity will fall to 47% and advanced manufacturing processes to approximately 58%. However, Taiwanese foundries’ recent production expansion plans remain focused on Taiwan including TSMC’s most advanced N3 and N2 nodes, while companies such as UMC, Vanguard, and PSMC retain several new factory projects in Hsinchu, Miaoli, and Tainan.
TrendForce believes, since Taiwanese foundries have announced plans to build fabs in China, the United States, Japan, and Singapore, and foundries in numerous countries are also actively expanding production, Taiwan’s market share of foundry capacity will drop slightly in 2025. However, semiconductor enclaves do not come together quickly. The integrity of a supply chain relies on the synergy among upstream (raw materials, equipment, and wafers), midstream (IP design services, IC design, manufacturing, and packaging and testing), and downstream (brands and distributors) sectors. Taiwan has advantages in talent, geographical convenience and industrial enclaves. Therefore, Taiwanese foundries still tend to focus on Taiwan for R&D and production expansion. Looking at the existing blueprint for production expansion, Taiwan will still control 44% of the world’s foundry capacity by 2025 and as much as 58% of the world’s capacity for advanced processes, continuing its dominance of the global semiconductor industry.
A powerful magnitude 7.3 earthquake occurred off the coast of Fukushima, Japan on the evening of March 16th (CST). Most of northeastern Japan is a production center for global upstream semiconductor raw materials. According to TrendForce investigations, in the main quake zone, only Kioxia’s K1 Fab (located in Kitakami) will face the possibility of a further downgrade to 1Q22 production. Some of the remaining memory or semiconductor companies in the region are conducting machine inspections but the overall impact has been muted.
In terms of memory, the intensity of the earthquake at Kioxia’s K1 Fab reached magnitude 5. When the earthquake occurred, wafer input was partially damaged. At present, K1 Fab has been shut down for inspection. The 1Q22 production capacity of the K1 Fab had been downgraded following the recent contamination incident and accounts for approximately 8% of Kioxia’s 2022 production capacity. Operating under a cloud of possible aftershocks, Kioxia’s capacity utilization rate may be slow to recover in the next week, causing further downward revision of K1 Fab’s 1Q22 production. The remaining Kioxia factories are unaffected, as is Micron’s Hiroshima plant.
Looking at the market spot price, pricing has moved up since February due to the contamination of Kioxia’s raw materials. The Russian-Ukrainian war did not trigger significant upward or downward movements in spot price. After last night’s Fukushima earthquake, pricing remains stable. TrendForce asserts, overall spot demand remains weak and prices are not prone to drastic changes.
In terms of raw wafers, SUMCO’s Yonezawa Plant in Yamagata and Shin-Etsu’s Shirakawa Plant in Fukushima are both within the affected area, experiencing an earthquake intensity of magnitude 5. Due to the extremely high stability required in the crystal growth process, the industry has not yet announced the impact of the quake. TrendForce specifies, in addition to shutdown inspections, damage to machines and silicon wafer input is inevitable. However, in addition to redistributing production plans, buildings were reinforced after the 2011 Tohoku earthquake and tsunami in Japan, so overall damage may be minor.
In terms of foundries, there are two 12-inch wafer fabs and two 8-inch wafer fabs in Japan, including UMC Fab12M (12-inch), Tower Uozu (12-inch), Tonami (8-inch), Arai (8 inches), located in Mie, Toyama, and Niigata prefectures, respectively, and separately experiencing quake magnitudes from 1 to 3. At present, these fabs are operating normally and any impact of the quake on the plants are largely insignificant. However, IDM manufacturer Renesas’ Naka plant is within the magnitude 5 zone and they have also shut down and reduced production to confirm the impact of the quake.
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.
Since February 14, UMC subsidiary Hejian Technology (HJTC), had entered phased shutdown and temporary suspension due to the pandemic, according to TrendForce‘s investigation. The plant is an 8-inch fab and its production capacity accounts for approximately 25% of UMC’s total 8-inch capacity and approximately 3% of global 8-inch capacity. Since this incident was not an unforeseen accident, utilization rate during the phased shutdown was maintained at roughly 25~30% and wafers on the production line did not need to be scrapped. The plant has gradually resumed operation today (2/24). Since it takes approximately five to seven days to recalibrate semiconductor equipment, full recovery of overall utilization rate is expected to fall in early March with an estimated wafer input loss of 14~20 days, affecting approximately 4~5% of the company’s 8-inch production capacity this quarter or approximately 0.4~0.5% of global 8-inch production capacity, a manageable situation overall.
UMC HJTC Fab 8N contains 0.5μm~0.11μm node production lines and is a full eight-inch fab. The actual proportion of customer products on the production line at the time of the incident is as follows: HJTC’s largest client Silergy accounted for 40% of the production line for PMICs, with most end applications being consumer and industrial products such as IP cams, air conditioners, and refrigerators. SinoWealth and Novatek each accounted for 13% of the production line with products such as MCUs and large size DDIs. Other PMIC clients include Mediatek and GMT who accounted for approximately 35% of the plant’s production capacity.
Since most customer products allocated to this fab are simultaneously produced at the UMC fab in Taiwan or at other fabs and end-user products including smartphones, TVs, and laptops are all currently in the off-season, restocking momentum is weak. TrendForce believes that although the shutdown was longer than expected, since no wafers were scrapped on the production line and the cycle time of some PMICs is short, wafer input losses have an opportunity to be mitigated through expedited order production and have limited impact on shipments. In terms of revenue, due to the relatively low selling price of 8-inch wafers, the impact of this incident on UMC’s annual revenue performance falls within a 0.3% range.