Shortages to Peak in First Half of 2017, Followed by a Different Landscape in the Second HalfIn 2016, prices for many raw materials in the semiconductor industry rose, and significant shortages emerged for memory and chips due to surging demand. The last time component shortages were this severe was in 2006. Foundries like TSMC are working aggressively to expand capacity, while upstream wafer suppliers are also demanding price increases – blank 12-inch wafers are expected to see a 10-20% price hike in Q1 2017, citing limited production capacity.Global Demand for 12-inch Silicon Wafers Surges, Bare Wafer Prices IncreaseAccording to industry sources cited by Digitimes, soaring demand for 12-inch wafer capacity – driven by advanced processes, 3D NAND Flash, and Chinese semiconductor manufacturers – has caused a growing shortage of silicon wafers. Recently, the world's top three silicon wafer producers, Shin-Etsu, Sumco, and Germany's Siltronic, have all announced price increases of approximately 10-20% for 12-inch silicon wafers in Q1 2017, forcing major semiconductor companies like TSMC, UMC, and Micron to accept the hikes. Facing what could be the industry's most significant upcycle in nearly 16 years, players are closely watching the subsequent price trends for silicon wafers.Global semiconductor manufacturers are engaged in a race for 12-inch wafer capacity, rapidly driving up demand for 12-inch silicon wafers. However, the annual growth rate of global semiconductor silicon wafer capacity is only about 2% for the coming years (excluding non-polished wafers and reclaimed wafers). Reports indicate that Siltronic's 12-inch wafer supply has already dipped into its safety inventory, signaling that wafer supply is becoming a critical concern.Semiconductor players indicate that Shin-Etsu, Sumco, and Siltronic have successfully raised prices for 12-inch silicon wafers by about 10-20% for Q1 2017, exceeding industry expectations. Although TSMC, due to its massive purchasing volume, historically enjoyed more favorable prices than other customers, the current tight supply has forced even TSMC to accept reduced discounts, effectively a price increase. UMC is reported to face price increases of around 10-20%.With Micron preparing for significant 3D NAND Flash expansion and its subsidiary Inotera Memories ramping up 20nm DRAM capacity, it has reportedly accepted price increases of up to 20% from its silicon wafer suppliers for 2017 to secure sufficient supply.Semiconductor manufacturers note that global monthly demand for 12-inch semiconductor silicon wafers is about 5.1 million units. The proportion of silicon wafer cost in the overall semiconductor market has continuously declined, dropping from a high of 10% in 2000 to just 2.5% in 2016. This is mainly due to rapid process shrinkage increasing the value per wafer, diluting the silicon wafer's cost proportion, coupled with past overcapacity in silicon wafer production.Although wafer manufacturers have raised prices before, typically increases lasted only a single quarter, as foundry customers held significant bargaining power. The industry landscape is now different. After DRAM industry consolidation left three dominant players investing in 3D NAND technology transition, and with intense competition in advanced processes among TSMC, Samsung Electronics, and Intel, plus the rapid rise of China's semiconductor industry, silicon wafer demand has surged, giving wafer producers greater negotiating leverage.Major global semiconductor players are continuously expanding advanced process capacity. TSMC is investing in 7/10/16/28nm processes; Intel in 14/22nm processes, each with capital expenditures of $8-11 billion annually in recent years. UMC, Samsung, and GlobalFoundries are also expanding 28nm and 14nm capacity.The NAND Flash camp, including Samsung, SK Hynix, Intel/Micron, and Toshiba, is fully engaged in 3D NAND expansion to meet demand from Apple's iPhone, SSDs, eMMC/eMCP, and other applications. The industry expects 3D NAND's global output value to surpass that of traditional 2D NAND for the first time in Q4 2017, marking a golden era.The massive capacity expansion by Chinese semiconductor manufacturers is a significant force. Existing mainland China 12-inch fabs have a combined monthly capacity of about 460,000 wafers, with approximately 630,000 wafers under construction. Future monthly capacity from mainland China's 12-inch fabs will reach about 1.09 million wafers, including new fabs from SMIC in Shanghai and Shenzhen, TSMC's Nanjing fab, UMC's Xiamen subsidiary, HLMC's second fab, the Fujian Quanzhou DRAM fab, and XMC's 3D NAND fab, representing substantial capacity growth.China's push into semiconductors includes the silicon wafer sector. Rumors suggest China is interested in acquiring Siltronic, though strong opposition from German and US governments is expected. If successful, it could impact global wafer supply/demand. There were also earlier rumors of a Shanghai-based capital company bidding for Finnish wafer maker Okmetic.Shortages to Peak in H1 2017, H2 to Present a Different PictureIn fact, the shortages for 12-inch wafer production extend beyond bare silicon wafers to include materials like fiberglass, slurry, and quartz. Combined with low fab inventory levels, these pose potential uncertainties for future wafer manufacturing. Prices for some specific items are expected to rise another 30-50%; companies with strong financials might consider stocking inventory.If upstream raw material prices for bare wafers increase by 15%, it will inevitably affect downstream cost structures. In a foundry's Cost of Goods Sold (COGS), depreciation accounts for about 50%, while bare wafers account for roughly 20% of the remaining 50%. Thus, the direct cost pressure from a wafer price increase is only about 2-3%.Foundries like TSMC transform wafers into chips. The selling price of a finished processed 12-inch wafer varies widely, often over 1,000andsometimesseveralthousanddollars,whiletheblankwaferfromsuppliersismuchcheaper,havinghistoricallyrangedfromalowof200 to a high of around $500 per piece.The rise in bare wafer prices is likely most unfavorable for IC design houses, whose gross margins could be impacted. Overall, companies with stronger bargaining power in the chain, like TSMC, are less affected by component shortages, while others may feel more pressure.Upstream supplier price hikes will likely be passed on by TSMC and others to their foundry customers, and ultimately to consumers, meaning processors, NAND, memory, etc., will likely continue to get more expensive in the coming year. The shortage is expected to be most severe around March-May 2017, with the landscape potentially shifting in the second half of 2017.Globally, at least 19 new fabs were built or planned in 2016/2017, with 10 located in mainland China. News of groundbreakings and announcements for key 12-inch fabs continues. The concern may soon shift from shortage to potential oversupply, with sales calls increasing accordingly.Market changes suggest semiconductor profits remain under pressure. Continuous mergers and acquisitions occur among both semiconductor manufacturers and distributors, while supply chain inventories are at rock bottom. A joke circulating in the market highlights the tough times: "The semiconductor business is so bad that many are switching to selling tea, red wine, and coffee – and those businesses are booming because, with business slow, everyone has time to drink tea all day, boosting tea demand."
