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Foundry capacity shortage

Taiwanese fabless firms outwit Korean rivals in chip supercycle

Foundry capacity shortage widens gap in sales and profit margins

By Jun 06, 2021 (Gmt+09:00)

(Courtesy of Silicon Works, South Korea's top fabless semiconductor company)
(Courtesy of Silicon Works, South Korea's top fabless semiconductor company)

Taiwanese fabless semiconductor firms, with backing from their hometown foundry companies, are reaping the benefits of higher chip prices and soaring demand from electronic goods brands to automakers. In contrast, their Korean rivals have yet to fully benefit from the global chip industry boom, struggling to find manufacturers for chips they have designed.

This year, Taiwanese fabless companies are expected to further expand their presence, even in premium markets, including the segment for organic light-emitting diode (OLED) displayer driver IC (DDI) chips dominated by South Korean chipmakers such as Samsung Electronics Co., Silicon Works Co. and MagnaChip Semiconductor Ltd., analysts said.

"Whatever price they say, we just want Taiwanese foundry companies to take our orders," lamented the chief executive of a leading South Korean fabless, after being recently notified that its regular Taiwanese foundry firm could not supply as many chips as it had requested.

The Korean fabless company's struggle to secure foundry capacity highlights the growing importance of foundry players in the global semiconductor industry amid supply shortages due to the faster-than-expected global economic rebound.

Taiwan is home to the world's largest foundry company, TSMC, with a market share of 56%, as well as third-ranked UMC. In aggregate, Taiwan commands 64% of the world's semiconductor foundry market, based on 2020 sales, followed by South Korea with 17% and China with 6%. That means fabless companies, if they fail to secure capacity from Taiwanese contract chipmakers, are unlikely to remain in business.

It is said that Taiwan-based foundry companies have increasingly placed their priority on the orders from domestic fabless companies such as MediaTek Inc. and Novatek Microelectronics Corp., as was required by the Taiwanese government. 

"Taiwanese fabless companies are now selling chips to Chinese smartphone and TV makers at high prices, maximizing their sales and profits," grumbled a South Korean fabless company's senior-ranking official.

The prices of chips used in electronic goods such as microcontroller units (MCUs) and DDIs have spiked by over 20% since the start of this year due to supply shortages. DDI produces images on a panel display.
(Courtesy of Silicon Works)
(Courtesy of Silicon Works)
At home, Korean fabless companies, including the sector leader Silicon Works and DB HiTek, cannot resort to Samsung Electronics, the world’s No. 2 foundry player with an 18% market share as of the end of March of this year. 

Samsung's foundry capacity has already been fully occupied to meet orders from US chipmakers such as Qualcomm and NVidia. At its current capacity, Samsung cannot even produce enough chips for its own products.

At its April earnings call, Samsung said the mobile DDI chip shortage caused by a lack of foundry capacity was behind the lackluster results at its system LSI business unit. 

WIDENING GAP 

The difficulty in finding contract chipmakers has widened the sales gap between Taiwanese and South Korean fabless companies to 5.7 trillion won in the first quarter of this year. That compares with the year-earlier gap of 2.1 trillion won, according to an analysis by The Korea Economic Daily on June 6. 

Combined sales in Q1 2020 Combined sales in Q1 2021
Taiwan's top 5 fabless firms 2,578.9 billion won ($2.3 billion) NT$158.8 billion ($5.7 billion) 
South Korea's top 5 fabless firms 443.6 billion won ($397 million) 651.3 billion won
($583 million)
Source: The Korea Economic Daily

Thanks to brisk sales, Taiwan's No. 1 fabless company Mediatek joined the list of the world's top 10 semiconductor companies by revenue in the first quarter of this year for the first time in its history. Last year, it ranked 16th. Among Taiwanese fabless players, fifth-ranked Novatek, specialized in DDI chips, is expected to climb to second place this year. 

Additionally, Taiwanese companies far outstripped South Korean rivals in terms of gross profit margin ratio, or sales minus the cost of goods divided by sales. 

In the first quarter of this year, Taiwan's top five fabless companies posted an average 47.5% in gross profit margin ratio, the analysis by this newspaper shows. That compared with the average 26% for South Korea's top five fabless firms.

The gap of 21.5 percentage points compares with the 15.2% in the year-earlier period.

The difference deepened even more in terms of operating profit. Taiwanese fabless manufacturers' operating profit margin averaged 25.4% in the first quarter, eight times that of South Korean competitors at 3.4%.

Operating profit margin of two leading Taiwanese fabless companies

Company  Q1 2020 Q1 2021
MediaTek 9.5% 18.7%
Novatek Microelectronics 15.4% 27.3%

Desperate to secure Taiwan's foundry capacity, Korean fabless companies now feel obliged to meet them face-to-face to place orders, industry sources said. But the two countries' still low vaccination rates and quarantine requirements have left them hesitant to make a trip to the Taiwanese suppliers.

As part of an effort to expand domestic foundry capacity, chip industry experts are calling for generous tax incentives on foundry companies, with SK Hynix mulling foundry expansion. Last month, Samsung announced a $17 billion investment plan to build a foundry factory in the US, but has yet to pick its site.

Write to Jeong-soo Hwang at hjs@hankyung.com

Yeonhee Kim edited this article.

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