This week, GlobalFoundries, Tower Semiconductor, and Applied Materials presented their recent earnings to the investment community. In addition to discussing their financial performance, they also provided valuable insights on the semiconductor market.
Below are insights I gleaned from their conference calls. Their transcripts and presentation slides are also below.
GlobalFoundries
Interest Rates
CEO Thomas Caulfield said the high interest rate environment is causing the semiconductor industry slowdown to persist.
It seems the impact of higher interest rates on the semiconductor industry has taken a backseat to discussions about AI's revolutionary potential, but if higher interest rates continue, consumer spending will decrease, companies inventory levels will pile up, companies will cut back on their purchases with suppliers, and semiconductor companies will produce fewer chips, making them less money.
Companies Are Spending More Money on AI Data Centers
Thomas Caulfield mentioned that the weakness in GlobalFoundries Data Center segment was due to his customers spending more money on advanced chip data centers.
Companies today are focused on buying data center equipment that will accommodate AI technology. This shift impacts manufacturers like GlobalFoundries because they specialize in lagging edge chips. Prior to reading Caulfield's comments, I was more focused on the challenges facing AMD and Intel because demand for their CPU based data centers has declined, but I never thought about the ecosystem that is tailored to CPU based data centers. They will also struggle.
Lagging edge manufacturers will also face more competition because it is easier to compete in the lagging edge arena. Intel is getting into the lagging edge market, China is ramping up its capacity, and other countries are jumping into the space as well. Unless GlobalFoundries makes the right pivots, they risk losing market share to very well capitalized competitors.
China's Increased Push Into the Foundry Business
Caulfield believes China's increased presence in the foundry business is not as dangerous to GlobalFoundries as people think, because most of China's capacity will be in their country, and companies are not planning to pile into China. Companies want their chips to come from a more reliable source.
Companies might not pile into China, but the more China increases their capacity to manufacture chips, the less reliant they will be on outside companies like GlobalFoundries to service their country. I always remember the Commerce Secretary's warning to US chip companies that they will lose access to the Chinese market, not because of the US government, but because the Chinese government will eventually push US companies out of China once the country is strong enough in semiconductors.
Productivity Ratio
GlobalFoundries shipped 2.2 million wafers in 2023, and according to their 20-F*, they have 4.272 million sq meters (~14 million sq. ft) of manufacturing space.
2.2 million wafers ÷ 14 million sq. ft = 0.16
GlobalFoundries shipped 0.16 wafers for every sq. ft of manufacturing space they have.
For now, I will use this metric to compare the productivity of different chip manufacturing companies.
*GlobalFoundries files a 20-F instead of a 10-K because they use the international accounting standard, IFRS, instead of the US standard GAAP.
Tower Semiconductor
Utilization Rates
CEO Russell Ellwanger provided information on the utilization rates of his factories (fabs):
Fab 1: 60%
Fab 2: 75%
Fab 3: 40%
Fab 5: 40%
Fab 7: 70%
Fab 9: 70%
Tower's average utilization rate for their factories is 59%. Much lower than GlobalFoundries ~70%.
Tower is currently trying to reach an 85% utilization rate. GlobalFoundries was in the 90% range in early 2023. It seems 85% or higher is an acceptable level in a foundry business.
Applied Materials
High Bandwidth Memory Size
The CEO, Gary Dickerson, mentioned the dies used in high bandwidth memory (HBM) are twice the size of normal DRAM. This means twice the manufacturing capacity is needed for HBM.
If the physical size of HBM dies is larger than standard DRAM, then the yield rate should also be lower, and the complexity higher for HBM chips than for standard DRAM.
Lower yields and higher complexity should limit the number of companies that can efficiently manufacture HBM chips.
Advancing Moore's Law
Gary Dickerson mentioned the advancements in technology for Internet of Things, Communications, Automotive, Power, and Sensor will depend on the development of new structures, materials, and the integration of components, instead of shrinking device features.
Semiconductor companies are bumping up against the limits of Moore's Law which predicted the number of transistors on a chip will double approximately every two years. Transistors are so small today that it's hard to keep shrinking them at the same historical pace. The alternative way to increase the performance of chips will be to use new structures, materials, and integration techniques.
Increasing Complexity In the Industry
Gary Dickerson constantly used the word complex on the call. According to him,
"The technology roadmap for semiconductors is rich with possibility and opportunities, but also incredibly complex."
"As industry complexity rises"
"We expect the equipment market to grow as fast or faster than semiconductors over time, driven by increasing technical complexity."
One of the reasons AMD stopped manufacturing their own chips and spun off their manufacturing arm, GlobalFoundries, was because it became too expensive to manufacture leading edge chips. Once GlobalFoundries was independent of AMD, they eventually stopped manufacturing leading edge chips because the costs became too high for them as well.
As chips become more advanced, they will also become more expensive to make. The increased expense will limit the number of companies that can build them. Right now, TSMC, Intel, and Samsung are the only companies capable of making leading edge chips. If any of these companies lose their financial footing, or fall too far behind, they will need to drop out of the marathon of making leading edge chips.
At Davos, Intel's Pat Gelsinger mentioned that if he started rebuilding Intel a year later, he would not have been able to turn the company around.
Increasing the Useful Life of Property, Plant, and Equipment (PPE)
Applied Materials increased the useful life of their PPE in 2024 from 5 - 8 years.
I see more companies in the semiconductor industry increasing the useful life of their PPE. I know companies are finding more uses for their equipment, but a part of me is wondering if something nefarious is going on. I've heard short sellers talk about shady companies in the past playing around with the useful lives of their PPE because it reduced their depreciation expense, and increased their gross margins and profits. I will continue to monitor this situation.
Conclusion
There is a treasure trove of wisdom in these conference call transcripts. I highly encourage you to read them.
Stay strong, stay blessed, and God willing, I will see you next week.
Joyful is the person who finds wisdom, the one who gains understanding.
For wisdom is more profitable than silver, and her wages are better than gold.
Proverbs 3:13-14 NLT
Comments