In early February, after issuing a revenue warning saying that many customers were cutting inventory, Microchip Technology, a major MCU manufacturer, said it was implementing employee salary reduction measures. At the same time, the three largest semiconductor factories in the United States will reduce their inventory in March and June. A two-week shutdown to better manage inventory amid a weak macro environment.

Using salary cuts instead of layoffs is a more decent way. In the latest financial quarter, Microchip's performance was disappointing, with sales revenue falling 18.6% year-on-year to US$1.7 billion.

Before news of the shutdown broke, Microchip had just received a US$162 million subsidy from the US government to fund US semiconductor and MCU expansion plans. Microchip announced a new fab manufacturing plan last year, in a multi-year plan costing US$800 million. A milestone was reached.

This situation is just like the TI shutdown in 2008 due to the Great Recession, and the Renesas shutdown in 2019 due to fluctuations in chip demand - they both stepped on the brakes on the occasion of large-scale expansion of production. What is behind Microchip's operation? what happened? The peak of prosperity must decline, and the peak of decline must move from recovery to prosperity. Will this turning point happen this year?

01 Inventory is full and prices are upside down

After Microchip's spot market continued to be cold for a whole year in 2023, there was not much improvement at the beginning of 2024.

A person who specializes in chip sales of this brand said that "it has just started, and it is similar to last year." Another person said that "there are new orders, but not many. It is difficult to say at the moment."

Another original factory account manager said that there was some demand from the customers he was responsible for last month, which may be better than the beginning of last year (when the goods were delivered to the agent, the agent was shipping). Moreover, the inventory of agents has dropped from the highest point, but some agents' inventory is still high, and they are working hard to communicate with agents to solve the problem.

As of September 30, 2023, Microchip's mixed-signal MCU and analog IC revenue accounted for 57% and 28% respectively. The MCU business accounted for the highest revenue, with products covering 8-bit, 16-bit and 32-bit.

In February 2023, the supply of some series of Microchip products was still tight and the prices were on the high side. In less than a year, the market began to have sufficient spot goods roughly from August. As demand weakened, the prices of most of Microchip's general products fell significantly, and they were hot sellers. Many models were upside down and were still weak in January this year. Except for the supply in some automotive and industrial fields, most prices were stable.

Taking two popular 8-bit MCUs as an example, the market quotation of ATMEGA128A-AU has dropped significantly in 2022, and has stabilized below 20 yuan in 2023. Considering that the price on the e-commerce platform is 25-30 yuan, it is obviously upside down. There have been some price increases in recent months, and they will start to rise in December 2023, from 15 yuan to around 20 yuan. ATMEGA2560-16AU dropped sharply from 140 yuan in February 2022 to more than 50 yuan, and has continued to stabilize at more than 50 yuan from the second half of 2022 to the present. In order to ship goods, some sales people even posted on a certain platform that "the price is unrivaled."

The reservation interface on Microchip's official website shows that ATMEGA128A-AU is expected to be shipped on April 4, 2024, and ATMEGA2560-16AU is expected to be shipped on April 17, 2024. Large-volume orders may take more time. Microchip's current standard delivery time is 7-8 weeks, and the delivery time has been significantly shortened. Compared with Microchip's long delivery times in the past, the market has returned to rationality.

At the beginning of 2021, there was a major shortage of automotive chips, and the delivery date of a certain Microchip product was extended, with the delivery cycle as high as 54 weeks. Some people complained, "It's only 52 weeks in a year, and the pregnancy is only 40 weeks. You can just take delivery after taking maternity leave." In May 2021, Microchip CEO Ganesh Moorthy said that during his 40 years in the semiconductor industry, he has never experienced a period when supply and demand are more imbalanced than now. At this point, Microchip's delivery lead time has become a generally recognized fact.

However, this set the stage for the subsequent bubble burst.

Due to the long order delivery time of Microchip products and the booming market demand, agents and distributors refer to the transaction data of the past two years to place orders and make excess orders during the period of "chip shortage" that is full of uncertainties. Reserve.

Microchip has also launched the PSP "Preferred Supply Program (PSP)", which provides customers with priority supply qualifications 6 months after placing an order (which cannot be canceled for at least 12 months), in the spirit of "first come, first served" , giving the highest priority in production capacity to customers in the PSP plan.

Soon, the response of customers and distributors to the "Priority Supply Plan" exceeded Microchip's expectations. For a period of time, as much as 44% of the backlog of orders came from the "Priority Supply Plan", and almost all of the categories with the most tight capacity came from the "Priority Supply Plan". To a certain extent, the PSP is a double-edged sword, paving the way for a massive decrease in orders in the future.

Cycles wait for no one, and after a period of waiting, these chips have arrived one after another. Our warehouse is full, and many customers have delayed picking up the goods because they "can't eat anymore." Starting in November 2022, with the continuous arrival of goods and the reduction in customer production demand, Microchip's spot market general material inventory is obviously saturated, showing oversupply. In December, the market took a turn for the worse. A large number of goods arrived from agents. More customers accepted the delivery date and were not in a hurry for spot demand. Microchip's spot market price dropped rapidly.

The chip price war that will begin in 2023 still smells of smoke and gunpowder. The economic downturn is more severe than expected. In the short term, Microchip still faces weak demand and high inventory risks, and has to cut shipments and extend production shutdowns, resulting in the inability to complete the previously planned backlog of shipments.

President and CEO Ganesh Moorthy recently concluded: “As we enter the fourth quarter of fiscal 2024, we expect customers may continue to reduce inventory levels in the near term as they adjust operations and seek to match demand in an increasingly active market. match."

The inventory levels of the world's major chip manufacturers in 23Q3 dropped slightly from the previous quarter. According to Wind data, the world's major chip manufacturers including Microchip (Intel, AMD, Nvidia, Qualcomm, Broadcom, Micron, TI, ADI, NXP, Microchip, Anson (United States) The average inventory turnover days in the second quarter of 2023 was 150 days, and in the third quarter of 2023, it dropped 1 day from the previous quarter to 149 days.

According to the latest statistics, taking the three major MCU manufacturers ST, NXP, and Microchip as examples, the average inventory in the second quarter of 2023 increased to US$6.3 billion from the previous quarter, and the inventory turnover days increased by 6 days from the previous quarter to 132 days, the highest level in five years.

The conventional inventory level is around 85-100 days. It can be seen that Microchip's inventory level is still very high, which will take a long time for the spot market to digest.

02 There are traces of Microchip's shutdown and salary reduction

Although Microchip began to suspend operations and cut wages, its performance has been outstanding for at least the past dozen years, including the last fiscal year.

MCU market share has climbed from eighth in 2003 to the top three in 2018, and will rank in the top five in revenue in 2022. From fiscal year 2019 to fiscal year 2023, through external mergers and acquisitions, sales growth, etc., Microchip's performance has achieved record growth. By fiscal year 2023, net sales reached US$8.439 billion, gross profit margin reached 67.5%, and operating profit reached 3.116 billion. The U.S. dollar has hit records.

In the second quarter of 2023, Microchip's performance is still impressive, with its net sales, gross profit margin, and operating profit setting records in the first quarter of fiscal year 2024 (April 1, 2023 to June 30, 2023).

However, in the third quarter of 2023 (as of September 30, 2023), Microchip's performance began to decline, with revenue increasing 8.7% year-on-year and decreasing 1.5% quarter-to-quarter to US$2.254 billion, as all regions and most end markets experienced Various degrees of weakness.

Microchip’s latest fiscal year 2024 third quarter (as of December 31, 2023) results show that Microchip Technology's Q3 net sales were US$1.766 billion, a decrease of 21.7% from the previous quarter and an 18.6% decrease from the same period last year. According to GAAP, Q3 gross The interest rate is 63.4%.

To help customers, Microchip has been delaying product shipments and adding additional product inventory to its balance sheet.

For the quarter ending March 31, 2024, Microchip Technology expects net sales to decline further, between $1.225 and $1.425 billion, GAAP gross profit margin between 58.5% and 61.1%, and GAAP net profit between $6.94 and $174.9 million. between. Capital expenditures are expected to be between $50 million and $60 million. Full-year capital expenditures for fiscal 2024 are expected to be in the range of $300 million to $310 million.

Microchip Technology said it is selectively adding capital equipment to maintain, develop and operate internal manufacturing capabilities to support the expected growth of the business.

Revenue has declined continuously in the past two quarters, and gross profit margin has dropped from nearly 70% in the past to nearly 60%. The subsequent forecast for fiscal year 2024 is even more bleak. It can be seen that Microchip has stopped production and cut wages, and the general environment is sluggish. Everyone should start living a tight life. In fact, Microchip had an early warning last year, with executives reporting three key weaknesses in their business.

First, the Asian market, which accounts for nearly half of sales, has experienced weak sales, which has greatly impacted Microchip. The impact of U.S. semiconductor restrictions has also begun to have an impact on sales. 46% of Microchip's revenue in the second quarter (the second quarter of the 2024 fiscal year, as of September 30, 2023) came from Asia, which was lower than the 48% in the first quarter.

In this regard, although domestic chips have also encountered sluggish demand, the proportion of domestic substitution has increased. The rise of domestic chips and policy support have weakened the market of major European and American chip manufacturers such as Microchip and ST.

Then there is a drop in demand in the automotive and industrial fields, and Microchip can no longer guarantee high interest rates.

Global demand for automotive and industrial applications is slowing down. STMicroelectronics' sales guidance for the first quarter of 2024 is lower than expected. Seeing that weak demand for industrial chips will continue, Infineon's sales of power supplies and sensor chips for industrial applications are "significant." The second quarter is expected to be particularly difficult. Analog chip giant Texas Instruments released a weaker-than-expected first-quarter outlook, triggering market concerns about the prospects of the automotive and industrial chip industries.

Finally there is weakness in Europe and uncertainty about inflation and energy prices.

In addition to the official warning, some financial analysts said that Microchip faces competition in the independent analog chip market and lags behind some large companies in 16-bit and 32-bit MCU sales.

According to Yole statistics, in the revenue ranking of global MCU manufacturers in 2022, Microchip Technology ranks fifth, second only to STMicroelectronics, Infineon, Renesas Electronics, NXP, and the top 10 companies have a combined market share of 93% %.

Among the top ten global analog manufacturers in terms of revenue in 2022, TI and ADI are still the two leading analog chip manufacturers in terms of market value and analog chip business revenue. Their revenue in 2022 will both exceed US$10 billion, while Microchip will Less than 10 billion US dollars, still lagging behind Infineon, NXP, ST, ON Semiconductor, etc.

In the MCU market where Microchip is best at, ST (STMicroelectronics) is almost the mainstream. Some engineers believe that Microchip's PIC product line is almost "suppressed" by ST. Only 8-bit MCUs are in good demand. Some engineers believe that, I have used several Microchip MCUs before and found them to be very stable, but the development environment was difficult to use and the price was on the high side.

Microchip is still the leader in 8-bit MCUs with a 32% market share. According to some people in the MCU industry, although application fields that require size, space, low power consumption and longevity are increasingly using 8-bit MCUs, However, since 32-bit MCUs have greater scale effect in subsequent production, and combined with their performance and ecological advantages, it is only a matter of time before they take over the market of 8-bit MCUs.

The share of Microchip MCUs has been increasing in the past few years, from 55.3% in the third quarter of 2021 to 57% now, while analog chips have dropped from 28.5% to 28%. MCUs cannot be sold, and TI warns that demand for analog chips will worsen further, so Microchip has to fight hard again.

03 History repeats itself

Will things get better this year?

Like ST and TI, Microchip's products cover almost all industries. It has a customer base of more than 125,000 in the industrial, automotive, consumer, defense, communications and computer markets. Because of its diverse coverage and large number of customers, it is praised by the market as an observation company. An important indicator of the semiconductor market, Taiwanese media likens it to the "canary in the mine."

Microchip's recent warning about poor financial results means that "the canary in the mine fainted first" and measures have to be taken to curb further decline in performance.

After Microchip's price increase in March last year, Microchip's management stated in an earnings conference call that it “does not intend to increase revenue by raising the price of existing products.” This situation has spread to domestic MCU manufacturers. Recently, major MCU chip manufacturers have been booming. General Manager Qun said that there is currently no obvious recovery, Holtek's revenue in February may further decline, and it is determined that there will be no further price adjustments in the first half of the year.

This year, the market for MCUs and analog chips is poised to turn around, and this process is destined to be full of challenges and opportunities.

For this year's semiconductor market, most institutions predict strong growth, and IDC's forecast is the highest, expected to be "more than 20%." Semiconductor Intelligence predicts growth of 18%. Other forecasts range from 10.5% to 17%. At the same time, every depression has the possibility of restarting prosperity through "innovation storms". Historically, steam engines, the Internet, smartphones, electric toothbrushes, sweeping robots, electric cars, etc., without exception, have formed long or short cycles.

The 2008 economic crisis hit the memory industry the most severely that year. The entire industry dropped sharply by 16.9%, and the sales of the mobile phone industry reached a freezing point. In early 2009, TI planned to lay off 3,400 employees and suspend production globally for three weeks. In 2019, Renesas announced that all factories around the world would suspend work at irregular intervals from April to September 2019 in response to slowing demand.

After hitting the bottom in 2008 and 2019 respectively, a new round of semiconductor cycle restarted.

In 2009, semiconductors just recovered and the 3G era began. Apple mobile phones led the entire industry chain to explode and grow. In 2011, the earthquake in Japan and floods in Thailand affected many semiconductor factories, triggering a rise in the price of semiconductor chips in the market and a shortage of silicon wafers. The goods lasted nearly two years.

In 2020, the outbreak of the global COVID-19 epidemic has led to a surge in demand for home working and epidemic prevention. Chips have been completely out of stock. The demand for chips in electric vehicles has risen sharply. Events such as fires, blizzards, and epidemic shutdowns have triggered large shortages in automotive chips, boosting It has affected the chip market and triggered a new round of wafer production expansion.

Similar to TI, which laid off employees and ceased production in 2009, and Renesas, which suspended operations in 2019, Microchip was cutting wages and making plans to suspend operations. Semiconductor storage fell to the bottom, and shipments of mobile phones, computers, etc. declined. Orders were cut, expenditures were cut, Layoffs, etc. are common, and semiconductor spending has dropped sharply from high growth in the past...

History is going through cycles, and does this wave of "bottom" mean that we are not far from going uphill?

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