The semiconductor market has been sluggish for nearly two years. The general-purpose analog chips on the market have generally returned to normal prices. The supply is sufficient, but the demand has not been ignited. In the spot market, everyone is competing for prices, competing between different foreign brands, competing between domestic brands, and even competing between domestic and foreign brands. However, no matter how much competition there is, no demand can be stimulated.

At the end of May, TI started a price war, shouting "We will follow any domestic price", and went all in on the card table. The price cuts began in October last year, and now TI has officially started to take drastic measures to recover the market. TI is obviously anxious.

The price war between chip manufacturers is like a Möbius strip. You are not involved, but you are in it. Although it is not a spot price war, they are fighting, which means that the spot you bought at a high price is becoming less and less valuable.

The cyclicality of analog chips is weaker than that of the semiconductor industry. Some people describe the analog chip market, which is already "chilling", as the price cuts by TI, the boss, directly turn from difficult mode to hell mode and get involved in the fight.

01  TI finally got anxious

Market: Don't be anxious yet

The chip prices in the Chinese market have been comprehensively lowered, and this old American chip manufacturer finally couldn't bear it. TI's classic general-purpose chip TPS51200DRCR, its spot market price soared to 70 yuan in 2021 during the chip shortage, and now it has finally returned to the normal price of about 1 yuan. Although the price is beautiful, the demand is not necessarily better.

Analog chips are not selling well, and inventory continues to pile up. TI's inventory amount in the first quarter increased from US$2.757 billion at the end of 2022 to US$3.3 billion, and the inventory turnover days were 179 days, a month-on-month increase of 45 days.

TI began to live a "hard life". In the first quarter of this year, TI's revenue and net profit both fell year-on-year for two consecutive quarters, with revenue falling 10.72% year-on-year and net profit falling 22.4% year-on-year. TI's analog chip business, in which it excels, saw revenue fall 14% year-on-year. Revenue from embedded processing chips increased by 6% year-on-year, and the automotive market became TI's only area of growth in the first quarter, with a month-on-month increase of about 5%, falling more than it rose.

The chips are going to rot in the warehouse, the market is still divided, and the growing areas cannot offset the decline. The performance is worrying. If TI does not follow up at this time, the revenue performance will probably be even worse.

According to reports, Texas Instruments comprehensively lowered the chip prices in the Chinese market in May this year, trying to grab more market share in the darkest moment before the industry recovers. A senior executive of an analog chip factory said, "TI has no fixed range and bottom line for this price reduction." The impact of Texas Instruments' price reduction this time has a greater impact on general analog chips.

Regarding the price reduction range, perhaps we can refer to the proportion in Taiwan, China. In May, there were rumors that TI had significantly reduced the price of power management chips by 20%-30% in the Taiwan market in China to seize market share.

TI's comprehensive price reduction was actually premeditated.

In October 2022, TI had already started flexible pricing, which was earlier than everyone expected, paving the way for the current fierce price war between analog chip manufacturers. It is not just a simple price cut. In February this year, Morgan Stanley Securities pointed out that Texas Instruments is very strong in attacking the market with seven major advantages, including increased capital expenditure, increased supply, increased self-use capacity, lower manufacturing prices, increased inventory, the US chip bill, and increased direct sales ratio. However, after more than half a year, the market demand for general analog chips is still like a stagnant pool. Excessive inventory and declining global purchasing power have slowed inventory clearance. Whether it is a foreign manufacturer or a domestic brand, the capacity utilization rate of TI's "first replacement" brand has also declined, and the overall demand for analog chips has not yet recovered. Business is difficult. Some people said that "a large customer wanted TI's unpopular and expensive materials, with a total amount of more than one million, but was intercepted by the original factory and directly talked to his customers about delivery time and price." At present, the market has not fully recovered, and the competition in domestic analog chips has intensified. In order to clear inventory and reduce gross profit, TI has a lot of room for price cuts, but whether it is TI or domestic analog chip brands, the current price cuts and sell-offs have not brought up the demand. In the short term, the impact on domestic analog chip companies and markets cannot be seen. Most of the analog chips that have emerged in China in recent years have entered the consumer electronics market and have been deeply affected in this downward cycle. Domestic analog chips are also engaged in price wars with each other. It is said that the most typical case is to reduce the price of mid- and low-end PMIC to 0.1 cent, directly replacing the opponent from the market. The domestic chip industry has fallen into an internal storm.

The prices of many domestic alternative brands need to be compared in terms of parameters, functions and models. Some TI prices are lower than domestic ones, while others are only 20%-30% higher. For the TPS51200DRCR of TI, which has a market price of about 1 yuan, the price of a domestic alternative model is 80-90 cents, which is not much different on the surface.

At present, the market of general analog chips is still sluggish. Compared with the price war between original manufacturers, everyone is more concerned about when there will be demand and when business will improve. After all, "no one will buy it even at the lowest price."

02 Why is TI in such a hurry?

TI has been in the Chinese market for 37 years since entering mainland China in 1986.

In 2006, TI shifted from mobile phone chips to the embedded and analog chip markets. Since then, TI has opened sales outlets, established R&D centers, and opened wafer fabs across China. It not only serves large customers and witnesses the rise of China's infrastructure, but also is committed to serving many small and medium-sized customers in China.

In the sales transformation of the semiconductor industry from 2010 to 2011, TI was the most active and fastest. TI flew into China's second- and third-tier cities, penetrated small and medium-sized customers, and took customers from all over China. It also increased the sales value of a single customer by catching all customer needs. On this basis, TI cut agents, engaged in e-commerce, and guided small and medium-sized customers to buy chips directly from the official website. TI's "locust marketing" created amazing value for fragmented chip sales.

TI wants to join the price war of domestic chips and fight a "price war" in order to improve product competitiveness, regain market share snatched by Chinese manufacturers, and consolidate its leading position in the analog chip market.

Unlike digital chips, analog chips can be sold to many types of customers, from mobile phones to elevators, buses, and airplanes. Where there is electricity, there are analog chips, and the breadth of customers is one of the best. Its life cycle is still long. If analog chip companies do well, they can make money with just one product, fishing for the long line, and making long-term (several years or even more than ten years) money.

TI has always been proud of "multiple product lines, wide customer base, multiple usage scenarios, casting a wide net, and catching more fish". It has more than 80,000 products and more than 100,000 customers around the world. It has also done enough homework to enter the Chinese market. Its chips have become the entry-level chips for engineers to study in those days, and it is also based on localization in terms of ecological construction such as customer support, etc.

However, the real business world is like a battlefield. Even if it goes smoothly all the way, both the "ancestor" and the business giant will face threats from latecomers. If the advantage is not used properly, it may directly turn into a disadvantage. Once the popular market is snatched away, a wide range of customers will be divided up, and customer stickiness will be much less than before.

In October 2020, there was a comprehensive shortage of chips. In less than a year by mid-2021, the process of domestic substitution of analog chips was further accelerated. Today, there are more voices in the market supporting domestic analog chips: "All that can be replaced have been replaced", "Domestic prices are good and goods can be supplied", on the contrary, a certain foreign large factory has been criticized by many people for "loving to raise prices and changing their minds".

The following periods have been roughly experienced in the past few years of domestic substitution of analog chips:

1. Around 2018, Sino-US trade frictions intensified and domestic substitution emerged;

2. From the end of 2019 to 2021, the chip shortage trend accelerated the process of domestic substitution;

3. By 2023, the chip shortage trend has achieved a breakthrough from "0" to "1", and is currently in the stage of "1" to "10".

The number of analog chip companies in my country has increased from 180 in 2017 to 270 in 2020 at a compound annual growth rate of 14.47%. In the three years from 2020 to 2022, the number of IC design companies has soared from 2,218 to 3,243. As a key member of domestic substitution, there will be 414 companies with analog chip products in 2022, accounting for 12.8%, which exceeds the predictions of some research institutions before.

my country's analog chip companies can be divided into two groups, one is the first-tier Liqi, Silergy, etc., and the other is Shengbang Micro, Nanochip, Siruipu, etc. Most of the core founders come from international analog chip giants such as TI. With the merger of large companies and the strong alliance of small companies, a number of listed companies have been born among domestic analog chip manufacturers in recent years.

In recent years, TI products have focused on high-end and attacked high-barrier fields such as industry and automobiles, and the support for the consumer field may not be as much as before. This has brought rare opportunities for differentiated competition to domestic manufacturers. Analog chip companies continue to accumulate product types, improve quality, continue to focus on product introduction and customer verification, and continue to attack in terms of products, technology, customers, market share, etc., taking the road of "surrounding the city with the countryside".

The most critical thing is that the rare historical shortage in the past two years is an important window period for domestic analog manufacturers to complete customer verification and realize product introduction. Once these customers are penetrated, due to the particularity of analog chips, people used to rely on TI chips, but in the future they can switch to other brands for long-term use and get continuous supply for more than several years.

Only Shengbang Micro, Jingfeng Mingyuan, Awin Electronics and other incompletely counted domestic leading companies have occupied more than 7 billion yuan of China's analog chip market. Data show that the market size of China's power management chips can reach 14.96 billion US dollars in 2022. In the context of overseas leading manufacturers such as TI dominating the Chinese market for a long time, it can be seen that there is still a broad space for domestic substitution.

From TI's 2022 annual report data, we can get a glimpse of the changes in its sales data in the Chinese market. In 2022, TI's sales of products sold to China accounted for 49% of its annual sales, a decline from 55% in 2021. About 25% of the total sales in 2022 came from local Chinese customers, which is roughly the same as in 2021.

TI warned in its annual report that TI faces fierce competition in technology and pricing. In particular, some emerging companies from Asia sell products to the same market where TI operates. For example, China is actively promoting and reshaping the semiconductor industry, and the tense trade situation may limit TI's participation in the Chinese market and hinder TI's effective competition. "If we cannot match price reduction or cost efficiency, or meet technology, product, and supply, the price and product development pressure caused by competition may lead to lower profit margins and lost business opportunities."

When domestic analog chip companies are becoming more and more powerful and besieging from all sides, TI's originally unbreakable market may be divided up. Seeing that a number of domestic analog chip companies are about to ride on their heads, if they do not take action, TI's market layout in China for nearly 40 years may be destroyed.

03 Why is TI so strong and what impact does it have?

Using the short-term pain of self-cutting to exchange for long-term market share is a killer move for large companies like TI under the Matthew effect. This is also the most important reason why TI can be so strong: cost advantage.

The strong will always be strong. Large companies want to eat up or suppress competitive small companies, mergers, price wars, and many other tricks. And often, large companies like TI can continue to survive, and eventually hit many small domestic manufacturers with insufficient funds and weak competitiveness.

For example, the price war is also going on in the car market now. Many people are concerned about how much profit margin Tesla has sacrificed after selling so many cars at a price cut. Tesla's gross profit margin in the second quarter has fallen to 18%, the lowest level in 16 quarters. Musk said that the price cut may not be over yet.

The biggest difference between TI and domestic analog chip companies is that as an IDM, it has its own wafer fab. Analog chips do not have high requirements for chip manufacturing processes, and wafer size improvement has become the focus. TI uses its own huge scale advantage in shipments to make chips. Coupled with the iteration of wafer size, chip costs have been precisely controlled. Capital is profit-seeking, and costs have been greatly reduced.

According to data released by TI, the cost of analog wafer bare chips manufactured using 12-inch production lines can be reduced by 40% compared to 8-inch production lines. After packaging and testing, the cost advantage of using 12-inch production lines to produce analog chips is still more than 20%.

From the perspective of a certain chip or product line, TI chooses one to make less or even no profit, and waits for the competitor to be defeated, and then seizes the market initiative.

Foreign investment said that TI will add more new production capacity in its own R-fab and L-fab in 2023, 12-inch wafers of 90, 150, and 180 nanometers and 8-inch wafers of 180 and 200 nanometers. Its new 12-inch wafers have a 35% to 40% lower production cost than 8-inch wafers, and produce more chips, mainly focusing on automotive and industrial products.

This gives TI a greater advantage to actively regain the market share that has been eroded in the past. It is said that the average selling price of related power management chips from Taiwanese manufacturers may be 20% to 30% lower than that of TI, so that the products are competitive.

With a broad market, a large number of customers, and the manufacturing costs in their own hands, TI has achieved the enviable high gross profit in the chip design industry.

TI's gross profit margin has been above 60% in recent years, and it topped the list with a gross profit margin of over 70% in the first quarter of 2022. More than a year has passed, and although the profit margin has obviously been affected, TI, as the global leader in IC design, can still achieve a gross profit margin of 40%-70% while owning many wafer fabs.

Domestic analog chip companies have to bear the price increases from wafer foundries in the past two years. More intuitively, the gross profit margins of Chinese IC design companies in 2022 are mostly concentrated at around 30%. It is difficult not to sweat when analog chip companies compete on price, or even rely on low prices. Not to mention TI's strong capital and strength in the fields of automobiles, industrial control, etc.

In addition to cost advantages, TI also has the advantages of providing comprehensive solutions and mastering domestic customer information for many years.

So will the terminal still use TI? Or will it return to TI?

For highly customized products, if there is no obvious price advantage, some customers will not give up suppliers they have cooperated with for many years. However, TI's price increase, long delivery time and even supply suspension in the last wave of the market have made many people realize the importance of stable supply. In the current environment, compared with price and performance, supply security may be considered first.

A salesperson who has worked for Silergy for many years said that the terminal has alternative plans for making products, but compared with TI, there are currently many alternatives among many domestic products, and everyone's prices are very competitive now. It is reported that in order to ensure the security of the supply chain, the terminal will now choose more than two suppliers for key components, and there must be domestic ones among them, which is much better than the monopoly environment many years ago.

Some terminals said that they used to use TI, and the delivery time started from 52 weeks, and then switched to domestic chips. Now they only keep some domestic + TI dual designs, and they have not used TI in mass production for a long time. There are also friends on the distribution side who said that many end customers of purely civilian products do not make any choices at all. They want domestically produced chips, independent control, and can only use domestic products for research and development, which is very different from the previous trend of chasing imported chips.

Speaking of the current market, it seems unimportant whether the price is lowered or not. TI does not think that the domestic business is good, and domestic companies do not think that TI's business is good. Perhaps we have to wait for the market to recover and see whether TI can regain the general analog chip market that was divided by domestic products. In the short term, TI's financial report performance in the second quarter of this year may reflect some of the results of TI's price reduction strategy.

View more at EASELINK