How a Global Foundry Loses Money in a Chip Boom, Auto News, ET Auto

But this dependence on customers has not translated into an ability to fill its factories or raise prices to the extent necessary to cover costs.

The current state of the global semiconductor market has been alternately labeled by automakers, politicians, and executives as scarcity, crisis, and even squeeze. For the companies at the center of it all, the only word to describe what we’re seeing is a chip boom. It is therefore inexplicable that a company that should bathe in profits could still lose money.

Enter GlobalFoundries Inc. The New York-based company is the world’s third largest contract chip maker and has just filed for listing with Nasdaq. With shares of leader Taiwan Semiconductor Manufacturing Co. more than doubling since the darker days of the Covid-19 pandemic, and its closest rival United Microelectronics Corp. which has almost quintupled, investors are expected to claim the $ 1 billion offer from GlobalFoundries.

Like its competitors, GlobalFoundries manufactures chips based on the designs of customers, most of whom do not have their own factories. Rather than land the most advanced orders for components like smartphone processors and graphics chips, the company shifted its strategy in 2018 toward researching older product types – which it euphemistically calls “rich in”. features ”- which include parts that convert sound and images to digital. signals.

The supply of older semiconductor products does not attract the high prices TSMC charges, but they are much cheaper and easier to manufacture. With modern cars devoid of much needed sensors, and even Apple Inc. noting the impact on iPad and iPhone sales, this should be a golden age for GlobalFoundries.

But even with manufacturing times hitting a record 21 weeks and prices pushed up – clear signs that demand is exceeding supply – the company is still failing to turn a profit. Revenue fell 17% last year, a second consecutive decline, and operating loss margins deteriorated. In a potential market of around $ 54 billion in 2020, it only captured $ 4.9 billion. While most of the pandemic-inspired chip boom and shortage occurred through 2021, the truth remains that this business declined last year while the foundry industry climbed 23%.

What is more concerning is that peaks and valleys are a natural part of this industry. New product categories such as PCs, laptops and smartphones have all driven past expansions, with declines after this period of growth ends. This time around we are witnessing a super cycle driven by faster telecommunications networks, cloud computing and streaming content, and electronically equipped cars. This helped GlobalFoundries grow its revenue by 13% in the first half of the year (TSMC was up 18%.) But even then it still recorded a loss of $ 198 million.

In its prospectus, the company boasts of the growing dependence of its customers on its services: “A key measure of our success as a differentiated technology partner is the combination of our revenues attributable to single-source activities”, which she defines as “those who we believe that it can only be made with our technology and that it cannot be made elsewhere without a major overhaul from customers.” ”

But this dependence on customers has not translated into an ability to fill its factories or raise prices to the extent necessary to cover costs.

The biggest expense for a chip foundry is equipment depreciation, which means whether full or empty, the cost of these factories weighs on the bottom line. Over the past three years, capacity utilization has ranged from 70% to 84%, while a rule of thumb for the industry is that it takes at least 90% to break even. What you certainly don’t have when the equipment is idle is the bargaining power to ask customers to pay more. On the other hand, TSMC is preparing to increase its prices by up to 20%.

And this year could be the peak of the current cycle. Although shortages remain, most struggles are over and most industries are returning to normal. The company, citing Gartner Inc., estimates that the foundry industry will grow by an average of 10.1% between 2019 and 2025. Last year hitting 23% and this year heading towards 12% – with TSMC taking the bulk. of that expansion for itself – out there There may not be a lot of momentum left to push GlobalFoundries into profitable territory. And if he does manage to get his head out of the water, it can be difficult to keep him.

Seasonality, industry overcapacity, reductions in demand and decreases in average prices are all described in his brief under “risk factors”. If you want a manual on how to lose money in a chip boom, just read the GlobalFoundries flyer.

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GlobalFoundries, which is owned by Abu Dhabi sovereign wealth fund Mubadala Investment Company, has yet to set terms for its listing, but it could ask for a valuation of around $ 25 billion, Reuters first reported in August. .

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