With rising material costs and tight capacity, price increases will become a main theme for Taiwan’s semiconductor packaging, assembly and testing (SATS) sector this year, analysts said.
By last week, players in the SATS sector had “already stopped offering seasonal price concessions and volume discounts. Now the price increase has extended to rush orders,” Yuanta Securities Corp (元大證券) analyst Andrew Chen (陳治宇) said in a note to clients on Friday.
The Chinese-language Commercial Times reported on Thursday that some providers of IC back-end services have raised prices on rush orders by up to 5 percent in the second quarter after some companies began to cancel a 5 percent discount on testing services this month.
The newspaper, citing unnamed industry sources, named Advanced Semiconductor Engineering Inc (ASE, 日月光半導體), the world’s largest chip packager and tester, and Chipbond Technology Corp (頎邦科技), the nation’s biggest LCD driver chip packaging and testing firm, as two companies that have made the move amid capacity constraints and rising gold and copper prices.
In his client note, Chen said ASE was “testing the waters” and expected both Siliconware Precision Industries Co (SPIL, 矽品精密), the world’s second-largest chip packaging and testing firm, and smaller rival Greatek Electronics Inc (超豐) to follow suit, based on the brokerage’s previous channel checks.
However, Chen raised a question about whether the price hikes on rush orders would extend further to all clients on all products.
“If it only applies to copper wire bonding packaging, competitors like SPIL may not benefit as it still lags in the process,” he said.
ASE, which shipped more than 1 billion copper-wired chips last year, is ahead in copper wire bonding packaging by six to nine months over its major competitors and at least one year compared with small subcontractors, Goldman Sachs quoted ASE chairman Jason Chang (張虔生) as saying in a report issued on March 26.
Chang said in a Taipei forum on March 22 organized by Goldman Sachs that ASE offered its customers discounts of between 10 percent and 20 percent on copper wire bonding, adding that this technology provided 20 to 25 percent cost savings.
“It would be very difficult for small subcontractors to compete with this kind of price discount,” Chang was quoted as saying in the Goldman report.
Chen agreed, saying the 2 to 5 percent price increase on rush orders is unlikely to deter clients from seeking ASE.
“What is clear to us, though, is that ASE will benefit from this pricing strategy on the back of its current market positioning,” he said.
As chip packagers tend to use more copper wire in bonding interconnections to maintain profitability at a time when gold prices are traded at a relatively high level, other analysts said the copper migration was a mixed blessing.
Morgan Stanley analyst Frank Wang (王安亞) said in a report on March 26 that if copper wire bonding revenue accounted for more than 50 percent of a package’s annual revenue in the next two years, it would drag on revenue growth because of lower margins.
Credit Suisse analyst Randy Abrams, meanwhile, said on March 29 that some integrated design manufacturers may decide to outsource more to chip packagers because they don’t want to make the transition investment themselves.
“The key risk could come in 2011 from excess capacity,” he said, adding that chip packagers may initially plan to increase copper wire bonding capacity to reduce costs but end up finding their added capacity outstrips the real market demand in the following year.
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