By Miranda Li

The semiconductor packaging and testing industry, which has benefited enormously from the upstream wafer foundries' full load, started to decline from the end of 2021, mainly because the demands for general-chip consumer products have gradually slowed down.

With the global semiconductor shortage and tight production capacity since the pandemic outbreak, there are increases in semiconductor demands and prices, and the orders to the first-tier assembly and testing factories spilled over to the second- and third-tiers. Almost all the packaging and testing factories globally have gained for the past years, no matter of large or small scale.

New production capacity is released continuously. But the markets of consumer electronics, 5G communications, and other areas have not developed as fast as expected now due to the impact of the pandemic and the industrial cycle.

Acknowledged by an executive of a Chinese medium-sized assembly and testing factory, the overall order volume of conventional products in the semiconductors has dropped by 20-30% since the first quarter of 2022 under sluggish market conditions.

Another well-known IC fabless company executive also felt strongly about this situation, "The packaging and testing capacity in the first three quarters of 2021 was fully loaded. Factories even raised the price in Q4 by 20% compared with the price before last October.

But since the end of 2021, the packaging orders for consumer electronics have fallen enormously, especially the IC products for mobile phones. The production capacity of the entire packaging industry now could have some relative respite."

The communications and consumer electronics markets are two critical applications for the Chinese IC industry. The market prosperity in this field directly determines the orders of downstream factories. JW insights learned from a distributor company that the first quarter is usually a traditional off-season for the entire consumer electronics market in the year. Hence the market decline in Q1 should be foreseeable.

In the communications field, it is a consensus that 5G construction right now is well below expectations. Huawei recently announced its sales revenue of RMB636.8 billion ($100 billion) in 2021, a 28.6% year-on-year decrease. It is the first time that Huawei has a negative revenue growth in the past ten years.

Huawei rotating chairman Meng Wanzhou pointed out that China's 5G construction was basically completed in 2020, and the following IC demands in this area were weak.

It is also foreseeable that the demand for chips used in the 5G construction will decline sharply this year. 

Of course, the production capacity in the upstream wafer foundry industry is still tight, and not all semiconductor packaging and testing manufacturers have a production capacity surplus. In the first quarter of 2022, the global packaging and testing leader ASE Test Limited also raised the order price by an overall range from 5% to 10%.

ASE Test Limited believes that the full-loaded capacity and supply shortage will continue until 2023, and the strong growth of HPC, automotive, 5G, IoT, and expanding demands for silicon content lead to strong needs of end-users in the long-term prospect. It has signed long-term service agreements with clients until 2023.

When the market demands in the overall semiconductor packaging and testing industry are weak, orders are further concentrated in first-tier factories, and the performance of fabs may show a polarized two-level situation.

An industrial insider admitted that first-tier fabs seized guarantee orders as they have signed capacity guarantee contracts with IC design clients during the production capacity shortage period. It is challenging now for small and medium-sized packaging and testing companies to receive spillover orders from first-tier fabs because of weak market demands.