By Li Panpan

(JW Insights) May 29 -- Chinese packaging and testing manufacturers are suffering in meager profits due to sluggish market demand and production overcapacity, said a recent JW Insights report analyzing 16 major manufacturers.

The global economic downturn and weakened demand for consumer electronics like smartphones and PCs resulted in prolonged semiconductor inventory adjustment cycles. The expected market bottom-out during the year’s first half has not yet come.

The same applies to the packaging and testing industry, with fierce market competition. Many small and medium-sized players are still losing money.

The analysis of the performance of 16 major Chinese packaging and testing manufacturers in 2022 shows that the industry is in a state of polarization in 2022, with orders concentrating on industry-leading manufacturers.

On the one hand, due to low-end overcapacity, the market was in a price war in 2022, and packaging and testing manufacturers that focus on traditional packaging, including Chip Packing Corporation (气派科技), Diantong Wintronic Microelectronics (电通微电), and Sanliansheng Technology (三联盛), fell into losses.

On the other hand, leading packaging and testing manufacturers represented by ASE, JCET, and Tongfu Microelectronics still maintained revenue growth in 2022 through working with high-quality industry-leading customers with orders in automobiles, high-performance computing, and new energy.

It is worth noting that in the first quarter of 2023, the market demand has not yet recovered, and the performance of those 16 major packaging and testing manufacturers is not optimistic.

Thirteen of them disclosed their Q1 performance in 2023. ASE Group, Huatian Technology (华天科技), and seven other companies showed reduced declines, accounting for about 69% of the total.

In terms of net profit, eleven have fallen sharply in the first quarter, accounting for 85% of the 13 companies. Huatian Technology and Chip Packing Corporation suffered losses. Only Blue Rocket Electronics (蓝箭电子) and SINO IC Technology (华岭股份) experienced a year-on-year increase.

In terms of gross profit margin, testing suppliers like V-Test Semiconductor (伟测科技), Leadyo IC Testing(利扬芯片), and SINO IC Technology still maintained a gross profit margin of more than 35%, and display driver chip packaging and testing vendors like Chipmore Technology (颀中科技) and Union Semiconductor (汇成股份), enjoyed a gross profit margin higher than 20%.

But the gross profit margin of first-tier manufacturers like Huatian Technology and Tongfu Microelectronics dropped to single digits in the first quarter. At the same time, that of ASE and JCET were less than 15%, lower than the bottom of the semiconductor industry in the first half of 2019.

The packaging and testing industry seems to be with meager profits again. The manufacturers mentioned above have expressed that sluggish end-user demand and a declining IC market resulted in insufficient orders and capacity utilization.

Faced with that, major packaging and testing manufacturers gave a conservative financial forecast for 2023.

ASE said its business is forecast to decline 7% to 15% in 2023 at its Q1 performance briefing. JCET has yet to set a revenue target in 2023 as it did before.

Tongfu Microelectronics set a revenue target of RMB24.8 billion ($3.51 billion) in 2023, a yearly increase of 15.73% from 2022, lower than the previous year of 35.52%.

Huatian Technology had a revenue decline in 2022. It forecasted its annual operating income in 2023 to be RMB13.5 billion ($1.91 billion), up by 13.44% year-on-year.

Apart from sluggish market demand, the packaging and testing manufacturers also face the pressure of new production capacity continuously pouring into the market.

Due to the high industry prosperity in the past few years, global semiconductor packaging and testing manufacturers expanded their production substantially.

At the same time, more and more fabless companies and other players have begun to set foot in packaging and testing. In the A-share market alone, more than 30 Chinese IC companies announced building their own packaging and testing production lines.

Liang Dazhong, chairman of Chip Packing Corporation, said absorbing the excess investment in production capacity takes time, and the market rebound of packaging and testing companies will be in the next year or two.

Another Chinese packaging and testing-related manufacturer also admitted that it had not seen signs of industrial recovery judging from its current orders and cannot make market forecast.