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7/26/2023
Welcome everyone to UMC's 2023 second quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask the question. For your information, this conference call is now being broadcast live over the internet. Webcast replay will be available within an hour after the conference is finished. please visit our website, www.umc.com, under the Investor Relations, Investors, Events section. Now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.
Thank you and welcome to UMC's conference call for the second quarter of 2023. I'm joined by Mr. Jason Wang, the President of UMC. and Mr. Chidong Liu, the CFO of UMC. In a moment, we will hear our CFO present the second quarter financial result, followed by our President's key message to address UMC's focus on third quarter 2023 guidance. Once our President and CFO complete their remarks, there will be a Q&A session. UNC's quarterly financial reports are available at our website, www.unc.com, under the Investors' Financials section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. including the risk that may be beyond the company's control. For a more detailed description of this risk and uncertainties, please refer to our recent and subsequent filings with the SEC and the ROC security authorities. During this conference, you may view our financial presentation material, which is being broadcast live through the Internet. Now, I would like to introduce UMC's CFO, Mr. Chidong Liu, to discuss UMC's second quarter 2023 financial result.
Thank you, Michael. I'd like to go through the 2Q23 investor conference presentation material, which can be downloaded or viewed in real time from our website. Study on page 4, the second quarter of 2023. Consolidated revenue was 56.3 billion NT, with a gross margin at around 36%. The net income attributable to the stockholder of the parent was 15.6 billion NT, and earnings per ordinary shares were 1.27 NT dollars. In the second quarter of 2023, the utilization rate was 71 percent, slightly up from 70 percent in the previous quarter. On page five, there's a quarterly sequential comparison income statement. Revenue grew 3.8 percent quarter over quarter to 56.3 billion, mainly due to better product mix lead to a higher ASP. Gross margin rate at 36 percent is also slightly better than that of quarter one and reached 20.25 billion NT. We have been controlling our operating expenses amidst of the current semiconductor downturn. So the current operating expenses in Q2 remain flattish at $5.7 billion compared to $5.78 in Q1 2023. Operating income reached $15.6 billion or 27.8% operating profit margins. Net non-operating income in the second quarter reached 2.8 billion, mainly coming from expenses, interest gains, as well as some investment income from our affiliate companies. After income tax of 2.588 billion NT, our net income attributable to the shareholder of the parent is around 15.6 billion, or 27.8 percent, percentage point. EPS was 1.27 in the second quarter. On page six, this first six-month comparison, revenue declined 18.4 percent to 110.5 billion NT. And the gross margin rate was around 35.7 percent. or 39.4 billion NT. Net income in the first half of 2023 was 32.2 billion, and net income rate was 29.2%. EPS in the first half of 2023 was $2.5820 per share. So on page 7 is our balance sheet at the end of June 30th. Cash on hand is around 163 billion NT, and total equity for the company is 326.9 billion. On page A, as we mentioned, the blended ASP benefits from a better product mix. In a way, it's also a lower utilization rate in 8-inch wafer capacity. So ASP in the second quarter aged up a couple percentage points. compared to the previous quarter. On page nine, revenue rebounded for our Asian customers in the second quarter, and now reach about 56% of the total pie, compared to 50% in the first quarter. And North America declined from 31% in Q1 to 27% in Q2. On page 10, IDN declines slightly to 21%, and Fabulous accounts for 79% of the total revenue in the second quarter of 23. On page 11, the revenue breakdown by application didn't change much. Communication remained the same. Computer remained the same. Consumer increased by 2 percentage points to 26%. On page 12, due to our newly ramped capacity becoming available in our P6 in Tainan FAB, our 20 to 28 nanometer revenue continued to rise. Now it's around 29% of the total revenue. 14 nanometer is about 12% declined by 3 percentage points from the previous quarter. On page 13 is our capacity, quarterly capacity breakdown. We will continue to see some mile increase coming out of our 12A, our P6 expansion in Q3. So the last page of my presentation is on fund capital expenditure plan for 2023. For the time being, it still remains at 3 billion U.S. dollars for the 2023 budget. So the above is a summary of UMC results for second quarter of 2023. More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wong.
Thank you, Chidong. Good evening, everyone. Here I would like to share UMC's second quarter results. For the second quarter, we reported results in line with guidance. With wafer shipment remaining flat from the previous quarter and utilization rate of 71%, second quarter revenue grew 3.8% quarter over quarter, mainly due to improved product mix within our 12-inch portfolio. Revenue from 22 28-millimeter products continued to increase sequentially, representing 29% of its second quarter sales, while contribution from specialty technology reached 59%. By seven, we saw short-term demand recovery in the consumer space for Wi-Fi, digital TV, and display driver ICs, while demand for computer-related products also moderately rebounded from the previous quarter. We are pleased to share that we have completed the transaction to acquire remaining shares in USCXM, our 12-inch fab in Xiamen, China. As one of UMC's four 12-inch fabs in geographically diverse locations, USCXM will continue to provide high-quality fabrication service to customers and increase its contribution to UMC's financial performance as a wholly-owned subsidiary now. Looking into the third quarter, wafer demand outlook is uncertain, giving prolonged inventory correction in the supply chain. While we saw spot of a limited recovery in the second quarter, overall end market sentiment remains weak, and we expect customers to continue stringent inventory management in the near term. Despite a weaker than expected environment going into the second half, we believe Our 2228 nanometer business will remain resilient due to our strong position in leading edge specialty technologies, such as embedded high voltage. In addition, we are gearing up to offer a necessary silicon interposer technology and capacity to fulfill emerging AI market demands from customers. Now, let's move on to third quarter 2023 guidance. Our weight assurance will decline by approximately 3% to 4%. ASP in U.S. dollars will increase by 2%. Rising costs will erode gross margin by low single-digit percentage point. Capacity utilization rate will be in the mid-60% range. Our 2023 cash-based CapEx will be budgeted at U.S. $3 billion. I conclude my comments. Thank you all for your attention, and now we are ready for questions.
Thank you, President Wang. And ladies and gentlemen, we will now begin our question and answer session. If you have a question for any of today's speakers, please press star 1 on your telephone keypad and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before, it is your turn to speak. Now, please press star two to cancel the question. Thank you. Now, please press star one to ask the question. Thank you. And our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please.
Randy Abrams, Credit Suisse, Yes, thank you. Yeah, I wanted to ask my first question about the shipment outlook. And I want to see if you expect at this stage for the decline to persist throughout second half. And then if you could split down by application, how you're seeing the auto industrial, and then for the areas that started to pick up, Wi-Fi, TV, driver IC and PC, how do you see that pickup sustaining, or do you see those starting to correct now?
Well, I mean, really on a higher level, given the overall software and market demand, while the post-lockdown, the recovery in China hasn't been stable, has been slower than expected and weakened macro conditions, where our customers are cautiously managing their inventory, and we expect the situation will likely lingering into Q4. So, mainly is inventory concerns. So, about inventory, while the end market demand has worsened compared to a quarter ago, across a segment in smartphones, PC, and servers, the inventory will be slower, slowly work off now. The pace of the direction is slower than we previously expected. However, at the auto and industrial segment, the demand of a year-over-year projection at this time we, our projection shows remains unchanged from the previous quarter. However, the inventory level has picked up in Q2 for those two segments now. So, therefore, we kind of cautiously observe the demand and supply situation now and to determine when the semicircle will start to improve or come back.
That's helpful. So, to clarify, it sounds like you said the pace of inventory digestion because of weaker demand in smartphone, PC, and server. I just wanted to clarify. That's what you were trying to say? Like weaker demand, that's keeping the inventory correction longer.
That's right. Intercepting of a smartphone, PC, and server space, yes.
For 28 nanometer, I think that node has been a bright spot, and the ASP guidance seems to imply that's continuing. Could you update on your plan or your goal, I think, to get utilization back up to 90%, 95% if that's still tracking? And do you see the P6 continuing to get filled up as it comes in?
Well, first of all, for the P6 expansion, we expect our 28-rim, which is actually still on track at this point. And we remain confident about our 22 and 28-millimeter expansion. as it will be a low and lasting no, or driving by many applications across the 5G, automotive, and IoT. And we have been focused on 22, 28 offering, including many of the leading specialty and logic technologies, along with our manufacturing quality and capacity offering now. So I think the 28 and the 22 right now remains resilient. Okay. And it's our projection now that 28 nanometer loading will remain at a relatively healthy level and mainly supported by the OLED driver, like I mentioned, for the specialty technology and other larger technology like ISP, Wi-Fi, and the SOI processors.
For the expansion on track, I think the plan was 12K end of this year, and then the rest of the 27.5K, would that change? What is the timing? Would that be available through next year or any slowdown to move in that capacity?
For the P6, the trajectory is still on track. So there is no slowdown. And they are mainly mutually committed by both the customer and us. And given the current projection, our focus is shows the 28 loading will remain at a healthy level.
The implication that if you could blend, you have that capacity with LTA on top, I guess supporting ASP, how do you net out the utilization looks like now back to mid-60s? So with the excess capacity, how do you net pricing environments mature node versus the new capacity coming on? If the trend for you to manage to stable or do you expect a bit more price pressure just with the prolonged inventory correction?
Well, we definitely see the pricing pressures. But the blended ASV actually is more the reflect of our loading between the 12-inch and 8-inch as well. If we start off this question with the ASP, and it's our belief when the end demand remains weak, the pricing does not help to stimulate the demand. We are respecting the overall foundry market dynamics and the pricing pressure. While the UMC will remain our pricing strategy, maintaining our pricing strategy, But we do work with our customers during the good time and the bad time to uphold their competitiveness and relevance in their respective market to secure their market share. In addition, our value-added technology and manufacturing quality and capacity alignment will support our customers' competitiveness as well in their market position. So in the pricing space, we respect the market dynamics. and the pressure, and we're closely working with our customer on that. In terms of the blended ASP, they are LTA for the P6 on the 28, and there is non-LTA protected 28, and they're also 8-inch outlooks. So if we blend it together right now in Q3, the ASP is you know, projected is going to be about no single-digit increase. In the forward-looking, we have to give a quarter at a time because that was subject to a different product mix.
Great. Thanks a lot, Jason.
Thank you. Next question is from Brett Simpson from Erity. Go ahead, please.
Yeah, thanks very much. I wanted to just come back to LTAs and... Maybe if you can discuss whether customers are generally sticking to these LTAs, and if not, can you maybe just talk about how you're resolving contracts with customers? Are you collecting penalty payments in recent quarters? Could you maybe quantify that? Any thoughts in terms of how you're managing through these LTAs, given it's a sizable amount? your utilization is obviously, you know, coming down quite significantly from where it was a year ago or so. So any update there would be very helpful. Thank you.
Sure. I mean, LTA is a mechanism to support both customer and us for longer-term perspective because we want to make sure the, you know, the customer want to make sure their supply resilience and we want to make sure that our investments also somewhat protected with such a commitment. So LTA is a mechanism of that relationship. During the downturn cycle, you know, we both have to look at this revisitor situation, but under the framework of, you know, we still have strong confidence in our long-term projections. So there are some modulation or adjustment to be made during, you know, given the LTA relationship. So they are resolving in some of the resolution of current LTA agreement, so that results in some of the financial, you know, penalty related matter. But at this point, it's still in the smaller session. The, you know, I think we both, you know, customer and us still have confidence in what have we aligned to do in terms of longer term. We respect the market dynamics, and we will work with our customers in dealing with those challenges. But again, the LTA is something that we both respect and seriously commit to it.
Okay. Maybe just switching gears a little bit on the gross margin situation. The guide, obviously, gross margins coming up a little bit from what was a resilient level in Q2. Where do you see the trough in gross margins for UMC as we go through this downturn? Do you think it will be, gross margins are troughing in Q3. Do you think it might, the weakness in gross margin might extend into maybe early next year? Any thoughts in terms of depreciation as well? Because it seems to be clipping up a little bit. Thank you.
Well, I mean, that's a multiple level of the consideration. One is the current market pricing pressure. The other is the recent rising cost. For Q3, the rising cost in electricity hike, raw material labor will impact our profitability. and we will continue to focus on our actions to mitigate those rising cost headwinds. We have implemented aggressive cost reduction activity to control the power consumption, productivity manage the material cost and usage, and streamline our process flow and labor management via smart manufacturing measures We'll also focus on technology improvements, such as the continuous improvement process, CIP, optimize our fat productivity and quality to help mitigate those headwinds. So, you know, we will try to maintain our structural probability level at a healthy level, but given the market current dynamic, you know, we will probably giving, will be more appropriate or prudent to giving this margin guidance one quarter at a time. And once we're over the down cycle, and then we probably can share a bit of a longer time perspective.
Yes, for the depreciation numbers for the 2023, we're still looking for a little bit over 5% year-over-year decline. And for 2024, the increase will be more meaningful. But again, we'll offer the numbers when we approach to the year end.
Great. Thanks very much. Thank you. Next question, Charlie Chan of Morgan Stanley. Go ahead, please.
Hi. Good evening, Jason and Qigong. Thanks for the updates. So my first question is actually about your 40-nanometer strategy or progress. Because one of your design service Just mentioned that there will be 14 nanometer AI ASIC demand and production could be in two years. So I'm just wondering that whether a company is already prepared for the 14 nanometer demand and any more details about the capacity expansion production timing, et cetera. We much appreciate it. Thanks.
Sure. It's our goal is always to fully exploit the DOV capability. And as we know, the DOV capability can sustain to the ThinkPad technology. And having successfully enjoyed the mass production of our 22-neumeter business now, And while we're witnessing the steady rise in revenue contribution, we are actively progressing with development of the 12 FinFETs and specialty FinFETs based on the existing 14 nanometer technology now. So from the technology development, we are actively progressing. However, on the capacity side, we still need to align with our customer for the capacity expansion, and subject to our ROI justification principle, which we have adopted for years now. So once that's more clear, and we will update accordingly.
Yeah, just to add on to that, we do have 14 capacity already for years. So we have been producing some 14 nanometer, crypto coin-related products a few years back. So I think what Jason was referring to is more massive capacity expansion going forward. So currently, we already have some 14 nanometer capacity already.
Okay. Thanks for that. Yeah, my next question is about your gross margin erosion in third quarter. I know that Major mentioned about the cost increase from electricity or raw material. But I'm wondering, maybe this question is to Qitong. Do you consider the $80 depreciation? I would think there's a kind of tailwind to your gross margin in third quarter. And also, I wanted to know what was the economic impact on the pricing erosion. So can you give us some more details about, number one, is the currency depreciation, and secondly, the pricing pressure?
For our guidance, we didn't factor in the currency fluctuation as a factor. So there won't be... in the couple percentage erosions in our third quarter margin guidance, which is not included.
Okay.
Yeah, as for ASP, our blended ASP guidance is up by two percentage points. Of course, like to like may vary according to different notes. And it also got some kind of mathematical help due to the lower age wafer capacity utilization rate. So, again, it's already reflected into our gross margin guidance.
Okay. So, Zhidong, can you remind us, for every 1% points of the ND dollars depreciation, what does it mean to your gross margin benefits?
It's about 0.4% at this point.
Okay. Okay, thanks. Yeah, and next is more focused on this pricing flexibility. So I think your peers, more or less, they already mentioned some heavy pricing pressure in the end that I can understand, and I think that it should be appreciated by customers that you want to support them to maintain their market position. But my concern is more about the 28 nanometer, your pricing strategy, because management mentioned that your 28 nanometer utilization is still healthy. You still have those AMOLED ISP demand. So I'm wondering for 28 nanometer, are you also being flexible about pricing? Because we I keep hearing some of your customers talking about you may have some compromise as well.
Well, I mean, our pricing position are the same to all nodes. Although the different node has a different circumstance or situation, but our position remains the same. We're maintaining our pricing strategy, but we do work with our customers whether on a no-to-no basis or the holistic level and giving a good time or bad time. I mean, the end goal is to try to help them and support them to be competitive and secure their market share. So it does not separate it by different technology nodes.
Okay, okay. So it's not just limited to the age, is that right?
No. I mean, it's in general principle our pricing position and strategy, yes.
Okay. Thanks, Jason. So in that case, can you give us a sense, you know, how much of your business is taking this kind of flexible pricing? Do you think more than half of your knows your business well? being flexible about the pricing in second half?
I mean, it's hard to quantify that, but given the weaker end demands, you know, I don't think any pricing changes will actually stimulate the end demands. It's mainly about the within the pie modulation between different players. So, And we definitely look at that closely and working with our customer closely as well and to support and make sure that we secure the share for both of us. And so from the percentage or quantitative point of view, it's hard to giving out at this point.
Okay. Okay. Thanks. And lastly, maybe... Following Brett's question about the growth margin, I'm wondering your view about the bottom of the FAB utilization. So third quarter, you see a sequential decline of UTR. Do you think that is the bottom of the utilization for this cycle?
Oh, I mean... Yeah, it's difficult to predict, and we won't predict that. So all we can say is the current weakness the inventory digestion, the slow pace is going to linger into Q4. I think that's all we can say for now. And we're certainly happy to give the gross margin guidance for the next quarter at the end of July.
Okay. Okay. Yeah. So definitely we want to listen to your opinion, but my observation is that your customers, although their demand is slow, but they are outgrowing foundry sectors. So I do think the semi-inventory will come down. And also don't forget that the channel inventory or downstream inventory is pre-present. So I am optimistic. But anyway, we look forward to your next updates. Thank you.
Great to hear that.
Okay, thanks. Thank you. Next one, Bruce Liu of Goldman Sachs. Go ahead, please.
Thank you for taking my question. I think, to be honest, we are still surprised about the CapEx Remain on Change and your RENBOV schedule for the P6 Remain on Change. I mean, Jason seems to be, you know, you mentioned, like, confidence about your customers. You know, I think that's the gap between investor and the management. Can you help us, like, you know, what gave you the confidence when you have a lingering fourth quarter and your customer came for the order all the time, and you believe that you can maintain very high detection rate for 28 nanometers for 21.4 to support the KFS?
I mean, first of all, the 28 nanometers serving some of the important applications. And for the OLED driver, the current penetration in early end market and the volume remain healthy. And in the ISP and the Wi-Fi space, we see new application continue coming into the space. So for the 28, giving the broader customer base and diverse the product line and product pipeline, that gave us the confidence because the the outlook remains healthy. And that also equates with our specialty technology leadership position as well. So I think that differentiating us with other 28-millimeter capacity out there. Right now, given the market outlook, we have been very cautiously looking at it because across the whole segment, The sentiment is weak, but what we have received and what we have validated and what we have delivered right now that has demonstrated the current broader customer base and the product pipeline does give us that confidence that this will probably stay in a healthy level for some time.
So can we do something like, you know, you're 40 nanometers, let me drop a lot, right? Can we convert some of the 40 to 28 or, you know, to say some CapEx or, you know, or like what's the schedule for the Singapore new fab, you know, can we slow down a bit for that, even though it might not impact the CapEx for this year, but we can have a more conservative CapEx outlook for next year?
I mean, We definitely look at this. Right now, for the P3, we expect it will go into volume production by mid-2025 as planned. So there's still kind of two years out. So we will monitor in the overall market and align with our customer for the P3 ramp. Once we have a further update, we will advise accordingly. And since most of the cap has increased, now the P6 is pretty much done, and it's more associated with the P3. And I think it's less of an effect on our 2023 number, but there is a possibility that for 2024 number, we will continue to assess and update.
Male Speaker 1 Oh, I see. Okay. So another thing I want to switch gears to, you mentioned that you were doing some interposer business. Can you help us understand your strategy for this interposer business? What kind of capital intensity, you know, what kind of return is going to be, you know, do we need to expand the capacity for that? Is that going to be the bottleneck to enter your other business? Can we have more color on that?
Sure. For the interposer, as a part of our advanced packaging space, we have been providing interposer and wafer-to-wafer oxide bonding technology for years. So it's not something new. As the increased demand for higher bandwidth and the reduced smaller form factor requirement, we have invested in the space, and we will not be absent from this. from those emerging markets. At the same time, it's our strategy for this space to work with the OSAP partner and to enable an open ecosystem. So, sort of, we are only providing the interposer within the supply chain, and we're working with OSAP for the back-end process. And so, that's kind of how we position ourselves within this packaging space. The interposer I mentioned earlier, accelerating, is really giving the recent AI coverage we are just gearing up to offer additional capacity as necessary to support the customers' needs. And that capacity is associated with the silicon interposer alone. And the current Capacity size is about 3,000. And it's our goal to double that capacity by mid next year.
OK, just to be clear that you have no plan to invest in chip-on-wafer or other package method, only for the interposer for this. Is that correct?
Right, chip-on-wafer means we are providing you wafer, the W, yes. Yeah, yeah, yeah.
No, no, you're not going to provide any like bonding or bond with, you know, bonding, debonding, you know, put on substrate, that kind of packaging method. No, just for the silicon and the culture. Is that right?
Yes, but we do do wafer to wafer bonding, hybrid bonding, yes.
Yeah, our approach is open ecosystem. So we want to leverage our partners. for the downstream, and it will be a total solution, but joined effort by all the ecosystem players.
What kind of profitability and return profile for this business?
Rather, I mean, currently, given the size of this capacity and the space, the revenue contribution is still relatively small.
So how about the profitability?
It's aligned with our current corporate average.
OK, so you saw it's in line with our current corporate average in third quarter because your corporate average went down a lot.
Our corporate average in quarter two was 36% gross margin, slightly better than Q1.
I see, I see. Okay, so basically the interposer business is around that mid-30% gross margin.
But it will not dilute our current corporate average, no.
I see, I understand. Thank you.
Thank you. Next question, Zihong of China Renaissance. Go ahead, please.
Hello, gentlemen. I have two questions. Number one, regarding the Shaman Fed, right now it's 100% owned by the group. So would there be any strategy change in our China operation or in our dealing with local customers there?
I'm sorry, again the question?
Oh, the shaman. Right now the shaman is fully owned by us.
Prior to the buyback, it's actually already dominant or controlled by UNC anyway. And, of course, right now it's 100 percent owned, so there will be no minority interest once Xiamen continues to make profit. And it's also our goal to see if there's any synergy we can generate between our two operations, Hejian in Suzhou and USC in Xiamen, to see any more synergy and also competitiveness by these two joint efforts. I think right now the domestic demand occupies even more percentage of the overall revenues.
I see, I see. All right.
Ray? Sorry. Please go ahead. Whether it is a Shaman facility or a Japan facility, they are one of our 412-inch sets under the UMC group. global capacity scale. With each one of their unique manufacturing locations, China, Japan, that will actually position us to support our broader worldwide customer base, and with UMC's overall comprehensive technology offering. And at the same time, the UMC's worldwide customer can also access to those local manufacturing sites to serve the local supply chain. So we think the geographic locator on those steps actually gave us that benefit, as well as our customers' access to the local market. And whether it is 100% required or before that, it was the same position that's supporting our worldwide customers.
Okay, fair enough. And my second question on the gross margin. So right now we are guiding gross margin back to maybe mid-30s level. How easy for us, for some of the companies, to see the gross margin back to the mid to high 40s last year?
I mean, I think we kind of touched this similar question on a few different ways. I mean, this current growth margin guidance was given based on the current outlook our product makes in the utilization projection and the ASP assumptions. And given the rising cost, there are lots of factors that will affect the long-term growth margin projections. One way to look at this is if we look back You know, I think compared to the UMC in the past, you know, if we look at a similar loading situation as well as the cost structure, I think we are much more resilient now in terms of our financial gross margin level. And going forward remains the same. We're going to take the same approach and continue to focus on the cost control, cost down path, you know, productivity improvement, all the necessary measure to against this pressure headwind. And hopefully we can deliver a much healthier, stronger balance sheet for the company. Now, since we're going through this down cycle now, and, you know, it's more appropriate and prudent that we don't give up any long-term projection at this time. But once it's more ready, then we definitely will share that with you.
I see. Okay. All right. Last one. Any chance to update the industry outlook for the year, the addressable market that we are serving?
Sure. Well, the semi-outlook, we expect the 2023 semiconductor market exclude the memory what declined by three single-digit year-over-year. For the foundry, we expect we now expect the industry will decline by meetings year over year. We see a weaker macro condition. We'll need to be very conservative as our customers continue to manage their business and inventory now. For our addressable market, I think we'll be higher than the meetings. Yes. I see. The decline will be higher. I see.
All right. Okay, fair enough. Okay, thank you, gentlemen.
That's very useful. Thank you. Next one, Goku Harihalan of JP Morgan. Go ahead, please.
Yeah, hi. Thanks for taking my questions. My first question, I just wanted to ask a little bit more on the pricing strategy and what you're seeing from price pressure. Are we starting to see more price pressure coming through for your China facilities, given we hear about a lot of foundry price pressure in China, given that UMC has significant capacity in Xiamen and Hejin? Is there a bigger price pressure that you're seeing for your Chinese capacity, or is it a price pressure that you're seeing across the board for the company itself?
It's across the board. is given the current market condition, and I think we're seeing a pricing pressure across the board. Not only from China factories, no.
Got it. And we do hear that many of your existing clients are considering using some of the Chinese foundries, at least for a portion of their future products. How do you see the China capacity build? Because that seems to be the one area where there doesn't seem to be any pause in capacity build-out. Still seems to be pretty aggressive among all the Chinese foundries for primarily mature 12-inch, given they cannot really build leading-edge. So, Jason, how do you expect this to kind of interact with the the price discipline that has existed in the non-China part of the market, including you guys and some of your peers over the next couple of years?
Sure. Well, I mean, first of all, I mean, without commenting about the peers, for UNC to stay competitive and remain relevant in our industry, We have established several advantages in our view for many years. One is the comprehensive specialty technology offering. Two, the competitive workforce manufacturing quality and our geographically diversified manufacturing site. In addition, our strong commitment bringing this company to, you know, to improve our customer relationship and ESG commitment we believe will further enhance our position as more of a trusted boundary partner. That's more on a higher level. And on a tactical level, we look at the major overlap area in the 8-inch. We have been improving our 8-inch customer stickiness by aligning with our customers on their product spec, differentiating their specialty technology, including process customization, JDP, the Joint Development Program, for products such as analog, power management, IC, MCU, and discrete devices. And so we are confident to navigate through this current market condition, as well as the competition landscapes. I think there's many areas that we need to do, but we do believe that we have several advantages in many areas. And we definitely have deployed those initiatives, and hopefully we can navigate through this.
Okay. Thanks, Jason. Maybe one other question. I think you have consistently mentioned over the last few quarters that cutting price or offering price discount in a downturn doesn't really work. Now, as we think about potentially going into next year, emerging from the downturn, do you think that's when we start to see a little bit more price aggression given a lot of your peers as well as you would be running at lower utilization? Is that when we should start to expect a little bit more price aggression in this industry?
I mean, obviously, we all know, right? I mean, the price pressure is there. And, you know, our comment is really about the pricing doesn't help to stimulate the end demand. So when the end market is shrinking, the overall tense shrinking, the pricing is, you know, mainly for the tactical level of approach, and which we will use. We will not ignore that. And we are, you know, like I said, we respect the overall foundry market dynamics and those pricing pressures. So we will work with our customer, you know, for those to help, you know, uphold their competitiveness and secure their market share. And from the pricing strategy level, and we remain clear about how to manage those market you know, in a separate level of, you know, whether it's a strategic level or technical level or the short-term or longer-term structure. So those strategies remain no change. But we will definitely use those, you know, if it comes to more of a technical purpose. And so we're not ignoring that. We would just want to manage the pricing prudently.
Understood. Maybe one question on 8-inch. It's been kind of seeing very low utilization across the industry. Do you feel that that's going to turn around sometime soon, or there is a situation in the market where more and more 8-inch product is getting converted into 12-inch, and as a result, this overcapacity situation could last for a fairly long period of time?
I mean, for the long run, we foresee some 8-inch demand will recover post-inventory correction. There will have some. There are also new applications from Megatrend, such as EV, plus increasing ID and outsourcing business, which will help lift the 8-inch loading. However, like you said, we do anticipate continuous pressure from some of the 12-inch mature nodes that has impacted the 8-inch supply chain. So they will have some recovery from the overall market once the post-inventory correction as well as the new application ran. But I think what you mentioned about it also happened there. So they will have some impact as well.
Okay. Thank you very much. Yeah, thanks. Next one, Sonny Lin of UBS. Go ahead, please.
Hi, good afternoon. Thank you for taking my questions. So my number one question is on pricing for your long-term agreement, especially for 28 nanometer. So as you said, given the ongoing demand, I wonder for your LTAs for P6 and the future Singapore expansion, are you seeing any pressure from clients to negotiate under contract pricing? And the second part of that question is for your Singapore FAB, if you look at the cost, how much higher is it versus the basic expansion in Taiwan? Will that be reflecting to your pricing for the contract as well?
So for the LTA, I answered earlier that our customers and us, we view that seriously. And at this point, the The changing on those LTAs vary in amount. It's relatively small. And between us and the customers, we do look at that as more of a long-term perspective, not a short-term tactical mechanism. So we still feel confident about those LTAs going forward. They are pricing disrupted, but not associated with the LTA. Even with some of the LTA revision, that will be in a very small portion, relatively small. The cost increase in Singapore is definitely much higher, not just because the geographical reason, but also because of the continuous inflationary cost increase. So we, you know, and that, At this point, we don't foresee that will stop anytime soon. We have to mitigate those headwinds and continue working with our customers to mitigate those and at the same time be transparent about the cost increase and to deal with that issue together. At the same time, we have to be realistic about the market price. So it is a balance act. and we'll continue to manage that throughout this whole process.
Got it. And so, just to make sure that it's applied correctly, so given the cost difference, will you be fair to assume that you could be pricing differently for your 20- and 90-meter capacity in Taiwan versus Singapore?
For the market price, they will not price differently. The market price reflects the current market situation, and it's usually not a cost-based topic. This is more of a joint investor program, and the cost is more of the factor. But if you're talking about the market price, it's not based on a cost basis. Yeah.
Got it. Thank you. That's very helpful. So my second question is about the structural supply versus demand for CharlieNet Foundry. If you look at your historical utilization rate through cycle, that would be between, I think, 85% to 90% through cycle. But apparently, in the last two years, the energy capacity had increased quite a bit. And so I just want to get your thoughts on how we should think about the full cycle utilization rate for you, maybe for next two to three years?
Well, I mean, from the business management point of view, we also want to help increase our utilization and help lower our FAPs. So, I mean, the From the financial model standpoint and the company's balance sheet healthiness level and the resilience, we'll probably have to plan out different scenarios. But as a business manager, I probably won't instruct our team to shoot for 80 or 90 percent utilization as our goal. So, from a financial simulation purpose, we have a different layer of the utilization rate assumption and to examine our financial resilience. But in terms of the business objective, it's our goal to fully loading our FAB.
I see. And so I guess earlier... Several analysts have asked the demand questions from different angles, but just want to try one more watch here. And so, I understand we are still through the cycle trough. Visibility is still not high, but as Charlie pointed out, the industry inventory continues to drop. And so, will there be good possibilities that we could potentially see a more meaningful recovery for software next year?
I mean, I certainly hope so. And I will also expect that, if that's the case. So I was glad to hear what Charlie mentioned. And we will closely monitor in the market dynamics. And right now, we do see the inventory correction were lingering into Q4. We haven't seen any meaningful demand recovery yet. Hopefully, you know, a quarter older and we will have a better view and better comments. But at this point, we do think this inventory situation will linger into the Q4.
Got it. Thank you very much.
Thank you. Next one is from Bratling, Bank of America. Go ahead, please.
Thank you for taking my question. So I have two questions. First one is pretty short. It's on 65 nanometer. So we saw the 65, actually, the mix increase found 19% in 1Q to 23% in 2Q. What was the driver behind? And should the strength continue into second half? That's the first question. Thank you.
Well, I mean, our 12-inch loading is still above our coverage average. and we don't commenting about the loading by notes. And the, but I can share with you the 65 loading in Q2 is increased, is mainly coming out from the automotive segments.
Got it. Thank you very much. And then my second question is on the advanced packaging. We would like to learn UMC's strategy and development in advanced packaging. We have learned from Faraday's earnings call yesterday. This collaboration with UMC on advanced packaging, multiple angles, and we also understand interposer and wafer-to-wafer bounding on the current focus of the firm. How fast do you expect it to grow, and do we have any incremental capacity plan on that? And also, what are the upcoming offers on top of those that can help UMC capture the upside from the advanced packaging? Thank you.
I do think because the higher bandwidth and reduced form factor, that's two major drivers for this advanced packaging needs. But they are for different applications. Usually the higher bandwidth is more for the AI processors, and the form factor is for some of the integration, waiver-to-waiver integration level to help in the form factor. So there's a different application. So it's important that UMC is not absent from those applications. We do see that market demand is increasing, and we're seeing there's going to be multiple applications coming in. So we want to make sure that we have the technology to serve in those markets. And so that's why we have been developing this and providing this interposer and wafer-to-wafer bonding technology for years now. The strategy also about the ecosystem. We're working closely with OSET partners for the back-end process. And we're also working with a design service company and about the integration, the waiver level design. So they are considered as a part of the ecosystem. Right now, we think this is in the early stage of the production ramp. Technology has been there for years, but the volume production has really just happened with the recent AI momentum. But that's more on the data side, the high bandwidth data side. For the form factor side, I think there's other pipeline coming in in the next year or so. So we haven't really seen meaningful or high volume production yet. The CAPEX spending on those space is already planted in our in our budget. That's not changing our overall CapEx number. It's embedded in that number already. So we think it's not to the level that we need to revise our CapEx to support this.
Got it. Thank you very much. Just one very quick follow-up is on the so-called open ecosystem. And then obviously we are seeing a closed system which currently dominates the market. So could you please provide some insights into the optimal collaboration model? And additionally, what may be the preferences of the clients in this regard? Thank you.
I think the concept is it's important to provide what you are relevant with. And advanced packaging, you know, in our view, is considered a silicon waiver-level integration technology, and that's where we're going to be focused on. For the back-end, because the back-end substrates, there will be a partner in that ecosystem providing that. The back-end packaging technology also have a problem to provide that service. We don't have much of a value there. So that's why we stick with the wafer level and silicon level integration focus. And so that's how we position ourselves and ensure that we will be in this bendable position because the wafer level integration has to be done in a wafer with a fabrication fab. But others, you don't have to. So that's why we actually, you know, pick the space that we are more relevant.
Got it. Thank you very much for the color.
Sure. Thank you. And ladies and gentlemen, thank you for all your questions. That concludes today's Q&A session. And I'll turn it over to UMC Head of IR for closing remarks. Thank you.
Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at ir.uc.com. Have a good day.
Thank you. Ladies and gentlemen, that concludes our conference for 2Q23. Thank you for your participation in UMC's conference. There will be a webcast replay within two hours. please visit www.umc.com under the Investors Events section. You may now disconnect. Goodbye.