Foundry houses raising quotes for 8-inch capacity amid tight supply are creating pressure on IC designers' profit margins in the short term, but in the long run could be a stabilizing factor in terms of profitability deterring downstream clients from asking for unreasonable price reductions, according to industry sources.

Robust chip demand for automotive electronics, IoT and consumer electronics applications has been filling China- and Taiwan-based foundries' 8-inch fab capacities, the sources indicated. Orders for chips including MCUs, analog chips, LCD driver ICs and MOSFETs have been ramping up for these applications.

Foundries including Hua Hong Semiconductor, Semiconductor Manufacturing International (SMIC), Taiwan Semiconductor Manufacturing Company (TSMC), United Microelectronics (UMC) and Vanguard International Semiconductor (VIS) have already seen the visibility of orders for 8-inch capacity extend through the end of 2018, the sources said. The foundries have moved to adjust upward their 8-inch foundry quotes to reflect tight supply, as well as to discourage their clients from double booking, the sources noted.

The rising foundry costs will have a negative impact on fabless IC firms particularly Taiwan-based players' gross margin performance. Nevertheless, the impact is short-term, the sources believe.

To mitigate the impact of rising foundry costs, IC design houses will continue to innovate and develop cost-effective offerings. Such moves will also enhance further the fabless IC companies' product competitiveness in the long run. As a result, their downstream device vendors will lose gradually bargaining power when negotiating prices, which is positive for those fabless firms eager to maintain their gross margins at high levels, the sources identified.

Some first-tier Taiwan-based IC design houses have suggested that foundry quotes are being adjusted as a result of rising materials costs, and are still evaluating whether they should also raise their chip prices to reflect the rising manufacturing costs. They also agree that gross margins will be affected in the short term, but find it more important to increase their market shares in the medium and long term.

Silicon wafer prices have rallied nearly 30% in 2018, according to sources at IDM vendors. Some IDMs have disclosed they are negotiating with their downstream clients about raising quotes for products such as analog ICs, MOSFET and discrete components by 10-15% in the third quarter.