2022 ASC 100: Semiconductor companies lead well in profit margin

According to DIGITIMES Asia Supply Chain 100 (ASC 100) list, tech companies in the "semiconductor" and "electronic components" sectors account for eight out of the top 10 businesses with the highest profit margin in 2021.

TSMC leads the list with the highest net profit margin of 37.6%, followed by its semiconductor peers MediaTek (22.6%), SK Hynix (22.2%), Tokyo Electron (21.0%), and Chinese state-own video surveillance equipment maker Hangzhou Hikvision Digital Technology (20.6%). Electronic components suppliers Murata Manufacturing (17.4%), AU Optronics (16.5%), and Innolux (16.4%) were in sixth to eighth places respectively, with South Korea's Samsung Electronics (14.0%) and Japan-based chipmaker Renesas Electronics (12.7%) rounding out the top 10 of ASC 100 ranking in 2022.

Semiconductor

The five semiconductor companies with the highest 2021 profit margin completely differ in their business operations: TSMC provides foundry services; MediaTek specializes in IC design; SK Hynix engages in memory production; Tokyo Electron supplies semiconductor equipment, and Renesas Electronics is an integrated device manufacturer (IDM) with expertise in automotive and industrial MCU. Although Samsung Electronics also manufactures semiconductors, it is categorized in the "tech products and equipment" sector.

Besides the five semiconductor firms mentioned, Taiwan-based OSAT ASE Technology (11.2%) also made it to the ASC 100 list in 15th place.

Overall, the semiconductor firms in ASC 100 posted an average profit margin of 19.8% in 2021. MediaTek, SK Hynix, Tokyo Electron, Renesas Electronics, and ASE Technology all witnessed significant increases in their 2021 numbers, while TSMC observed a 1% drop from its 2020 profit margin.

The high profitability in the semiconductor industry last year can be largely attributed to the global chip shortages kickstarted by the COVID-19 pandemic in late 2019. As the pandemic accelerated digital transformation, semiconductor demand for laptops, servers, and cloud computing was driven up by stay-at-home economies.

Being the world's largest semiconductor foundry, TSMC benefited from robust demand for its high-end processes and mature technologies last year, during which it began mass-producing its 5nm manufacturing process and started to work on its 3nm process. An influx of pre-payments from clients to book the company's existing and new capacities also served as the main driver for its profit growth last year.

Looking to 2022, TSMC will likely continue to experience profit growth, as it is currently leading Samsung Electronics and Intel in sub-7nm process nodes, and its clients include well-known chipmakers Apple, Nvidia, AMD, Qualcomm, Broadcom, and Intel.

MediaTek registered a nearly 200% profit growth in 2021 thanks to product specifications upgrades and higher demand across its core products, including smartphone SoCs and IoT-related chips. While many fabless chipmakers struggled to maintain their growth margin amid rising costs and supply chain challenges, MediaTek was more capable of raising its quotes to reflect foundry quote hikes and generate good profit results than its smaller peers.

MediaTek released several new chipsets in 2021, including the Dimensity 9000 chip for high-end 5G smartphones, Kompanio 900T application processor (AP) for Android-based tablets, and the Pentonic 2000 chip for next-generation TVs. The Dimensity 9000 is the world's first smartphone processor built on TSMC's 4nm process node.

Given its market leadership in the segments of 5G, networking, and server chips solutions, MediaTek has a chance to maintain its profit growth in 2022 if it manages to overcome challenges such as insufficient market growth momentum and competition from Qualcomm.

Renesas was not included in the ASC 100 list for 2020, but it joined the 2021 list at the 96th place in terms of revenue, with a profit margin of 12.7% and a 168.8% profit growth. Its profit margin almost doubled from the 6.4% in 2020.

After a fire struck one of Renesas's chip plants in Japan in March 2021, the IDM took about three months to resume full operation at the fire-damaged facility. In March 2022, the company had to again suspend operations at three of its Japanese factories due to a 7.4-magnitude earthquake.

Despite these two incidents, Renesas managed to maintain healthy profit growth in 2021 and the first quarter of 2022. It has also been active in exploring partnerships with the automotive supply chain. The IDM has set up an EV innovation center in Bangalore, India with Tata Elxsi, and it has expanded its collaboration with Honda to develop advanced driver-assistance systems (ADAS).

As global chip shortages are expected to persist for at least another one or two years, the semiconductor industry can expect the upward trend in its profit growth to continue. However, recent COVID-induced lockdowns in China have resulted in major supply chain disruptions, which could limit some semiconductor companies' profitability in 2022.

Display Panel

Three of the top 10 companies with the highest profit margin in 2021 are electronic component makers. Taiwan's leading display panel makers AU Optronics (AUO) and Innolux have significantly improved their rankings from 2020, while Japan-based Murata Manufacturing remains in 6th place.

Seven out of the 10 electronic component companies in ASC 100 registered at least a 100% profit growth in 2021, namely LG Display, Innolux, AUO, BOE Technology, LG Innotek, TDK Corp, and Kyocera. The other four companies saw only slight increases in their 2021 profits, with Luxshare Precision trailing with a 4.0% profit growth.

Amid weakening demand for small- to medium-sized TV panels in the device-end market, both AUO and Innolux have been transforming business operations by decreasing the proportion of total output for less profitable panels of standard specifications and increasing those for high value-added large-sized panels. The operational transformation of the two panel makers can explain why they saw higher profitability in 2021 than their peers.

AUO largely increased its production capacity in 2021 after it began leveraging smart manufacturing to improve its productivity and yield a few years ago. Despite sharp falls in TV panel prices in the second half of 2021, the company's strategy to focus more on high value-added customized panels shipped in small volumes allowed its profits to stay at a relatively high level.

Innolux, which is also focusing on higher-value LCD panels, unveiled three in-house-developed innovative display technologies (InnoLED, multi-user natural 3D display, and integrated cockpit display system) in 2021. It also introduced a 27-inch 1,440p IGZO 300Hz miniLED-backlit panel for gaming applications during the same year.

Although global demand for display panels rose in 2020 and the early months of 2021 thanks to the COVID-19 pandemic, such demand has been on a decline due to the shrinking effects of the stay-at-home economy since the second half of 2021. China's power restrictions in September 2021 also had serious impacts on production and shipments in the panel industry.

While the panel industry could benefit from the rapid development of electric vehicles (EVs), as demand for automotive displays is expected to rise, worsening inflation amid the Russia-Ukraine war and logistics problems caused by the COVID-19 pandemic can cripple the industry in 2022.

Contrary to analysts' prediction that prices for small- to medium-sized LCD TV panels would slightly rebound at the end of the first quarter of 2022, the prices are still falling. Meanwhile, as marine shipment cost for TV panels has hiked 5-10 times pre-pandemic levels due to lingering logistics problems, TV vendors are becoming conservative in procuring LCD panels.

AUO chairman Paul Peng also warned that the ongoing COVID-induced lockdowns in China have triggered a global supply chain disruption, which will take at least a quarter for the panel industry to recover from when the lockdowns are lifted. He said the situation has created too many uncertainties for AUO and panel makers to predict their performance in the second half of 2022.

Automobile and EV battery

Although automakers account for four of the top 10 companies with the highest revenue in 2021, only three of the 26 automotive manufacturers in ASC 100 are in the top 20 in terms of profit margin. Dongfeng Motor takes the 17th place with a profit margin of 10.1%, while Toyota Motor (10.0%) and Guangzhou Automobile Group (9.7%) are in the 18th and 19th place, respectively.

The average profit margin of companies in the "automotive manufacturing" sector is 3.8%, the lowest among all eight industries in DIGITIMES' ASC 100 research.

Meanwhile, the average profit margin of the "electrical components" sector, which includes EV battery manufacturers, is 7.8%, the third-highest among all industries, behind the "semiconductor" and "electronic components" sectors.

China-based Contemporary Amperex Technology (CATL) leads all battery manufacturers in profit margin with 12.2%, followed by South Korea's Samsung SDI (8.6%) and LG Energy Solution (4.6%).

As the automotive industry moves toward full electrification, demand for EVs and related batteries has been rising at a rapid pace, creating lucrative business opportunities for companies in the car supply chain.

However, the prolonged shortage of automotive chips has been a major challenge for EV makers for the last two years. Most carmakers were unable to meet their production goals in 2021, and some have admitted that they would continue to restrain production in 2022 due to chip shortages.

Meanwhile, although some industry analysts predicted that EV batteries would become less expensive in 2022 as a result of technology improvement and increasing EV production, Russia's invasion of Ukraine has led to a shortage in battery raw materials, potentially driving up production costs for EV batteries.

The price of lithium carbonate used in LFP batteries, for example, has gone up to as much as 60% in March since the beginning of the year, causing China-based battery makers CATL and BYD to boycott the high prices by refusing to buy materials.

Despite the strong demand for EVs, uncertainties caused by geopolitics, inflation, limited minerals, the COVID-19 pandemic, and the chip shortages will likely slow down EV development in 2022. These major factors will also determine the profitability of the EV and battery industries in the next few years, while the profitability of individual carmakers will depend on their capacity to adjust to the EV industrial transformation.

Source: Companies; compiled by DIGITIMES, May 2022

Source: Companies; compiled by DIGITIMES, May 2022

About ASC 100:

Asia Supply Chain 100 (ASC100) 2022 ranks the top 100 Asian tech companies, focusing on electronics, information & communication technology, machinery, and automobile industries, by their revenue in 2021. The top 100 companies were able to manage uncertainties and succeed. Based on the rankings, DIGITIMES Asia also summed up the findings and insights in a series of articles.