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the unstoppable momentum is probably the best interpretation of the development of the silicon carbide (sic) industry in recent years.

the hot global sic industry momentum, accompanied by a series of actions such as capital increase and expansion, mass production and shipment, and contract cooperation, major manufacturers are seeking to contribute to performance growth and continue to strengthen their moats around various links in the sic industry chain, intending to stabilize the basic situation first and then wait for an opportunity to extend their tentacles.

however,against the backdrop of booming industry development, sic giant wolfspeed presents a different picture.

the plummeting market value, continued losses, company sales, and even rumors of bankruptcy... have become the most helpless reflections of the reality facing this industry giant in recent years.

recently, wolfspeed's latest financial report also revealed the tragic situation that the company's revenue was lower than expected, its losses continued to expand, and its gross profit plummeted.

these data undoubtedly made investors furious and cast a shadow on wolfspeed's future, and the market has greater doubts about whether it can achieve profitability. since the beginning of this year, wolfspeed's stock price has fallen by more than 70%, making it the worst performer in the philadelphia semiconductor index.

under such a huge contrast, what exactly has wolfspeed experienced and where will it go in the future?

wolfspeed's rise and fall

wolfspeed, a leader in sic industry

wolfspeed was originally a division of cree that focused on third-generation compound semiconductor business. the company's technology was initially commercialized in the led market, and it is committed to promoting changes in led lighting.

since 2017, cree has begun a strategic transformation, shifting its development focus to the wolfspeed division to provide development funds for its core power and rf businesses.

in march 2018, wolfspeed consolidated its leadership in rf silicon carbide-based gallium nitride technology by acquiring infineon's rf power business.

in 2019 and 2021, it sold its lighting and led businesses successively. in october 2021, cree was officially renamed wolfspeed, focusing on the development and innovation in the field of third-generation compound semiconductors.

shortly after the name change, cree and wolfspeed, which had gone through many twists and turns, hit a record high since their ipo with a share price of over $139, which can be regarded as a highlight in the company's development history.

in terms of product technology, wolfspeed took the lead in launching the world's first sic mosfet, the cmf20120d, as early as 2011. with its many advantages and features, it has become an ideal choice for power electronic switching circuits, breaking the industry's deep doubts that sic power transistors could not be manufactured.

in subsequent development, wolfspeed continued to explore different crystal structures, worked hard to reduce costs, and continued to promote the development of the sic industry. finally, after tesla launched the model 3 using sic inverters in 2018, the sic industry exploded.

wolfspeed is also looking for its own opportunities in this trend.

wolfspeed is the world's first 8-inch silicon carbide wafer manufacturing plant. it took seven years from the project announcement in 2015 to its completion and mass production in 2022.

in 2023, in order to accelerate transformation and streamline its business, wolfspeed sold its rf business to macom and has since become a pure vertical silicon carbide company.

during the frequent downsizing, transformation and technological innovation process, wolfspeed has also signed a series of long-term supply agreements with renesas, infineon and other leading global semiconductor companies with a total amount of billions of us dollars to supply customers with silicon carbide bare wafers and epitaxial wafers for a long time.

wolfspeed has long been a leader in the sic substrate and epitaxial wafer market.

i saw his building collapse.

with the strong demand for sic in new energy vehicles, wolfspeed should have been a shining company. however, before it could taste the fruits of victory, the giant is facing unprecedented challenges with the fierce competition in the market and the rise of new forces.

as of the most recent trading day, the company's stock price has fallen from a peak of $139 in november 2021 to $12.25. in other words,in just a few years, wolfspeed's market value fell by more than 90%.

as the stock price plummeted, investors gradually lost confidence, began to question the company's financial situation, and strongly demanded that it take measures to turn the situation around. this also caused wolfspeed to lose favor in the market and face rumors of being acquired.

in april, investment firm jana partners said that wolfspeed management's mistakes in capital allocation, execution and strategy led to the stock's decline. "while wolfspeed has distinctive manufacturing capabilities and plays a vital role as a u.s. supplier supporting the energy transition, every current shareholder seems to have suffered a loss on their investment." the investor urged wolfspeed management to explore all ways to increase shareholder value, including potential sales.

looking back at wolfspeed's development over the years, one has a sense of déjà vu: "i watched him build a tall building, i watched him entertain guests, and i watched his building collapse."

what is the root cause of wolfspeed’s problem?

with such a huge gap between the front and rear, what happened to wolfspeed?

large investment, low capacity utilization, and continuous losses

in recent years, some giants in the sic industry have made a lot of money, while some manufacturers have had no choice but to swallow the bitter fruit of increasing revenue but not profit or even losses. wolfspeed is a typical representative of the latter.

as the demand for sic devices continues to rise, the global sic industry has set off a wave of investment and expansion, with many substrate manufacturers taking the lead. take wolfspeed as an example. although wolfspeed is leading in many indicators and shareholders believe that the company has great growth potential, it has been in a long-term loss because wolfspeed has been investing heavily.

since 2017, wolfspeed's annual revenue has not exceeded $1 billion. however, wolfspeed is implementing a capacity expansion plan with a total investment of $6.5 billion to accelerate the expansion of 8-inch capacity. this gamble strategy has put pressure on performance and profit losses have become the norm.

investors are getting a little anxious due to the huge capital expenditure and slow return on investment.

jana partners noted that wolfspeed's 10-year total shareholder return was -61%, compared with an average of 331% for its peers.

although wolfspeed is promoting the growth of 8-inch wafer production capacity, 6-inch sic wafers are becoming more cost-competitive with other products on the market. at the same time, the conversion from 6-inch to 8-inch seems to significantly reduce costs and bring quick benefits, but in fact, the low yield and high defect density of 8-inch silicon carbide wafers will set obstacles to their large-scale application.

it can be understood that the return rate of 8-inch factories that blindly pursue technological upgrades does not match the huge investment, and it takes time to gradually achieve product yield improvement, stability and market certification.

in addition, a large part of wolfspeed's 8-inch production capacity is idle, and the current capacity utilization rate is only about 20%. it is expected that the mohawk valley plant utilization rate will reach 25% in the first quarter of fiscal year 2025, which is one quarter ahead of schedule.the fab itself has huge depreciation costs, according to this utilization rate, this will lead to an increase in the unit wafer cost produced and a low return on investment.

it is understood that wolfspeed's newly expanded factory not only failed to bring about a surge in performance, but also increased the company's costs. in the current quarterly loss of nearly $200 million, the new factory brought a loss of nearly $50 million (us$25 million in factory startup costs and us$24 million in underutilization costs).

for the full fiscal year 2024, the company's consolidated revenue will be approximately us$807 million, with a gaap gross margin of 10%, compared with 32% in the same period last year.

the decline in the company's gross profit margin is affected by the market demand for products and insufficient capacity utilization. the current price war in the field of new energy vehicles has directly affected the market demand for sic, resulting in wolfspeed's profitability not improving.

according to lu xingzhi, a well-known industry analyst, wolfspeed's silicon carbide wafer costs as much as $17,000, which means that for every $10,000 wafer sold, wolfspeed loses about $7,000.

wolfspeed's competitive pressure and continued losses have caused the market to worry about its independent viability. faced with such circumstances,investors have always been decisive in their decisionswhen seeing some abnormal situations, the first thing that comes to mind must be to stop losses in time.

in the past, a major "support point" for wolfspeed's stock price was that the market believed it had high growth potential, but revenue no longer showed high growth performance. after tearing off the "high growth" coat, the company whose losses were still expanding found it difficult to win market confidence.

supply-demand contradictions and involution intensify

in the second quarter of 2024, market research firm yole analyzed data showing that in the short and medium term, the slowdown in demand in the electric vehicle market in 2024 will have a significant impact on the sic device market. the company expects the growth rate of the sic power device market in 2024 to be only 18% compared to 2023. however, it is expected that in 2025, the growth rate of sic products in the automotive market will jump to about 38%.

from the application side, in addition to the automotive business, sic power devices are also widely used in industrial fields such as charging infrastructure and photovoltaics.

wolfspeed ceo gregg lowe said at an analyst meeting that despite the decline in demand for automotive semiconductors, the company's electric vehicle business revenue has grown for three consecutive quarters because some automotive chip designs required for electric vehicles accumulated over the past 5-7 years are only now beginning to increase production. gregg lowe also said that other important high-voltage power device industries and energy markets, such as ai and solar energy, will continue to turn to silicon carbide, boosting the company's overall revenue.

it can be said that wolfspeed has no demand problem, and it can even be said that the demand is quite strong.what we really face may be supply and strategy issues.

because demand levels alone cannot determine whether there is a supply-demand mismatch for sic wafers, supply is also a key factor.

enthusiasm for electric vehicles has been so high over the past few years that new and existing sic wafer suppliers have announced plans to more than triple their production capacity from 2.8 million 150mm sic wafer equivalents in 2023 to 10.9 million in 2027.

wolfspeed is in a unique position as a market leader, but is losing market share to chinese competitors that can provide high-quality wafers at lower prices.

in my previous article, "uncovering the domestic sic industry: involution, cost reduction, and dilemma", i mentioned that sic substrate and epitaxy together account for more than 70% of the overall cost of sic products and are the key to determining device quality. at present, the development of domestic sic substrate and epitaxy technology is relatively good, and is basically close to the level of global giants.

in fact, we can see signs of this from the dynamics of manufacturers in the industry. for example, some international silicon carbide manufacturers have also begun to choose chinese substrate materials as their long-term suppliers. among them, infineon actively seeks cooperation with chinese sic substrate companies to meet the market's growing demand for sic devices. tianyue advanced and tianke heda have been included in its supply chain; bosch signed a long-term agreement with tianyue advanced in april last year.

sanan optoelectronics and stmicroelectronics are also working together. in june last year, the two parties announced the establishment of a new 8-inch sic device joint venture manufacturing plant in chongqing, with an annual production capacity of 480,000 8-inch sic substrates and automotive-grade mosfet power chips, which will effectively promote the new upgrade of china's third-generation compound semiconductor industry.

in addition, since 2024, several domestic sic technologies and products have become increasingly popular in the international market. in march 2024, keyou semiconductor signed a long-term contract with a well-known european company, with a contract value of more than 200 million yuan; in april 2024, century golden core signed an order for sic substrates with a japanese customer. according to the agreement, century golden core will deliver 130,000 8-inch sic substrates to the customer for three consecutive years in 2024, 2025 and 2026, with an order value of approximately us$200 million.

this series of measures shows that international giants have recognized the production process, raw material quality and substrate quality of chinese substrate manufacturers. by strengthening cooperation with international giants, we can provide chinese manufacturers with more market opportunities and technical support, jointly develop new products and new technologies, and improve the international competitiveness of products.

it is estimated that my country's 6-inch sic substrate production capacity will account for 42% of the global capacity in 2023, and is expected to increase to about 50% in 2026.

according to yole's report, in 2023, tianke heda's global market share will be 18%, tianyue advanced's global market share will be 14%, and wolfspeed's global market share will be 33%. the two chinese companies tianke heda and tianyue advanced have a combined global market share of 32%.it is clearly impacting the global silicon carbide market.

market share of silicon carbide in each segment in 2023 (source: yole)

the growth of the "chinese army" has changed the situation where wolfspeed dominated more than 60% of the global market share before 2021.this put wolfspeed's management under great pressure.

at the same time, due to the continuous expansion of global sic production capacity, the price of sic substrates has fallen much faster than the market has expanded. according to industry insiders, domestic substrate suppliers have cut prices by 30%-40% in recent months. at the same time, in response to increasingly fierce competition from chinese competitors, european and american sic substrate suppliers have also slightly lowered prices for asian customers.

since there are many domestic manufacturers in the fields of sic crystal growth and substrates, if the price reduction model is launched first, it will probably force more and more manufacturers to follow suit, and thenthis triggered a price war for sic substrates and led to an "involution" dilemma.

in fact, sic is currently entering a comprehensive production capacity and price competition stage. with the 8-inch market set to usher in a major battle in the future, the sic market will only become more competitive in 2024.the result of the competition is that everyone is engaged in a price war and no one makes any money.

in addition to being squeezed by domestic companies, overseas manufacturers have also begun to gradually fill in their own substrate map of wolfspeed's silicon carbide substrate advantages. industry giants such as rohm, st, and on semiconductor have successively acquired sic substrate suppliers. in recent years, manufacturers have been frantically expanding production, and huge production capacity is waiting to be released.

these are huge blows to wolfspeed, which is in a state of continuous losses.

overall, the main challenges facing wolfspeed are concentrated on the huge initial investment, low utilization rate of new factories and the corresponding high costs, excessive internal competition in the industry and resulting in a "price war", etc.

it can be predicted that the sic market will only become more competitive in the short term, and technology, yield, and price will become the key to competition, and the pressure on wolfspeed will increase.

where is wolfspeed headed?

wolfspeed was in an awkward position, with its future still uncertain, but action had to be taken.

in this era of change, wolfspeed is standing at a critical crossroads, even a matter of life and death.

in a growing but increasingly competitive market, how does wolfspeed choose?

first, it must carefully evaluate its own strengths and weaknesses and develop a practical strategic plan to ensure that it continues to maintain its leading position in the future sic market.

cut costs and close some factories

wolfspeed's most immediate response to shareholder concerns has been to cut costs, manage expenses and slow capital spending.

as 6-inch sic wafers remain cost-competitive, wolfspeed has to face this challenge. how to balance the production of wafers of different sizes while maintaining market share has become a major problem that the company needs to solve.

at the earnings conference a few days ago, wolfspeed ceo gregg lowe said that the manufacturing cost of 8-inch silicon carbide wafers at the mohawk valley plant is significantly lower than that of the company's 6-inch silicon carbide wafer plant in durham. to further reduce costs, wolfspeed plans to close the 6-inch plant in durham. wolfspeed announced that it will provide more details on the plant closure plan at the next earnings conference in november.

it is worth mentioning that as early as 2021, wolfspeed had talked about closing the durham plant, but at the time due to strong demand, the company chose to continue operating the plant. in june of this year, wolfspeed pointed out that there were problems with its equipment at the durham plant, which could have an impact of approximately $20 million on its first-quarter revenue.

it can be understood that wolfspeed's decision to close its 6-inch wafer fab was not made overnight, but was based on comprehensive considerations of many factors.

from a cost-effectiveness perspective, the production cost of 6-inch wafers is obviously higher than that of 8-inch wafers. with the advancement of technology and changes in the market, 8-inch wafers have shown greater advantages in production capacity, efficiency and cost.

capacity optimization is also an important reason for wolfspeed to close its 6-inch wafer fab. in the context of the current global semiconductor market, especially the automotive semiconductor market, which is declining, wolfspeed needs to adjust its capacity structure more flexibly to cope with market uncertainties. by closing the inefficient 6-inch wafer fab, the company can invest more resources in the more competitive 8-inch wafer production, improving overall capacity utilization and market response speed.

equipment problems at the durham plant were also one of the direct reasons that prompted wolfspeed to make this decision. concerns about the future operating prospects of the 6-inch wafer fab accelerated the implementation of the closure plan.

delayed factory construction

wolfspeed may reconsider or postpone investment plans in new facilities, such as its german fab, while improving its financial metrics.

in june, wolfspeed announced the postponement of plans to build a $3 billion factory in germany, highlighting the difficulties the european union faces in increasing semiconductor production and reducing its reliance on asian chips.

a spokesman said wolfspeed's planned factory in saarland, germany, which will produce chips for electric vehicles, has not been completely canceled and the company is still seeking funding.

but given the weak electric vehicle markets in europe and the united states, wolfspeed has cut capital spending and will focus on increasing production at its u.s. factories.the company will not start construction in germany until mid-2025 at the earliest, two years later than originally planned.

improve capacity utilization and strengthen vertical integration

wolfspeed needs to develop and implement an effective strategy for the company's performance losses. on the one hand, it needs to improve the capacity utilization of the most advanced 8-inch sic wafer fab in mohawk valley. in june, the wafer fab in mohawk valley achieved a utilization rate of 20%, and continued to see strong revenue growth in the plant, contributing approximately $41 million in revenue in the quarter. wolfspeed needs to continue to increase the utilization rate of the new plant to reduce production costs, increase gross profit margins, and alleviate loss pressure.

on the other hand, wolfspeed can actively invest in the production of sic power devices, striving to achieve vertical integration from substrate to device and expand its customer range. although the construction of the factory and the increase in production have encountered some delays, wolfspeed's first-mover advantage in 8-inch wafer production still provides it with an important competitive advantage.

at the same time, wolfspeed is taking proactive steps, such as plans to reduce capital expenditures by approximately $200 million in fiscal 2025 and identifying areas across wolfspeed's business to reduce operating costs.

wolfspeed is also in constructive negotiations for a preliminary memorandum of terms for a capital grant under the us chips and science act. in addition to the capital grants that may be available under the act, wolfspeed's long-term capital spending plans anticipate receiving more than $1 billion in cash refunds from irs 48d tax credits, of which wolfspeed already has approximately $640 million on its balance sheet.

at the same time, establishing cooperative relationships with potential strategic investors or partners is also an effective way to alleviate financial pressure and accelerate business development.

in the future, wolfspeed management needs to formulate more prudent market strategies to avoid market misjudgment again. if wolfspeed can improve profitability and stabilize market share in the short term, it still has the possibility of continuing to develop as an independent company. however, if losses continue to expand or market demand continues to be sluggish, the possibility of the company being acquired will further increase.

final thoughts

as one of the hottest tracks at the moment, the market size of sic is continuing to grow.

according to emergen research, the silicon carbide market will maintain an average annual growth rate of about 11.6% from 2023 to 2032. by 2032, the market size is expected to reach us$9.18 billion.

although the current substrate prices have fluctuated significantly and overseas major manufacturers have lowered their silicon carbide revenue expectations for 2024, from the perspective of the terminal market, whether in automobiles, photovoltaics, or industry, the long-term demand for silicon carbide remains strong.

this means that there is no problem with the overall demand in the sic market, but there is something wrong with wolfspeed itself.

wolfspeed's current predicament is both the result of market changes and a reflection of its own strategic mistakes, which has caused serious setbacks in its business. whether it can achieve self-recovery in the future depends on how to effectively improve capacity utilization, control costs, and quickly seize market opportunities when demand picks up.

the market is extremely hot. as sic gradually enters a stage of comprehensive capacity and price competition, the competition and pursuit for market voice and added value is far from over.

if wolfspeed can get through this, it should be able to make the money back later.