Long-term agreements (LTAs) signed with foundry partners have caught IC design houses in a dilemma over whether they should honor the contracts in the second half of the year amid weakening consumer demand, according to industry sources.

Continuing to honor the LTAs will further drive up chip inventories at IC designers, now that their clients are significantly slowing down taking in chip shipments from them, the sources said.

But if IC design houses violate the contracts, they will have to face punitive payments from foundry partners, who are firmly asking them to honor the quotes and capacity utilization commitments set in the LTAs, the sources continued.

IC designers never thought that LTAs aimed at ensuring foundry capacity support amid tight IC supply could become a problem, the sources noted, adding that based on contracts they cannot easily stop taking shipments from foundry partners despite weak demand from clients.

In the first half of 2022, leading fabless chipmakers such as MediaTek, Novatek Microelectronics and Realtek Semiconductor were still able to negotiate with foundry partners over adjusting capacity allocations for their multiple chip offerings. But in the second half, the room for capacity adjustment is getting narrower and narrower due to slack demand spreading to a wider variety of chips, the sources stressed.

Smaller IC designers failing to manage well the ratios between long-term and short-term foundry contracts will face even heavier pressure on their business operations in the second half of the year. Some of them reportedly have decided to pay for the contract violations, avoiding more losses from swelling inventories.

Many IC design houses are still actively in talks with foundry partners on capacity adjustments, which, however, will see little possibility in the third quarter after factoring in basic semiconductor production cycle, the sources said. They may have a chance to lower inbound chip shipments from foundry fabs in the fourth quarter of 2022 or the first quarter of 2023, indicating that almost all IC design houses may bear heavy inventory pressure in the second half of the year, the sources added.

By DIGITIMES