"Bankruptcy" crisis averted! Silicon carbide giant secures $1.5 billion lifeline, stock price surges nearly 43% at one point!

Wolfspeed, the global leader in silicon carbide (SiC) that has been in massive losses, not only saw its stock price continuously falling but also found itself in a financial crisis. Rumors were circulating in the industry that Wolfspeed might face bankruptcy or be forced to "sell itself".

To rescue Wolfspeed, on October 15, 2024, local time, the U.S. government and an investment fund consortium led by Apollo announced a $1.5 billion funding support to help Wolfspeed expand its domestic silicon carbide manufacturing capacity in the United States, optimize its balance sheet, and accelerate its long-term profitability goals.

Impacted by this news, after the U.S. stock market opened on October 15, Wolfspeed's stock price surged by 42.79% at one point, reaching a new high in nearly two and a half months. Although the price later retreated, it still maintained a 21.27% increase by the closing, at $13.80 per share, with a market capitalization of $1.751 billion. Compared to its previous closing price of $11.38, it has dropped by 92% from its historical high of $142.33 shortly after its listing in 2021.

Receiving a $750 million "Chip Act" subsidy, 8-inch silicon carbide capacity will increase tenfold

On October 15, local time, Wolfspeed and the U.S. Department of Commerce jointly announced that they have signed a non-binding Memorandum of Terms (PMT). The U.S. Department of Commerce will provide Wolfspeed with up to $750 million in proposed direct subsidy funds under the CHIPS and Science Act.

It is reported that the proposed $750 million direct subsidy funds will support Wolfspeed in building a new silicon carbide wafer manufacturing plant "John Palmour" in Siler City, North Carolina, USA. This new 2 million square foot factory will become the largest silicon carbide wafer manufacturing plant in the United States and the world's first large-scale 200mm (8-inch) silicon carbide wafer manufacturing plant. It will help ensure reliable domestic semiconductor supply in the U.S., laying the foundation for future energy and artificial intelligence prosperity.

In addition to Wolfspeed's North Carolina project, the proposed chip investment is expected to support the expansion of Wolfspeed's existing silicon carbide device manufacturing plant in Marcy, New York. This will help the factory develop into the world's first fully automated 200mm silicon carbide power device factory and increase its production capacity by approximately 30% The factory is qualified to serve automotive, industrial, and energy customers.

These projects are expected to create over 2,000 manufacturing jobs and 3,000 construction jobs in total, and are also part of Wolfspeed's previously announced over $6 billion capacity expansion plan.

With the proposed funding to support these projects, Wolfspeed expects its silicon carbide device production to increase by 5 times, and its 200mm silicon carbide material production capacity to increase by 10 times.

Gregg Lowe, CEO of Wolfspeed, said: "Achieving this milestone under the U.S. CHIPS Act is an incredible achievement in Wolfspeed's long-term growth strategy... As a key participant in the semiconductor industry, this proposed investment will solidify our leadership position in the silicon carbide field, while contributing to the resilience and competitiveness of the U.S. supply chain. This is not just Wolfspeed's growth, but driving technological progress and providing power for the future."

Securing $750 million in New Financing

In addition, a consortium of investment funds led by Apollo, The Baupost Group, Fidelity Management & Research Company, and Capital Group have also agreed to provide an additional $750 million in new financing for Wolfspeed.

Joseph Jackson, a partner at Apollo, said: "We are pleased to support the company in building its leading silicon carbide capabilities and expanding our investment in Wolfspeed by providing additional funding. We believe Wolfspeed is at the forefront of a sustainable transportation critical transformation, ensuring the company has a lasting capital channel to complete its expansion plans will help solidify its leadership position in the field. Together with our lending consortium (including multiple funds that also own a significant amount of company shares), we believe this strategic investment will bring significant long-term value while advancing key principles of the CHIPS Act."

These investments will collectively support Wolfspeed's long-term growth plans and support domestic silicon carbide production in the United States, providing power for clean energy systems such as electric vehicles (EVs), artificial intelligence (AI) data centers, and battery storage.

Wolfspeed also expects to receive up to a 25% tax credit for qualified capital expenditures under Section 48D of the CHIPS Act, with an estimated maximum cash refund of $1 billion. These capital expenditures are mainly related to equipment and completion equipment at its John Palmour Silicon Carbide Manufacturing Center in West Siloam, North Carolina, and the expansion of the Mohawk Valley Fab M-Line West in Utica, New York Summary: The company may ultimately receive up to $2.5 billion in expected funding support to expand silicon carbide manufacturing in the United States.

From Global Silicon Carbide Leader to Near "Bankruptcy"

It is well known that under the global trend of promoting energy conservation, emission reduction, and carbon neutrality, silicon carbide materials with high power, high frequency, high voltage resistance, and high temperature resistance have become excellent alternatives for high-power silicon-based devices in electric vehicles, renewable energy systems, battery energy storage systems, artificial intelligence, and data centers. They can not only improve performance, reduce energy consumption, and shrink system size, but also lower the overall system cost.

According to data provided by market research firm Yole Intelligence in the Power SiC 2022 report, the SiC device market is expected to continue growing, with a compound annual growth rate exceeding 30% from 2021 to 2027, surpassing $6 billion in 2027, with the automotive market expected to account for around 80% of this market.

As a global leader in the silicon carbide market, Wolfspeed (formerly Cree) was established in 1987 and is headquartered in North Carolina, USA. In 1987, it established the first commercial silicon carbide production line, ushering in the commercial era of silicon carbide. Since then, Wolfspeed has been a global leader in silicon carbide technology. Currently, Wolfspeed remains the world's largest producer of silicon carbide technology, mainly supplying silicon carbide substrates and silicon carbide devices.

However, with more and more manufacturers entering the silicon carbide market in recent years and expanding production, the market has become oversupplied, leading to a continuous decline in silicon carbide prices. In particular, with the continuous expansion of production capacity by Chinese silicon carbide manufacturers, the price of silicon carbide substrates has fallen much faster than the market expansion rate.

Industry observers note that in recent years, China has made rapid progress in silicon carbide research and development technology, producing substrates that even surpass Wolfspeed in specifications such as on-state resistance, leading to a significant drop in silicon carbide substrate prices.

"Last year, the purchase price of 6-inch silicon carbide substrates supplied by Chinese manufacturers was around $1,000, now it's only over $500." The foundry price of 6-inch silicon carbide wafers has also dropped to around $1,200 to $1,800 per piece, a 70% plunge from around $4,000 per piece over two years ago.

Chiu Poshun, a senior analyst at Yole, said that mainland Chinese silicon carbide substrate manufacturers such as Tianke Heda, Shandong Tianyue, and Hantian Tiancheng are the most active companies in this price war. By 2023, the global supply of silicon carbide substrates will be 1.7 million pieces, but only Tianke Heda is estimated to have a production capacity of 160,000 6-inch wafers by the end of last year, and will start producing 8-inch silicon carbide wafers this year; Shandong Tianyue is expected to reach a capacity of 300,000 6-inch wafers by 2026 and will also start producing 8-inch silicon carbide wafers Chiu Poshun stated that under the continuous intensification of market competition, Wolfspeed's market share in silicon carbide materials and epitaxial materials had dropped to 33% and 37% respectively in 2023.

In addition to supplying silicon carbide substrates, Wolfspeed also directly sells its own silicon carbide power devices. The continuous decline in silicon carbide substrate prices and silicon carbide wafer foundry prices has directly led to pressure on silicon carbide device prices. Especially for Wolfspeed, its existing business model also faces competition issues with customers (manufacturers who purchase its silicon carbide materials to develop their own devices), further leading to its passivity in the silicon carbide materials and devices market.

Data from TrendForce shows that in the global silicon carbide power device market in 2023, Wolfspeed's market share was only 11.1%, far below competitors such as STMicroelectronics and Infineon.

Furthermore, major power device manufacturers such as STMicroelectronics and Infineon are continuously expanding their own silicon carbide production capacity while strengthening cooperation with Chinese silicon carbide manufacturers to help expand their presence in the Chinese market - the world's largest electric vehicle market and the largest silicon carbide consumption market. For example, in May 2023, Infineon signed a supply agreement with Tianyue Advanced to purchase 150mm silicon carbide substrates and ingots; STMicroelectronics announced a partnership with Sanan Optoelectronics in June 2023 to jointly invest $3.2 billion in Chongqing to establish an 8-inch silicon carbide device factory.

Clearly, in the context of intensifying competition in the silicon carbide market, insufficient demand for silicon carbide (total demand is growing but being shared among more manufacturers), and continuous price declines, Wolfspeed's performance continues to be incurring losses. Its large 8-inch silicon carbide production capacity construction plan is also severely dragging down its performance and cash flow.

In August of this year, Wolfspeed announced revenue of $200 million for the fourth quarter of the 2024 fiscal year (i.e., the second quarter of the 2024 calendar year), a year-on-year decrease of 14.9%. Gross profit was only $0.02 billion, a significant drop of 96.3% year-on-year; due to the cost increase caused by the underutilization of the Mohawk Valley Fab 8-inch silicon carbide wafer factory (only 20%), the gross profit margin for the quarter was only 1.2%, hitting a historic low. GAAP net loss expanded to $175 million.

The financial forecast for the next quarter (third quarter of 2024) is also not optimistic, with revenue guidance of $185-215 million and GAAP net loss expected to further expand to $194-226 million As of the end of this quarter, Wolfspeed's cash balance is approximately $2.2 billion, but it may consume $600 million each quarter, which means that if it fails to achieve profitability in the coming quarters, its cash will face the risk of depletion. Moreover, due to insufficient cash, Wolfspeed's long-term liabilities continue to increase, with its net debt reaching 4.5 times its equity.

Affected by poor second-quarter performance, poor third-quarter financial forecast targets, and a severe financial crisis, Wolfspeed's stock price has been continuously declining. As of September 10th, its stock price hit a historical low of $7.28, a decrease of about 94.9% from its all-time high of $142.33 in 2021. Even compared to its closing price of $43.24 on January 2nd this year, it has dropped by about 83.2%, with a market value of less than $1 billion.

The continuous losses in Wolfspeed's performance, the continuous decline in its stock price, severely impacted investor confidence, and there were rumors in the industry that Wolfspeed might "go bankrupt" or face "acquisition".

Renowned analyst Lu Xingzhi previously publicly stated, "Looking at Wolfspeed's financial numbers, everyone feels that this company may announce bankruptcy protection at any time, or sell cheaply. Originally a good hand, now turned into a bad hand, I don't know what measures the future acquirer will take to salvage it."

At a time when Wolfspeed is facing a "bankruptcy" crisis, the U.S. Department of Commerce has taken action by not only providing $750 million in direct subsidy funds but also pushing for an investment fund consortium led by the U.S. asset management company Apollo to announce $750 million in financing for Wolfspeed. It is worth noting that Apollo had previously been rumored to be interested in investing $5 billion in Intel, which is also in financial crisis.

In an official press release, Wolfspeed also pointed out that several U.S. federal agencies have recognized the importance of strengthening domestic silicon carbide production in the United States. The Department of Energy has listed silicon carbide as one of the 17 "critical materials" with a high risk of supply interruption, which are essential for clean energy technologies. The Department of Commerce also considers silicon carbide semiconductors to be important for national security. Therefore, the U.S. believes that strategic investments in domestic silicon carbide manufacturing (i.e., investment in Wolfspeed) are necessary to consolidate its technological leadership and continue to stimulate innovation in key technologies in the U.S.

In summary, the $750 million "chip bill" direct subsidy funds and $750 million in new financing obtained by Wolfspeed will undoubtedly help facilitate the implementation of its production capacity expansion plan, alleviate the severe financial crisis it is currently facing, and accelerate the realization of its long-term profitability goals.

Article Author: Chip Intelligence - Langkejian, Source: Chip Intelligence, Original Title: "Bankruptcy" Crisis Averted! Silicon Carbide Giant Receives $1.5 Billion Lifeline, Stock Price Soars Nearly 43%! 》