On the evening of October 28, BIWIN Storage released a performance report that seemed to stun the entire semiconductor industry. Net profit attributable to shareholders for the first three quarters reached CNY 8.768 billion, representing a year-on-year increase of 28,728.12%.
Upon the release of BIWIN Storage's Q3 report, many focused on the year-on-year growth rates of CNY 21.7 billion in revenue and CNY 8.7 billion in net profit. However, the more critical figure was different: Q3 net profit was CNY 1.602 billion, a quarter-over-quarter decline of 62% from Q2's CNY 4.267 billion. Longsys also acknowledged in its earnings forecast that the marginal contribution of storage price hikes to profitability had significantly slowed down.
The quarter-over-quarter figures for module manufacturers were unimpressive. However, placing the financial reports of fabless design companies from the same period side by side reveals a contrasting picture: GigaDevice's (note: context implies Juchen/Giantec, but text says Juchen which is likely Giantec Semiconductor or similar, strictly translating 'Juchen' as per glossary if available, otherwise pinyin. Glossary has 'GigaDevice' for ZhaoYiChuangXin, 'Juchen' not in list, using Pinyin 'Juchen') Q3 non-recurring adjusted net profit grew 111% quarter-over-quarter; Dongxin Semiconductor's Q3 net profit grew 59% quarter-over-quarter with gross margin reaching 79.31%; and Montage Technology's non-recurring adjusted net profit grew 32% to 46% quarter-over-quarter.
Module manufacturers saw deceleration quarter-over-quarter, while design companies accelerated. This leads to a judgment: profits for module manufacturers are granted by the cycle, whereas a portion of design companies' profits is earned through their own capabilities.
However, both sides face distinct risks. Module manufacturers do have pathways forward. BIWIN's self-developed controllers and construction of advanced packaging and testing production lines essentially aim to shift the business model from "buy, package, and sell" towards design-centric value creation. Longsys is building Lexar brand premiums, achieving a gross margin of 58.9%, also attempting to move away from pure assembly. Yet, both paths require time, and the market cycle does not wait. The most lucrative window for price hike dividends lasts only a few quarters. If module manufacturers fail to convert these profits into technical assets during this window, the next downturn will reclaim them with interest.
The risk for design companies lies elsewhere. Their current profit margins are built upon the scarcity of supply in small-to-medium capacity storage. As original manufacturers tilt capacity towards HBM and servers, supply in niche markets contracts, giving companies like Dongxin and Juchen, which focus on small-to-medium capacities and companion chips, significant price elasticity. Once original manufacturer capacity flows back, or demand fluctuates, design companies' gross margins will fall rapidly. Dongxin understands this well, evidenced by increasing R&D investment by 163% year-on-year in Q3 when gross margins approached 80%, and launching the "Storage-Compute-Connectivity" project. Spending heavily on long-term initiatives when profits are thickest demonstrates the design companies' sober awareness of the cycle.
The quarter-over-quarter decline for module manufacturers versus growth for design companies does not indicate superiority of one over the other. It reflects two different positions in the industrial chain moving through different stages within the same cycle. Inventory benefits for module manufacturers are fading, while pricing power for design companies is being realized. However, high gross margins for design companies are equally unsustainable. The difference lies in whether they can transform excess profits into entry tickets for the next cycle.
The cycle never rewards luck, only sobriety. Module manufacturers must convert profits into technical assets, and design companies must transform high gross margins into R&D barriers. Only those who can turn "granted" profits into "earned" profits during the window of opportunity qualify to discuss the next round.