Chip inflation is spreading, and Morgan Stanley predicts that "backend packaging and testing plants" will raise prices in 2026, for the first time since the pandemic.

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Author: Xu Chao

Source: Hard AI

Morgan Stanley says the wave of semiconductor inflation that began with foundries and memory is now spreading downstream. OSAT (Outsourced Semiconductor Assembly and Test) providers are preparing for the first price-increase cycle since the Covid-19 pandemic.

Morgan Stanley warns that strong demand for AI semiconductors is severely squeezing packaging and testing capacity, forcing backend firms to gain stronger bargaining power. Leading companies in Taiwan, ASE and KYEC, will lead this price hike.

Analysts expect that, affected by three major factors, the price of advanced packaging will rise by 5-10% in 2026, the first upward price cycle since the chip shortage during the pandemic:

1) Strong AI demand: TSMC’s CoWoS capacity is overflowing, rapidly filling ASE’s CoWoS capacity and KYEC’s testing capacity.

2) Capacity constraints: ASE and KYEC need to reject lower margin products, or shift capacity from wire-bonding of non-AI semiconductors to flip chip packaging for AI semiconductors.

3) Material cost inflation (gold, copper, BT substrates).

Capacity Squeeze Driven by AI

Morgan Stanley’s analysis believes that tight capacity is the core driving force behind this round of price increases. As TSMC’s CoWoS capacity is unable to meet demand, a large number of its orders are spilling over to companies like ASE.

Analysts say, ASE’s capacity utilization rate (UTR) for Q3 2025 has already reached 90%, which essentially constitutes a shortage and provides strong bargaining power for 2026 price negotiations. To meet AI-related demand, ASE is even shifting some of its wire-bonding capacity to the more profitable flip chip packaging.

Based on this optimistic outlook, Morgan Stanley has raised its earnings forecasts and target prices for related companies, increasing the target price for ASE and KYEC to NT$228 and NT$218, respectively, and reaffirming its "Overweight" rating.

However, the report also points out that this optimism is not "shared by all"; facing intense competition from domestic mainland Chinese peers and lower capacity utilization rates, Morgan Stanley maintains an "Underweight" rating on JCET.

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