Author: Xu Chao
Source: Hard AI
Morgan Stanley stated that the wave of semiconductor inflation, which began with wafer foundry and memory, is spreading downstream. Chip backend packaging and testing (OSAT) manufacturers are preparing for the first price increase cycle since the COVID-19 pandemic.
Morgan Stanley warned that the strong demand for AI semiconductors is severely squeezing packaging and testing capacity, forcing backend manufacturers to have stronger bargaining power. Leading manufacturers in Taiwan, ASE and KYEC, will lead this price increase.
Analysts expect that due to three major factors, the price of advanced packaging will rise by 5-10% by 2026, marking the first price upcycle since the chip shortage caused by the COVID-19 pandemic:
<blockquote>
<ol>
<li>
Strong AI demand, TSMC's CoWoS capacity overflow is rapidly filling ASE's CoWoS capacity and KYEC's testing capacity.
</li>
<li>
Capacity constraints, ASE and KYEC need to reject lower-margin products or shift capacity from non-AI semiconductor wire-bonding to AI semiconductor flip chip.
</li>
<li>
Material cost inflation (gold, copper, BT substrates).
</li>
</ol>
</blockquote>
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/8a5d5756-cc4c-4bd5-8f4d-581a998c06df.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/8a5d5756-cc4c-4bd5-8f4d-581a998c06df.png"/>
<h2>Capacity Tightening Driven by AI</h2>
Morgan Stanley's analysis believes that capacity tightness is the core driving force behind this price increase. As TSMC's CoWoS capacity is in short supply, its orders are significantly overflowing to manufacturers like ASE.
Analysts stated that ASE's capacity utilization rate (UTR) for the third quarter of 2025 has reached 90%, which effectively constitutes a shortage and provides strong leverage for price negotiations in 2026. To meet AI-related demand, ASE is even shifting some wire-bonding capacity to higher-margin flip chip packaging.
Based on this optimistic outlook, Morgan Stanley has raised the earnings expectations and target prices for related companies, increasing the target prices for ASE and KYEC to NT$228 and NT$218, respectively, while reiterating an &#34;overweight&#34; rating.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b8167473-bc1d-415c-9eec-4ea78d80a6d7.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b8167473-bc1d-415c-9eec-4ea78d80a6d7.png"/>
However, the report also pointed out that this optimistic sentiment is not &#34;shared equally,&#34; as Morgan Stanley maintains a &#34;reduce&#34; rating on JCET due to fierce competition from domestic peers in mainland China and lower capacity utilization rates

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Morgan Stanley warned that the strong demand for AI semiconductors is severely squeezing packaging and testing capacity, forcing backend manufacturers to have stronger bargaining power. Influenced by three major factors, the price of advanced packaging is expected to rise by 5-10% in 2026, marking the first price upcycle since the chip shortage during the COVID-19 pandemic. Leading manufacturers in Taiwan, ASE and KYEC, will spearhead this price increase

- Morgan Stanley reports that the semiconductor inflation wave, starting from wafer foundry and storage, is spreading downstream, with OSAT vendors preparing for the first price increase cycle since the COVID-19 pandemic.  
- Strong demand for AI semiconductors is severely straining packaging and testing capacity, leading to increased bargaining power for backend manufacturers, particularly ASE and KYEC in Taiwan, with advanced packaging prices expected to rise by 5-10% by 2026.  
- Despite the optimistic outlook for ASE and KYEC, Morgan Stanley maintains a "reduce" rating for JCET due to intense competition and lower capacity utilization in mainland China.

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JCET

Taiwan Semiconductor

Direxion Semicon Bull 3X

The chip inflation wave is spreading, and Morgan Stanley expects that "backend testing and packaging factories" will raise prices in 2026, marking the first increase since the pandemic