Sourceability Insights: April 2023 Market Update

Excess inventory is rising but plans for future resiliency are quickly coming to fruition. South Korea, home to DRAM and NAND superstars Samsung Electronics and SK Hynix, has seen the worst excess stock build-up. Both original component manufacturers (OCMs) cut production in late 2022 but might see operating losses as South Korea posts another month of trade deficit.??

While excess concerns mount, hope for returning consumer demand aiding in the digestion of stockpiles is growing. New technology, ChatGPT, and 5G applications are quickly becoming popular. As a result, demand for components has led to a push for new foundries to handle orders.??

But delays are on the horizon for some OCMs and their product lines. The Wuxi Welnew factory fire in January will impact some product lines until May or June when operations resume. Some OCMs have transferred orders to other sites to be completed as others announce incoming delays for clients. Some of these OCMs, such as Vishay, are already dealing with the allocation of orders thanks to logistics challenges and raw material shortages.??

Despite the hurdles, the global chip market did show some promising steps in the right direction throughout March. Unfortunately, near the end of the month, the electronics industry lost a prominent and remarkable legend.?

Chip World Mourns the Loss of Gordon Moore

Intel co-founder and industry pioneer whose theory on computer chip development was used as a yardstick for progress, Gordon Moore, has passed away. He died peacefully in his home in Hawaii on Friday, March 24th, 2023. He was 94.??

Founder of Fairchild Semiconductor, Moore co-founded Intel in 1968 with Andrew Grove and Robert Noyce. Serving Intel as its chief executive officer from 1975 to 1987, Moore was prominent in contributing to the rise of the PC era and their most crucial component, the microprocessor. His theory, Moore’s Law, was coined by Craver Mead, an engineering professor at the California Institute of Technology based on Moore’s observation. A 1965 observation regarding the number of transistors determining a computer chip's speed, memory, and other capabilities doubles yearly.??

Later revised in 1975, Moore’s Law is still used within and beyond the semiconductor industry as a progress mark. The debate over whether the law still applies now that chips are becoming nanometers wide is ongoing. Intel’s prominence within the semiconductor industry can be attributed to Moore’s observation as it poured investments into improving manufacturing at a pace its rivals couldn’t surpass for years. The proverbial hardware heart of the personal computer industry and the growth of the internet, Gordon Moore is survived by his wife, Betty Irene Whitaker, along with his sons and four grandchildren.??

ChatGPT and 5G Applications Fueling Chip Recovery?

OpenAI’s ChatGPT has been taking the world by storm. This artificial intelligence chatbot, released in late November 2022, quickly grew to over 100 million users by January 2023. It is currently still reaching new highs in popularity. ChatGPT, a generative pre-trained transformer (GPT) chatbot, is part of the language models family and utilizes machine learning with natural language processing (NLP) to generate messages that mimic human conversation.??

Versatile in its numerous applications, ChatGPT can help create marketing messages and operate assembly robots on production lines. Its agile functionality has made it extremely popular in dozens of industries and remains in the number one spot despite new competition. ChatGPT is also integrated with a company-wide moderation API from OpenAI to prevent offensive prompts or inaccurate information.??

ChatGPT isn’t the only technology that’s been in the spotlight recently. 5G applications have been steadily gaining attention alongside AI, especially now that a relatively new chip provides faster and more efficient connections. Thanks to their thermal stability, high breakdown voltage, and high electron mobility, gallium nitride (GaN) chips quickly became the go-to for mobile chargers, data center power supplies, and 5G.??

GaN chips’ faster data transfer speeds, improved efficiency, and high-frequency reliability reduce the weight and space needed in 5G base stations equipped with GaN chips. With a less demanding process to create GaN chips than silicon or alternative silicon carbide (SiC) chips, OCMs have been broadening their portfolios to include GaN products.??

As a result of 5G and ChatGPT popularity, chip foundries and other facilities have recently seen growth where the slump has previously eaten away. The need for foundries has risen, with TSMC possessing a favorable edge in the processor race. Meanwhile, Infineon recently acquired GaN Systems at the beginning of March. The acquisition allows Infineon to provide a complete array of power solutions with silicon, SiC, and GaN components.??

The U.S. plans to expand GaN foundry systems to help support the rising use of GaN, which can be made with legacy node component equipment in traditional silicon chip manufacturing. TSMC, like ChatGPT, is in a great position as GaN Systems's foundry partner had been TSMC.??

Wuxi Welnew Factory Fire Delays Announced

Early January 2023, before the confetti from New Year celebrations had been entirely swept away, the semiconductor supply chain kicked off the new year with a big disruption. In China’s Wuxi province, the Welnew Microelectronics factory was caught in a severe blaze. Thankfully, no casualties were reported.??

Over the last several years, fires at critical chip manufacturing or affiliated facilities have rocked the semiconductor supply chain. In March 2021, Renesas suffered a massive fire at its Naka Factory in Japan. It took months to recover from the fire and resume operations. The fire greatly affected the automotive chip supply chain, which started feeling stress at the end of 2020. Renesas produces one-third of the globe’s automotive MCUs. With production halted the fire massively contributed to the automotive demand pile-up that continues to impact the supply chain today.?

In January 2022, almost a year after the Wuxi Welnew fire, ASML Holdings suffered damage from a fire at its Berlin factory. The impact was minimal, but it took several weeks for the factory to recover. As the leading manufacturer of lithography machines vital to advanced chip manufacturing, there was a great deal of worry about how it would affect the supply chain.??

The Wuxi Welnew fire has ceased production of MOSFETs, RF Small Signal, LED drivers, and other product lines. As a supplier for several more prominent manufacturers, including Toshiba, Vishay, Infineon, and OSRAM, announcements have been made addressing future product delays. These manufacturers have already suffered from rising raw materials and logistics costs on their resistor lines. The fire could inevitably lead to further price hikes.??

OSRAM and Vishay have already placed certain advanced power TOPLEDs on allocation. Both companies expect it to be resolved by May 2023. Lead times could increase over the coming months, but with low demand for some components still resulting in excess components, it would be minimal. That said, after a series of price hikes at the end of 2022 throughout Q1 2023 of 5% to 10%, any added costs resulting from the Welnew factory fire would be painful for OEMs.??

Infineon and Toshiba are the least affected, with Infineon transferring production orders to different factories in Shanghai and Malaysia. Toshiba does not expect delays or allocations on its product lines.???

South Korea Drowning in Excess Inventory

Excess inventory is still growing. Recovery is coming, but it remains only a twinkle on the horizon. Experts believe the chip surplus will continue to linger throughout 2023, with significant progress in digesting excess inventory arriving in late Q3 and Q4. While rising technologies keep advanced chip nodes from becoming excessive, some markets still face steep declines.??

For South Korea, home of memory chip giants Samsung Electronics and SK Hynix, excess is becoming a monumental problem. A report by DigiTimes stated that in February, for the 12th month in a row, South Korea posted a trade deficit. According to the article it was caused by, "poor outbound shipments of its main export products of DRAM and NAND flash chips, whose inventories have hit record-high levels.” Consumer downturn and the chip glut, could have South Korean suppliers witnessing their memory business “turn into an operating loss.” That’s a rare occurrence for chip-making giants that survived the 2008 DRAM crash.?

Even with the production cuts South Korean OCMs made last year, excess inventory has quickly exceeded those cuts. Global DRAM revenue was down by over 30% in Q4 2022, with NAND flash revenue continuing to slide in Q1 2023. Experts are tentative about the future, but many hold firm to the cyclical nature of DRAM’s boom and bust cycle. Three quarters of decline mark this cycle before recovery in the fourth quarter.??

There is no singular way that recovery is organized, as there might be two quarters of decline, one in the middle showing recovery, then a drop again before stabilization occurs. Over the last several decades, the DRAM market has stayed true to this cycle, even during the 2008 DRAM crash. The NAND market, while more fragmented, tends to follow, with recovery occurring a month after DRAM stabilizes.??

Samsung doesn’t believe the DRAM and NAND slump will last much longer. Rising technologies, including 5G networks, artificial intelligence, and autonomous vehicles, will help boost a coming uptick in demand for memory chips. This demand is expected to return in late Q3 and Q4 of 2023. Around the same time, excess inventory will make significant progress toward stabilization.??

As some OCMs recover faster than others, countries are working overtime to ensure domestic capabilities are built up when chip demand returns to full force. It’s one of the reasons Samsung is forging ahead with new fab construction plans for South Korea’s Gyeonggi Province. Samsung plans to invest $230 billion over 20 years to create a five-plant cluster where further NAND and DRAM components will be produced along with rechargeable vehicle batteries, electric vehicles (EVs), robotics, displays, and biotechnologies.???

U.S. and India Working on Chip Resiliency??

The U.S. and India have been working diligently within their countries to create a domestic semiconductor ecosystem capable of resiliency. Over the last few years, the decision to have a robust domestic supply chain has been pushed in importance thanks to the 2020-2022 chip shortage. The U.S., after having gone years without government incentive programs or subsidies to support the electronic component industry, passed the CHIPS and Science Act. The act allocated $52 billion in government funding to semiconductor OCMs for the construction of new plants and the research and development of semiconductors.??

On a global scale, dozens of countries are taking similar actions to boost domestic chip manufacturing capabilities. One of the most notable countries is India, whose government seeks to position it as the top chip-making destination in its geopolitical area. Recently, Apple suppliers have been moving to India en masse, with Foxconn leading the charge.??

In 2022, Foxconn joined mining conglomerate Vedanta Resources to sign a pact with India’s Gujarat for a $19.5 billion investment. Both companies will participate in building a semiconductor and display manufacturing fabrication plant in India’s western state. Then in early 2023, Foxconn signed a memorandum of understanding (MoU) with Telangana’s government for further electronics manufacturing. Another agreement and iPhone plant are in the works with India’s state of Karnataka.?

With Foxconn’s continued involvement in India, the U.S. and Indian governments have signed their own MoU to support a new initiative called the India-US Trade Dialogue. The agreement focuses on aligning export control regimes of both countries for critical chip technologies, strengthening collaboration. The U.S. Semiconductor Industry Association (SIA) and the Indian Electronics Semiconductor Association (IESA) will develop a private-sector task force.??

The MoU details have yet to be shared, but many assume it entails sharing production-grade technology between American companies and India. The U.S. is currently the hub for leading fabs and fabless companies. Secretary of Commerce Gina Raimondo believes this is a crucial step to help India achieve its aspirations of becoming a supply chain leader.??

The agreement comes after further sanctions were placed on China by the Netherlands, where leading lithography equipment manufacturer ASML Holding is based. With those actions, India is quickly becoming the go-to destination for OCMs as India has a sizeable technically skilled candidate pool combined with a large global economy.??

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