The truth about the global chip shortage: who messed up semiconductors?

The core shortage anxiety of the auto industry does not seem to abate over time. Some insiders estimate that the core shortage will continue from the first half of 2021 to the second half of the year. Not only that, but the core shortage industry is spreading more and more. In January 2021, Honda, Volkswagen, Ford and other car companies announced that they would reduce production or shut down some factories due to insufficient chip supply. Subsequently, consumer electronics industries such as mobile phones and panels are also facing a shortage of cores. The downstream is affected. What is the global core shortage situation? Where is the problem? How to relieve worries? Affected by the insufficient supply of chips, according to the forecast of a third-party information service provider IHS Markit, in the first quarter of 2021, automobile production will be 672,000 less than initially expected. In the memory of a GM China executive, this round of global core shortage is unprecedented. The lack of cores of car companies is transmitted to chip foundries, and chip foundries around the world are operating at full capacity. In the nearly half a century that the semiconductor industry has been catching up with Moore's Law, cyclical capacity shortages have been a long-term situation in the industry. In the past, it was possible to rely on measures such as the advance layout of foundries or counter-cyclical construction to reduce contradictions, but this time every link in this industry seems to be "miscalculated." The full production of the foundry is transferred to the upstream equipment manufacturer, and then transmitted from the equipment manufacturer to the upstream component manufacturer. The delivery period of some components has even been extended from the original 1-2 months to half a year. Insufficient supply from the upstream, which in turn is passed on to the downstream, exacerbates the shortage of goods in the consumer electronics industry. On February 4, at Qualcomm's (QCOM: NASDAQ) financial report for the first quarter of 2021, President Cristiano Amon said that the capacity shortage is comprehensive, and it is expected that the shortage of supply will return to normal in the second half of the year. On February 24, Xiaomi’s vice president Lu Weibing said in his personal Weibo, “This year the chip is too scarce, not a shortage, but a very scarce one.” Why is the semiconductor industry chain that has been running for half a century so vulnerable? How does the global core shortage occur and spread to all links? When can the shortage of core be alleviated? How does the car company's core shortage occur? Affected by the new crown epidemic that began to ferment globally in early 2020, automakers adjusted their sales forecasts last year and asked OEMs to reduce production. The foundry can't wait and die. A good way is to find other businesses. Foundries do have new opportunities. The epidemic has catalyzed the demand for home office work. All related information products are doing well, such as cloud computing, cameras, PCs, etc. These manufacturers have become new customers of foundries and have undertaken the excess production capacity of auto factories. But what everyone did not expect was that after the epidemic was brought under a certain degree of control, especially in the second half of last year, China's car sales rebounded. According to the statistics of the Passenger Car Market Information Joint Conference, the total car sales in the Chinese market in 2020 will be approximately 20,123,700, and China has become the world's largest car market. This change made car companies and foundries unexpected. In the 2020 global sales announced by Lexus, China has become the only region where sales are growing.

In the past, the conventional approach of chip foundries was to coordinate and manage customer needs. For example, priority is given to ensuring long-term customer production, and priority scheduling is based on the two-year production quantity statistics in 2018 and 2019. They will also make arrangements in advance through counter-cyclical construction to ensure that the newly built factories can catch up with the timing of tight production capacity.

The pressure that this change transmits to chip foundries is that the consumer electronics orders that have been placed obviously cannot be cancelled, and the production of automotive chips appears to be very urgent and necessary.

"Under the two contradictions, there is a delay in the response time of the chip foundry." The aforementioned equipment company practitioners told the Caijing reporter that the cycle from the establishment of the factory to the formation of production capacity is measured in years, and the mature process transformation can be as little as one year. The advanced technology takes more than two years. When the existing production capacity is squeezed by cloud computing and consumer electronics, it is almost impossible to cut off the signed orders and return to the production of automotive chips.

Is it possible to find vacant production lines for conversion? For automotive chips, random replacement of any production link will bring great technical and financial uncertainty.

The nature of the car chip itself also determines that it is difficult to convert it into production. Unlike consumer electronics, automotive chips are extremely resistant to external working environments, such as temperature, humidity, dust, life, and stability. The specifications and standards of automotive electronic components are called automotive-grade in the industry, and automotive-grade electronic components have high prices and high requirements. This increases the difficulty of manufacturing automotive chips.

Take the lifespan as an example. The lifespan of automotive-grade chips is at least 15 years, compared with 1 to 3 years for consumer electronics chips. In terms of temperature, automotive-grade chips need to withstand a temperature difference of about minus 40 degrees Celsius to a maximum of about 155 degrees Celsius. However, consumer electronics generally suffice from zero degrees Celsius to 40 degrees Celsius above zero.

Moreover, it takes a long time for automotive chips to develop and verify. For many automotive chips, the development time may exceed one year. If you want to start research and development to market, at least three years. There are also some car-regulated chips that can only be produced on production lines that have passed car-regulation certification.

Liu Weidong, the founder of Jiuhao Electronics, told the Caijing reporter that he has been "not eating well and sleeping well" for a long time. This is an integrated circuit entrepreneurial design company that focuses on the development of signal conditioning chips for sensors. The chip design company will hand over the order to the chip foundry to produce the chips, then supply it to the downstream component suppliers, and then hand it over to the automakers. Among the products of Jiuhao Electronics, there are several automotive sensor chips. There are customers with huge demand in the front, and the chip foundry is in full production in the back. Orders need to be queued. The only thing that can be done is to wait. Liu Weidong has no plans to switch production. One is because the conversion requires cost, and the other is that the particularity of the car chip makes it impossible to replace any production link at will. He needs to be responsible for the customer and ensure the quality of the product.

Earlier, Continental, the world's leading supplier of automotive ancillary products, stated in an official response to the Caijing reporter that although it has been carrying out various tasks around the clock, it still cannot meet customer needs, causing some customers to adjust their production plans or product portfolios. Continental's main products are tires, brake systems, body stability control systems, engine injection systems, tachometers, and other automotive and transportation industry components. Chip foundries are their upstream.

A GM China executive told Caijing reporter that the biggest feeling brought by the shortage is that sales targets may not be fulfilled. In order to ensure the smooth production of the most profitable models, they will produce low-selling models to the back row.

Tight production capacity is transmitted from downstream to upstream. Applied Materials (NASDAQ: AMAT), one of the world's largest semiconductor equipment suppliers, announced its first quarter 2021 financial report, showing that the quarter's revenue hit a new high, a year-on-year increase of 24%. Net profit was US$1.13 billion, a year-on-year increase of 27%.

Under the bright financial report, the pressure on equipment companies is not small. In the past six months, international logistics capacity has declined, container shipping prices have skyrocketed, and spare parts cannot be shipped. The aforementioned equipment company practitioners told Caijing reporter that the delivery period of some spare parts has been extended from the original 1-2 months to half a year. Even longer. This in turn exacerbated the shortage of goods.

It seems that downstream demand is still increasing, which can only be solved by adjusting the supply chain and waiting for the expansion of chip foundries. Many chip foundries, such as TSMC, Samsung, UMC, SMIC, etc., are expanding production to respond to strong demand.

Deeper reasons

In addition to the imbalance between supply and demand caused by the epidemic, the unprecedented global core shortage is the result of multiple factors.

Looking back at this time, news of large-scale core shortages by car companies frequently broke out in the second half of last year. In fact, the industry felt the tension in the earlier half of the year. According to the results of various surveys conducted by reporters from Caijing, chip design companies, car companies, consumer electronics industries, and upstream manufacturing and equipment companies have found that chip production capacity is intensified, and there will be signs in early 2020.

A senior practitioner from an equipment company told the Caijing reporter that in early 2020, when the epidemic was severe in the United States, they even had to recruit workers to assemble equipment to ensure production. These jobs were originally performed by outsourced factories. Workers do it.

When production capacity is tight, some downstream design manufacturers and application manufacturers even directly contact equipment manufacturers.

In November last year, the chip design company MediaTek (2454.TW) announced that it would spend 372 million yuan to purchase chip manufacturing equipment from Fanlin Semiconductor (LRCX: NASDAQ), Canon Co., Ltd., and Tokyo Weili Kechuang, and lease it to the foundry Liji Power (Taiwan Powerchip Semiconductor Manufacturing Co., Ltd.) used. This is a rare practice in the chip industry. Generally speaking, the chip design company hands the order to the foundry, and the foundry conducts chip manufacturing.

The deeper reason is that the 8-inch wafer fabs have been closed in recent years. Most of the chips used in automotive chips and IoT information equipment are manufactured using 8-inch wafers. For example, 5G radio frequency chips, PC terminals, fingerprint recognition chips, car control chips, sensor chips, etc., and these demands will continue to increase in the next few years.

However, the capacity of 8-inch wafers is far from keeping up with the growth rate of demand, and even 8-inch wafer fabs have been closed year by year. In mainland China, based on the technological advancement and profitability of chip projects, many projects are aimed at 12-inch production lines when they land, and some 8-inch production lines are converted to 12-inch production lines. According to the statistics of IC Insights, a third-party data agency, Samsung Electronics has a monthly production capacity of 3.06 million 8-inch wafers by the end of 2020, ranking first among the largest factories, followed by TSMC.

According to data from the International Semiconductor Industry Association, the number of global 8-inch wafer production lines reached 200 in 2007, and then began to decline, to 188 in 2016.

If 8-inch wafers are insufficient, why not switch to 12-inch wafers? This is because of economic benefits. The 8-inch wafer production line has low fixed cost and mature technology, so it is still the first choice for many information equipment.

Jiuhao Electronics' automotive sensor chips are foundry by TSMC and SMIC. In the first two years, despite the tight 8-inch wafer production capacity, they can still queue up after a while. By March 2020, the production capacity of the chip foundry will change. It’s very tight. Only products related to the fight against the epidemic can reach production capacity. By September 2020, it will be difficult for almost all products to be ranked.

Correspondingly, the equipment required for the 8-inch wafer production line is also facing shortages. The reporter of Caijing learned that the prices of second-hand equipment for the 8-inch production line are now rising. According to calculations by Surplus Global, a third-party data agency, there are currently about 700 second-hand 8-inch wafer manufacturing equipment for sale in the market, but the demand for 8-inch wafer manufacturing equipment is at least 1,000. The shortage of equipment limits the short-term expansion progress of related manufacturers. Practitioners from equipment companies told the Caijing reporter that they have also received a lot of demand for 8-inch production line equipment.

That being the case, when business comes, will 8-inch wafer fabs increase substantially in the future? Many people in the industry have told the Caijing reporter that they will, but the expansion is limited. "The core of the semiconductor industry is one word,'quantity.'" said the practitioners of the above-mentioned equipment companies. For equipment companies and foundries, unless the volume is large enough, the equipment companies can make money if the price increases. At this time, the equipment companies are willing to produce the equipment needed for the 8-inch production line.

In addition to the decrease in the number of 8-inch wafer fabs, the turbulent political environment is also the cause of tight supply and demand. Some large companies have increased their efforts to stock cores and their stocking volumes have increased significantly. This makes the chip demand market even more tight. Mobile phone manufacturers will increase their spending on chip purchases in 2020. According to data from a third-party market research organization Gartner, global chip purchases will reach US$449.8 billion in 2020, an increase of 7.3% over 2019. The top five vendors in terms of spending are Apple, Samsung Electronics, Huawei, Lenovo, and Dell Technologies. Huawei's chip procurement spending in 2020 has dropped by 23.5%.

Global chip procurement value company rankings in 2019 and 2020 Data source: Gartner

In addition to these non-long-term factors, the rapid development of the technology industry is also an important factor. In the past two years, China’s chip industry has doubled in strength, especially as the number of Chinese chip design companies has increased significantly, and more and more products requiring chips have been growing rapidly. This is also an important factor in the imbalance between supply and demand in the industry chain.

Increase prices, wait, and reshape the supply chain

After the production capacity is tight, the price increase seems logical.

A new round of price increases kicks off the semiconductor industry in 2021. At the beginning of the year, packaging and testing plants, chip foundries, and chip design companies announced price increases.

For small and medium-sized chip design companies, this is a forced move. In the case of tight production capacity, they do not have the ability to bargain with chip foundries, and can only ask the factory to arrange production.

Liu Weidong learned that large-scale chip design companies are also facing tight production capacity. However, large-scale design companies have the ability to transfer production to other chip foundries, such as manpower, financial resources, and recognition in other chip foundries.

The method he adopted is to communicate frankly with chip foundries, obtain their recognition and understanding, and wait patiently. If the foundry recognizes the sustainability and future competitiveness of a design company, even if the other party is a startup company, it will give it production capacity. This, in turn, is also a process of great waves for design companies.

The price increase seems to be a result. Reshaping the supply chain and ensuring the security of the supply chain are more long-term needs. "If there is no new crown epidemic, under the influence of the turbulent international political environment, the reshaping of the supply chain will also happen, but the epidemic has accelerated." A number of chip industry practitioners told a reporter from Caijing.

In order to ease the pressure on the supply chain, some companies have accelerated their global deployment. A senior person from a foreign-funded equipment company revealed to a reporter from Caijing that his company's expansion of production capacity in Asia has been greatly accelerated last year. On the one hand, considering the relative ease of the epidemic in Asia, on the other hand, it is close to the main chip foundry customers. In addition, they ensure the security of the supply chain and create a more flexible industrial chain through investment and mergers and acquisitions in the downstream.

In order to be able to keep up with demand during the development of the technology life cycle in time, equipment manufacturers need to judge possible technological trends and market changes in advance than their downstream companies, and make layouts based on this. This is for equipment manufacturers. It is a big challenge. Another challenge is that it is difficult to find a second and third alternative manufacturer in many key links. How to pan for gold in waves is a great test.

On December 7th last year, 17 European countries issued a joint statement, proposing to strengthen Europe's electronic and embedded system value chain from two aspects. The first is to strengthen the processor and semiconductor ecosystems, and the second is to expand the industrial influence throughout the supply chain to deal with key technological, security and social challenges.

On February 24 this year, U.S. President Biden also signed an executive order requiring federal agencies to conduct a 100-day review of the supply chain of four key products: semiconductor chips, high-capacity batteries for electric vehicles, rare earth minerals, and medicines. Production capacity, analysis pointed out that this move may be to get rid of dependence on overseas suppliers, especially Chinese suppliers.

In China, local supply chains will receive more and more attention, and import substitution will accelerate. Earlier, an investor told the Caijing reporter that when he talked to many companies, everyone would consider backing up in China or transferring orders to China.

When can this lack of cores end? The judgment of the industry is that there may be some relief in the second half of 2021.

In early March, China's largest chip manufacturing company SMIC (00981.HK/688981.SH) received approval from the US government to import mature process equipment. On March 3, SMIC issued an announcement stating that the company and the Dutch semiconductor equipment supplier ASML (ASML) signed a purchase order of up to about 1.2 billion U.S. dollars for the purchase of a deep ultraviolet lithography machine (DUV). According to the revised and restated bulk purchase agreement, the term is extended by one year to December 31, 2021. This is conducive to SMIC's expansion in mature manufacturing processes and can solve some of the problems of tight production capacity.

In addition, Zhang Rujing, the founder of SMIC, has made progress in the project of Qingdao Xinen. The main construction of the power plant, R&D, design, and office building of the 8-inch chip factory has been completed and will be put into production soon. When the limited newly-added 8-inch production line is put into operation, the tight production capacity can also be greatly eased.

Now, every company in this semiconductor industry chain is rethinking its ability to fight risks. "The superimposition of the two things of the new crown epidemic and geopolitics can be said to be the worst situation we can think of." Many practitioners told Caijing reporters that reshaping a more pragmatic supply chain will It is an important thing for a long time in the future.

Disclaimer: This article comes from the Tencent News client self-media, and does not represent the views and positions of Tencent.com.

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