“I think this is the first time in my 41-year career in the semiconductor industry that people are waking up to the fact that the electronic systems industry just doesn’t exist without semiconductors. Those of us in this industry for any length of time always knew this, but the governments and general public are just now realizing this fact.” — Bill McLean, president of IC Insights, in Semiconductor Engineering

With so many unanticipated events in the last year, perhaps none is more surprising than the rise of the integrated circuit in the consciousness of regular folks beyond our own technology circles of influence. But of course, this much appreciated situation is the outcome of other less desirable events.

 

Panic Purchasing

A well-worn news story of the early pandemic was the panic-driven shortage of toilet paper on store shelves. It was either before the seriousness of Covid-19 was known (these were the days before the naming of the virus or its disease had been settled) or it was an opportunity for some potty-humor comic relief to the devastation underway in China, Italy and New York. The trigger of this panic was demand rather than supply, but the economic balance was rapidly and dramatically tipped. The bright side of this was that the concept of the supply chain entered the everyday vernacular to be shortly followed by a broad appreciation of the previously little known integrated circuit.

 

Public Education

The chip shortage is now mainstream news and something people on the street have actually heard of. Why? The automotive industry, of course. Everybody’s heard of cars. People looked to new cars since most opportunities for travel have become local creating unanticipated demand. Car makers have suffered the most from the chip shortages, or at least we have heard the most about them. The general public became acutely aware of the supply chain and the interconnection of vendors and delivery schedules when car makers announced that production would be slowed due to a shortage of integrated circuits. There is an even brighter side to the story as we see the microelectronics industry on the evening news and in the minds of the great unwashed masses who for the first time were made aware that chips were not only something you eat in your car but a part of the car itself. (I guess depending on how often your vehicle gets cleaned, some may have already known another version of this.) Governments from the big three auto producing countries — Germany, Japan, and the US — have played a major role in raising the profile of the chip shortage generally. With a supply issue for something so near to their hearts (and other anatomy), the understanding of the general public was broadened. They were now open to the realization that complex systems like smartphones, televisions, or automobiles depend on the assembly of myriad smaller components from many manufacturers in a global system.

 

A Perfect Storm

A pause in orders and the rapid snapback in demand for at-home technologies of all sorts got that big snowball started down the mountain. February snow and ice in Texas compounded the problem shutting down several big semiconductor foundries. Infineon, NXP, and Samsung all lost several weeks of production from the initial power outages followed by restart procedures. The order of the expression is usually reversed, but the fire was next. The blaze at the Renesas Naka fab in Japan will have a lasting impact on chip supplies, hitting the automotive sector the hardest. Nikkei Asia provided a detailed analysis of the leadtimes. The Nikkei analysis indicates five times longer leadtimes for many components critical to system electronics companies. Power management and microcontrollers are two of the longest supply time extensions with sourcing now expected to take up to one full year. The largest wafer consumers like Apple and Qualcomm will use their leverage to keep impacts to a minimum. Just a few crumbs are left after the big dogs are done. Governments have pushed TSMC to channel more wafer production to the automotive equipment suppliers. There just isn’t anything left beyond a few of the largest wafer consumers. Small and medium entities are in a dicey situation. For system integration companies, procurement is becoming a bloodsport. As the biggest chip companies largely monopolize the wafer output, so the largest system companies like Apple and Samsung suck up the packaged chips. Smaller players are left out in the cold and many will simply not survive this shortage.

 

Cash Flow

They say money can’t buy happiness, but it will build more fabs. The Biden administration is pushing for $37 billion to expand production capacity. It’s a perfect time for a little gravy as US automakers’ pain is quickly recognized by legislators from car and truck plant jurisdictions. Centralized semiconductor production in Taiwan creates concern. To complete the trifecta, there are lots of votes to be tallied for politicians looking to be the face of re-shoring manufacturing to the US. Even before the political photo ops (and well before any funds are deployed), big companies have already committed big bucks to new wafer fabs and expansions. Intel announced $20 billion for two new plants in Arizona. TSMC raised its 2021 capital budget to $30 billion — almost double the 2020 plan. Samsung appears ready to invest another $17 billion in a new Texas fab. The supply chain shock is now reaching back to the foundries with spending projections going through the roof. Samsung is already the largest semiconductor company by capital expenditure, but this is largely due to them being the leading memory manufacturer. Although memory expansion is also taking place to address demand, the investments listed above are just for advanced logic nodes used for systems-on-chip and various cutting-edge processors. Additional wafer capacity is on the way. But when? None of the newly announced investments will translate into new production for at least a few more years. Unless demand subsides, the chip shortage could extend through 2022. Alas, system manufacturers will not get any short term gratification. But survivors of the chip famine will be reaping benefits once the new production comes on line.

 

What goes up…

From the reports of 2020, fast forward to the present. Now CNN is reporting reduced buying. Considering the volume each roll of TP requires, most people have very limited storage space, and hoarders might put off buying for a while. Will toilet paper demand tank? And the semiconductor business? A chip demand correction seems inevitable? Will there be overcapacity? According to Nikkei Asia, TSMC Chairman Mark Liu suggested that clients are double booking to firm up inventories. Besides magnifying the difficulties for smaller players, the correction from overbooking will likely be more dramatic than a simple overcapacity issue. Wafers and chips require less space than toilet paper, so it could be easier to stock up now for those who can. How rapidly that demand subsides will be watched closely. Given our recent history, pessimism might be the natural state for many of us. Still, the timing of extra wafer capacity might not warrant a lot of optimism.