The electronics industry endured unprecedented disruption due to the coronavirus pandemic but the problems don’t end there. The $400 billion semiconductor manufacturing industry that we all rely on to power our daily lives is affected by technology, politics, social, and environmental factors. To plan ahead, it’s important to understand the world stage.
Semiconductor Sovereignty
Geo-politics has always had a big impact on electronics supply chains so expect to hear more about ‘semiconductor sovereignty’ as China, Korea, Japan, the U.S., and Europe all seek to build independence in the biggest electronics landgrab the world has known.
Semiconductors and microelectronics are part of an interdependent manufacturing network centered on the Pacific Rim. Taiwan and South Korea dominate the chip-manufacturing industry with TM Lombard economist Rory Green estimating the two Asian nations account for 83% of global production of processor chips and 70% of memory chips. That has raised concern in the States, where one lobby group called the current crisis the “canary in the coal mine” for future supply-line shortages.
US told to stop playing catchup
Many American companies have been severely impacted by recent shortages, with GM saying it could lose as much as $2 billion in operating profit this year. U.S. companies consume around 20% of the world’s semiconductors so a group of 15 senators wrote to President Biden urging him to take action to “incentivise the domestic production of semiconductors in the future”. Warning that ignoring the issue could have grave consequences, Biden told reporters that the recent chip shortfall underscored the need for the U.S. to “stop playing catch up.” But according to the Centre for Strategic Studies, “Disentangling this integrated supply chain, created under more favorable political conditions, will be difficult for the United States, since many U.S. chip companies either have facilities in China or rely on Chinese companies.”
China 2025 Ambitions
Beijing has long wanted to make the country more self-sufficient in semiconductors in any case and China is publically driving towards a goal to domestically produce 70% of their IC needs by 2025. It may be falling dramatically short but they continue to invest in semiconductor manufacturing equipment, which is manifest in increased production. According to reports, China’s spending on wafer fab equipment has doubled in the past five years and, consequently, the value of semiconductors manufactured in China will also (nearly) double over the next four years.
China has also captured the top spot in 2020 among international patent applications for the second consecutive year, a United Nations ranking released Tuesday shows, demonstrating once again how Asia is leading the tech innovation in the new normal. China first topped the U.S. last year, filing about 1,000 more applications than the U.S., which lost its crown for the first time since 1978.
Taiwan – A flashpoint for the electronics industry
Taiwan is the world’s largest producer of semiconductors, accounting for 22% of global manufacturing capacity in a 2020 estimate from Boston Consulting Group. “Taiwan is the next big prize” for China and is “the most significant flashpoint” that could lead to a large-scale war, said McMaster, now a senior fellow at Stanford University’s Hoover Institution, in a hearing before the committee. Republican Sen. Tom Cotton noted that a move on Taiwan by Beijing would have implications for the great power competition in advanced technologies. “If China were able to invade and annex Taiwan, it would also put in Chinese hands the world’s leading producer of semiconductor chips as well,” said Cotton.
Demand for chips increasing 20% each year
The semiconductor market is worth $400 billion and according to Bloomberg is poised to grow by USD 90.80 billion during 2020-2024 progressing at a compound annual growth rate of over 4%. Chip demand remains very strong with foundries continuing to post strong financial performances in 1Q21, with a 20% YoY growth in the combined revenues of the top 10 foundries, while TMC, Samsung, and UMC rank as the top three in terms of market share.
TSMC announced that its capital expenditure in 2021 will reach 25 billion to 28 billion US dollars, of which 80% will be used for new plants in the United States and advanced processes below 7 nanometers. Recently, TSMC and Samsung, the leading chip producers, have spent billions getting a new highly complex 5-nanometre chip-manufacturing process up to speed to power the latest cutting-edge products.
Electronics growth areas
The emerging 5G, HPC, AI and automotive applications will be driving the global semiconductor market growth in 2021 and over the next several years, according to Clark Tseng, director of Industry Research and Statistics at SEMI.
Foundries are fully loaded so they have to invest in production
In response to increased client demand for 5G chips, CIS, driver ICs, and HPC chips, Samsung will continue to raise its semiconductor CAPEX this year, which is divided between its memory and foundry businesses and represents Samsung’s desire to catch up to TSMC. With regards to process technologies, the Korean company’s capacity utilization rates for the 5nm and 7nm nodes have been relatively high in 1Q21, during which Samsung is expected to increase its revenue by 11% YoY.
In addition to chip demand from the automotive sector, UMC has been keeping up with manufacturing driver ICs, PMICs, RF front-end, and IoT products. The company’s capacity thus remains fully loaded in 1Q21, and UMC is expected to undergo a 14% YoY increase in revenue. GlobalFoundries is similarly experiencing high capacity utilization rates due to the increase in automotive chip demand, as well as the military chips that it has been manufacturing for the U.S. Department of Defense. GlobalFoundries’ revenue is expected to increase by 8% YoY in 1Q21.
Lead times will continue to lengthen
While the second wave of the Covid-19 pandemic is still in full swing and transportation hurdles make it difficult to get high-tech goods into Europe in time, the demand of customers – particularly in the automotive sector – is growing strongly, according to market analysts DMASS, which represents 85 percent of chip makers and distributors in Europe. Longer lead times and price increases from manufacturers will likely dominate the first half of 2021. It remains to be seen if the extremely high bookings level is sustainable beyond summer.
Environmental disruptions and natural resources
Weather patterns are continuing to disrupt the industry. Recent heavy storms shut down chip plants in Austin, Texas, including wafer fabs for NXP, Infineon and Samsung, as power was diverted to residents and critical services. This impacted on the work-in-progress in the wafer fab which was acquired with Freescale in 2015 and makes automotive microcontrollers.
Last month an earthquake measuring 7.3 on the Richter scale occurred in the northeastern region of Japan, which affected the production of manufacturers such as Murata, Renesas, and Shin-Etsu. Among them, Murata’s factories in Fukushima and Miyagi were forced to suspend operations; Renesas estimated that it would take a week to resume normal production.
In addition to this, a shortage for certain raw materials like silicon wafers and ABF substrates placed a further squeeze on semiconductor production capacity. ABF shortfalls are likely to widen further into 2021 as demand for 5G infrastructure, networking and high-end GPU and CPU applications has outgrown capacity expansions by makers of the substrates, according to industry sources.
Pandemic exposes cracks
The long-term effects of COVID-19’s impact on the semiconductor sector and demand in various end-markets were unforeseeable. But the flaws of a system dependent on a few regionally centralized part fabricators have been clear for years now. SourceToday says the current supply scarcity is the product of unmanaged systemic deficiencies that have developed over time.
Current semiconductor shortages
Late last year, Daimler, Fiat Chrysler, Nissan, General Motors, Honda, Toyota, Mazda, Subaru and Volkswagen cut production or temporarily closed factories because of the component shortage. Most recently, Ford made headlines for reducing assembly work on its best-selling F-150 pickup trucks at two of its plants. Bloomberg estimated the vehicle chip supply crunch would cost the sector $61 billion in lost revenue. However, industry insiders anticipate the impact on the global consumer electronics segment will be even worse. Recently, Acer announced the global supply of notebooks and other PCs will remain constrained all the way to the third quarter of this year as components continue to be in tight supply.
Indications show how the shortage is spilling over into other sectors. Professional buyers have to be more strategic in searching out new tools for quoting component pricing and availability. To avoid supply chain disruptions, contact Astute Electronics…
