The current shortage of semiconductors is the result of the strong increase in demand in recent months, in turn a consequence of the stoppage of supply and demand in the second quarter of 2020 due to the pandemic and the veto imposed by the United States on the Exports of chips to China, and especially to Huawei, which caused that since mid-2019 all the available stock of chips was hoarded to face the embargo. The result is that previously unplanned orders, such as those in the auto industry, cannot now be filled. If Europe does not act quickly, it will not only be its automobile industry that lacks semiconductors but also its telecommunications equipment and many other manufacturing industries that depend on chips and a well-oiled global logistics chain.
The global semiconductor market, which remained between 290,000 and 340,000 million dollars during the first half of the last decade, registered a remarkable annual growth between the end of 2016 and the end of 2018, reaching 468,000 million dollars in 2018 Then, in 2019, it dropped a sharp 12% to $ 412 billion, largely due to the fall in the price of memories, to recover substantially in 2020, with an increase of 6.5% and a total turnover of $ 439 billion, according to the latest estimate from SIA, the global semiconductor industry association.
The automotive industry will have to rethink its production model, but the telecommunications equipment industry is also very exposed to the ups and downs of chips, because it is not self-sufficient
The behavior of the world semiconductor market was extremely erratic during 2020. In the first quarter it grew slightly, to stop sharply in the second due to the stoppage of factories due to the pandemic. Then, in the second half of the year, it recovered an unusual dynamism, to the point that in the autumn estimate of the World Semiconductor Trade Statistics (WSTS), the most reliable source, it contemplated a growth of 5.1% for 2020, which it has finally been pulverized to 6.5%. This means that in the last quarter of 2020, 30,000 million more were billed than expected for the same period in autumn. For 2021, the WSTS contemplated a very high growth, of 8.4% and 469,403 million dollars of turnover, which was almost achieved in 2020.
EVOLUTION OF THE WORLD SEMICONDUCTOR MARKET
Source: WSTS (November 2019). Figures in billions of dollars. The figure for the year marks January, as indicated at the bottom of the graph.
WORLD SEMICONDUCTOR MARKET IN 2019 AND ESTIMATES FOR 2020 AND 2021
Source: WSTS (Fall 2020). Figures in billions of dollars.
By this 2021, evidently, the estimates of the WSTS have been totally obsolete. But the sharp mismatch between last fall’s forecasts and the final data for 2020 highlights the tremendous volatility of the global semiconductor market in recent months, and which explains, in part, the current shortage of semiconductors that the entire industry suffers from. uses them.
In reality, this cyclical nature of semiconductor sales is nothing new, as can be seen in the graph below for the last 25 years, especially with the sales slump in 2001 and 2009, followed by a more or less rise. less equally dizzying. But 2020 has been especially volatile and the typical seasonality of the sales of each year has not been followed either, as can be seen in the graph below. In the ESIA graph, it can be seen that semiconductor sales continue their upward rhythm throughout 2020 while at the European level they remain stagnant with a fall close to 10%.
Several factors explain this strong uniqueness of the global semiconductor market throughout 2020. First, the pandemic, which paralyzed part of the semiconductor factories for several weeks now a year ago and the entire chain of chip assembly and verification, as well as logistics, over several months. But, although production was paralyzed, orders continued to be placed, thanks to the stocks accumulated in recent months, until warehouses around the world were empty.
Another key factor, and one that explains the strong increase not foreseen as of mid-2019, is the veto imposed by Donald Trump and vigorously defended by his Secretary of State, Michael Pompeo, on the exports of chips to Chinese companies, and especially to Huawei. The silent response of the Chinese company was to buy all the semiconductors it had at its disposal. When, in spring 2020, the US Administration issued an order that TSMC could not sell any more chips to Huawei as of August 15, 2020, the furor over buying all the chips available in the market reached its zenith.
Smartphones and consoles compound the chip shortage
To make matters worse, at the end of last spring Apple had already designed the iPhone 12 and placed a large order with TSMC, as did Qualcomm for the same customer. Sony and Microsoft also put pressure on TSMC a few weeks later on TSMC to supply them with the processors for their consoles that were to be sold at Christmas. And for the storm to be perfect, the pandemic prompted an upselling of computers, servers and graphics cards to put in equipment from AMD and NVidia, which also run on chips from TSMC. In computers, however, who made the August, literally, was Intel, with its production of processors sold for several months.
In the meantime, it turned out that the demand for cars, stopped short by the cessation of activity of the factories due to the pandemic, began to recover after the summer. And demand increased for electric cars, which consume ten times more chips than combustion cars, especially utility cars, which are the best sellers. Automakers are used to working out of stocks, placing orders for delivery within a few days. In addition, they tend to buy from automotive component manufacturers, who manufacture their own chips but the most sophisticated ones also acquire them from the only two most sophisticated companies, mainly Samsung and TSMC.
Microcontrollers at a dollar a unit
The automotive chip industry is very peculiar, because it is generally very low-priced microcontrollers, typically one dollar, and which also does not use cutting-edge technology of a few nanometers but tens of nanometers for their manufacture, because the components work at high voltages and currents and the transistors have to be relatively large. They traditionally include a highly sophisticated chip within a vast array of less sophisticated ICs and chips.
The automotive microcontroller industry is run by a group of Japanese and European companies not well known to the general public. They are the Japanese Renesas, which accounts for 30% of the market, the Dutch NXP with 25%, the German Infineon, which bought Cypress last April with 22%, and the American Texas Instruments, the Taiwanese Microchip or the Swiss , formerly Franco-Italian, STMicroelectronics, with between 6 and 8% of this market, as seen in the following graph.
Source: HIS Markit. Graphic taken from The Wall Street Journal, February 10, 2021
Car manufacturers, however, do not buy the components from these chipmakers but from other companies, such as the German Robert Bosch or Continental or the French Valeo, among others, which also manufacture their own chips but include those of the aforementioned companies. . Car manufacturers deal mostly with the latter, so their market vision is very narrow and they have little knowledge of the reality of the semiconductor market.
Accustomed as car manufacturers are to working “just in time”, without stocks, what they did when the pandemic came was to stop placing orders. The following graph shows how, between March, April and May, orders for integrated circuits from car manufacturers fell sharply to 30%. When the demand for cars grew after the summer, car manufacturers again placed orders and were surprised that other industries had taken over all of the world’s semiconductor production and there was no idea when these orders could be supplied to Cars.
Although conspiracy theories are the order of the day, especially in the United States, it is not that TSMC or other sophisticated chipmakers do not want to sell to automakers. It is simply a matter of economics and pure profitability of the orders. As CCWei, TSMC CEO said in January in its fourth quarter results presentation, car chips account for 3% of its turnover, compared to 51% for smartphones (read Qualcomm, Apple and MediaTek) or 31 % of high performance chips (read NVidia and AMD).
To top it all, TSMC makes about 70% of the most sophisticated car microcontrollers, which cost about a dollar. Unless TSMC feels very pressured, as Angela Merkel and Emmanuel Macron have made it known on behalf of their automotive industries, but also representatives of Joe Biden for the benefit of General Motors, Ford and Fiat Chrysler Jeep (now Stellantis) the Taiwanese company will go for the most lucrative chip orders, several tens and even several hundred or thousands of dollars. As Stephen Sangui, CEO of Microchip, a maker of automotive components, says, “One dollar component can keep a $ 40,000 car from running out.” In fact, General Motors is delivering cars that are missing some component.
Automakers buy components from large manufacturers, which include very sophisticated but very low-priced microcontrollers that are uninteresting to companies like TSMC
And as if there were not enough evils for car manufacturers, two weekends ago there was an earthquake north of Tokyo that paralyzed the most important factory of automotive components owned by the Japanese Renesas and had to be closed temporarily. And last Thursday, a major Samsung chip factory and another one of NXP located around Austin, Texas, had to close due to lack of power. Getting production back to normal in a chip factory isn’t as simple a process as flipping a switch, even if power is back on. It will be several days or even weeks before it returns to normal, to the despair of factories waiting for their component orders.
It is clear that the automotive industry will have to rethink its production model, because the global logistics chain, especially when it comes to semiconductors, is so complex and depends on so many factors that there is no need for a catastrophe as happened with the pandemic to there are severe service interruptions. In any case, the exposed situation of fragility with respect to semiconductors is not exclusive to the automobile industry.
The telecommunications equipment industry, that of Nokia and Ericsson without going any further, is also highly exposed to the ups and downs of the chip industry, because these companies are not nearly self-sufficient. They design, and manufacture, many of the chips that are integrated into their equipment, but the vast majority are manufactured by the aforementioned great specialists, both highly sophisticated chips and not so much. In addition, its telecommunications equipment is also powered by companies that design chips but give them to third parties to manufacture, usually from Taiwan with factories in mainland China, such as the range recently introduced by Marvell.
To address what Thierry Breton, Commissioner for the European Commission for the Internal Market, considers an “excessive and unacceptable” dependence of Asia and the United States on European industry in the matter of semiconductors, the European Union is considering the creation in Europe of an advanced semiconductor manufacturing factory, in which several countries would participate, including Spain, similar to what is being done with electric batteries for automobiles. The project could count on the technological collaboration of Samsung and TSMC, the two most advanced companies in the world in the manufacture of chips. It is also the case that TSMC mainly uses the photolithographic chip manufacturing equipment from ASML, a Dutch company that is the world’s leading supplier and the most advanced of this type of machinery.
The project, in any case, would take time to complete because, as experts recall, building a chip factory and making it work is not a matter of months but of several years and, in addition, an investment of several billion dollars is required. . In the short term, to ensure an adequate supply of advanced chips and not depend on the vetoes that the United States has imposed on China and the restrictions on TSMC, the origin of part of the current problems, experts consider that the European Union would have to reach a comprehensive semiconductor agreement with Japan and make clear its position on the advanced chip and equipment trade with China because, after all, it is in China that much of the world’s chips are produced and assembled, verified and they ship to end customers. In terms of advanced automotive components, Europe and Japan are also the main producers.