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Chip supply again under heavy pressure


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When the supply problems of chips and electronic components were beginning to be resolved, new difficulties have recently resurfaced with great force, due to the repercussions of the new omicron variant and the conflict in Ukraine. The supply of semiconductors may return to normal if the feared recession causes demand to fall but, paradoxically, it may worsen in the medium term because the supply of sophisticated components to manufacture the chips is very insufficient. Some of the new chip factories being built, for example, are expected to run a year and a half behind schedule because key components are missing from production lines.


The supply and demand cycles for semiconductors have always been out of step in their more than half century of existence, with shortages or overproduction depending on the period, and with the consequent ups and downs in the prices of finished components. The pandemic brought the entire supply of chips and their logistics chain to a standstill, with automakers being the most affected when demand for cars was reactivated, because they did not have components with chips in stock, and they had to queue to receive their products. Companies with long-term orders and willing to pay any price, such as smartphone or server makers, came out on top.


Semiconductor manufacturers were far from idle last year. The world semiconductor market grew by 26.3% in 2021, going from billing 470,889 million dollars to 594,952 million, according to figures from the consulting firm Gartner, recently revised upwards. Much of this growth is due to rising chip prices due to shortages and more expensive, higher-margin chips being prioritized, but still far more semiconductors were made over the past year.

The global market for semiconductors grew 26% in 2021, reaching 595,000 million dollars; this year it is expected to grow another 9%

As seen in the table below, the vast majority of semiconductor manufacturers had impressive turnover growth in 2021, in some cases more than 50% compared to the previous year. Very notable are the increases of memory manufacturers, such as Samsung, SK Hynix or Micron, the companies that sell processors and chips manufactured by the Taiwanese TSMC, such as Qualcomm, MediaTek and NVidia, as well as Broadcom and AMD, which also commission the manufacture of your chips.

A special case in the table is Intel, which only manufactures processors for its own consumption (although it has decided that it will soon manufacture for third parties) and whose turnover stagnated last year. This has led Samsung to occupy the first place, thanks to the fact that it manufactures semiconductor memories and chips for its own consumption and for third parties of high value and cost. Gartner lists only manufacturers that sell under their brand; this keeps TSMC and others, such as GlobalFoundries, from being listed because they manufacture primarily for third parties.


Apple, one of TSMC’s big customers, also does not appear because its processor turnover was relatively small last year compared to the strong growth of the others, although it had appeared in the top ten on the list in other years. Another company that does not appear is HiSilicon, the designer and manufacturer of Huawei chips, its parent company, because its turnover fell 81%, from 8.2 billion dollars in 2020 to 1.5 billion last year, due to the US embargo. Manufacturers of chips for automotive or industrial equipment, such as Texas Instruments, Renesas, Infineon or NXP, also had high growth, although not as much as manufacturers of memory or processors for smartphones and servers.


This growth of 26.3% in the world turnover of semiconductors was due, on the one hand, to the increase in demand and, on the other, to the higher average price of chips. For this 2022, it is estimated that the world market will grow 9%, reaching another record figure and that it will pulverize again in the coming years. The forecast is to touch the 700,000 million dollars in 2025 and exceed a trillion dollars (with twelve zeros) in 2030. “2022 can only be a better year [for chips]”, said recently very proud Pat Gelsinger, CEO from Intel for a little over a year.

Investment in chip manufacturing equipment grew 44% in 2021

To meet this projected increased demand for chips, manufacturers are investing massively in new production lines and building new manufacturing plants (fabs in industry parlance). Last year, global sales of semiconductor production equipment rose 44%, from $71.2 billion in 2020 to $102.6 billion last year, according to specialist consultancy Semi.


By region, China is the one that acquired the most equipment to manufacture chips and the one that grew the most, closely followed by South Korea and Taiwan. The three Asian regions account for more than 80% of the investment in equipment to manufacture chips and with an average growth of more than 50% last year. Japan and North America follow, with less than a third of the investment of each of the three leading countries, and little growth. Europe invested 3,250 million in chip production equipment last year, 3% of the world total, and with a growth of 23%, higher than the 17% of the United States, as seen in the table below.

By types of semiconductor production equipment, the silicon wafer production segment grew 44%, while other direct chip production equipment increased 22%. The growth of equipment dedicated to chip assembly and encapsulation saw exceptional growth last year, according to Semi at 87%, and sales of chip verification equipment rose 30% in total.

Serious chip supply problems are not expected this year; what worries us are the delays in the construction of the new production plants due to the lack of components

Investment in specific equipment for the manufacture of chips (fabs) has also grown spectacularly in recent years: 55,000 million dollars in 2019, 65,000 million in 2020 and 90,000 million last year. For this 2022, Semi’s forecast is that 107,000 million dollars will be invested in fabs, with an increase of 18%, and that in 2023 they will also exceed 100,000 million, as seen in the graph below.

The $100 billion figure for semiconductor production equipment is a historic milestone, acknowledges Ajit Manocha, CEO of Semi, and is expected to stand for several years. Taiwan is the one who is expected to invest the most in fabs this year, 35,000 million dollars and an increase of 56%, followed by South Korea with 26,000 million and 9% increase, and China with 17,500 million that, despite the bulky of the figure, it is 30% lower than that of 2021, when it reached the maximum.


Europe, together with the Middle East (Israel), is expected to invest 9.6 billion dollars this year, a small figure compared to Asian countries, but which would represent a growth of 248% compared to 2021. In North America, Semi expects that The maximum investment will be reached in 2023, with 9,800 million dollars, less than a third of what each of the three leading Asian countries in chip production allocates. As these figures make abundantly clear, Asia’s absolute dominance in chip manufacturing is not a matter of chance, nor has it happened overnight, no matter how many wails US politicians insist on proclaiming (and in part of Europe).


Eighty-three percent of the $107 billion spent on chip production equipment will go to the 150 fabs and production lines that have been refurbished and built this year, up from 122 fabs last year. Half of this investment will be made by custom chip manufacturers (basically TSMC and Samsung) and 35% by memory manufacturers (Samsung, Kioxia/Western Digital, SK Hynix and Micron). In the world, Semi estimates, there are 1,426 chip factories and production lines, including 124 expected to start production next year.


The figures also published by Semi regarding the world market for materials used in the manufacture of semiconductors are equally interesting, because they corroborate the predominance of Asia. All regions are seeing near-average growth of 15.9% expected this year, from $55.5bn to $64.3bn, with Taiwan, China and South Korea leading the way, as seen in the chart below. .

All of them are similar figures, because whoever invests the most in production lines is also the one who consumes the most materials, be it in pure silicon ingots, cutting machines, lithographic insolation, encapsulation or essential gases, including Russian Xeon. For the twelfth year in a row, Semi stresses, Taiwan tops the list of largest consumer of chipmaking materials.

Delays in the construction of fabs, due to lack of components

From all these investment figures of the large semiconductor manufacturers, it is clear that the supply of chips will grow significantly in the coming years worldwide. If, as feared, there is a slowdown in the demand for electronic products in the coming months, the supply of semiconductors will be sufficient to supply the demand, without the tensions in the supply chain and the general price increase of recent years. two years.


What worries semiconductor manufacturers and manufacturers of electronic products, be they smartphones, computers, telecommunications equipment, televisions, household appliances or cars, which are incorporating more and more chips, is not so much the availability of semiconductors in the coming months but in the next two to five years. The demand for chips of all kinds, but especially the most sophisticated ones, is expected to increase sharply from next year and it is feared that the supply will be insufficient in some critical components, no matter how much this supply increases. All this, of course, on the risky assumption that the new omicron variant does not cause great damage.


The main cause of this concern is the shortage of critical components that manufacturers of semiconductor production lines have and of all the ancillary machinery to produce it, which is just as sophisticated. These manufacturers, such as ASML, Applied Materials, KLA or Lam Research, depend on multiple suppliers and the lack of some components paralyzes all production, as has happened in the last year and a half to car manufacturers around the world. .


As an inevitable consequence, deliveries from chip production lines to end customers, who are going to use them, are delayed. If it typically took three to four months before the pandemic, in 2019, for the delivery of some equipment, last year the waiting period was ten to twelve months and now it can easily exceed a year and a half. Some chip verification teams, such as those made by the United States-based company KLA, exceed twenty months and the delivery of some basic substrates for the final encapsulation of the chips can take up to thirty months, instead of of the usual year or year and a half, according to the Nikkei newspaper.


Naturally, if it is a piece of equipment at the end of the production line or a sophisticated material, part of the production can be paralyzed, but if there are delays in deliveries at all stages of construction of a new fab , as is now beginning to be usual because the manufacturers of finished equipment cannot cope, the delays are piling up one after another. If the construction of a chip factory starting from a plot of land is already a very slow process (three years is the minimum), when the different stages are dilated, it is easy to reach five years before seeing the process fully ready.


A fab must be thought of as a highly sophisticated factory complex. Apart from the chip production lines located inside pristine rooms, without the slightest hint of germ or speck of dust, tens of kilometers of pipes run underground that transport the gases and fluids necessary to dope and insolate the wafers. These fluids are powered by thousands of valves and pumps that, before the pandemic, were typically delivered in three months or less; now it can take a year or a year and a half before they reach their destination.

Fear of “unforeseen” delay in 2023 deliveries

The CEO of TSMC, C.C. Wei, was very concerned last week, announcing the brutal increase of 45% in profits and 35% in turnover in the first quarter of this year, due to the possible “unforeseen” delay of materials and machinery for the production of chips during 2023 and 2024. Since the beginning of this year, Wei said, the company has had unexpected problems with deliveries of some supplies.


“[The company’s] chip production expansion through this year 2022 is smooth and we are working on planning for 2023 and beyond,” Wei said, but clearly hinted that he couldn’t be sure what was going to happen. to happen next year. Naturally, TSMC has a direct line to its main equipment and material suppliers, but it cannot ignore the serious supply problems of all kinds that affect semiconductor manufacturers.


A few days before the presentation of quarterly results, the president of TSMC, Mark Liu, confirmed that the semiconductor industry was feeling the effects of the increase in the price of materials and delays in deliveries, which add to geopolitical uncertainties. and inflation in the global economy. However, TSMC believes that it can achieve and even exceed its forecast of increasing annual results by 25% or 29%, Wei said, despite these uncertainties.


On the demand side, Wei said that his company is beginning to see a certain slowdown in the sale of smartphones, computers and tablets, although other products, such as high-performance servers or sophisticated automotive components, are in high demand. . Analysts generally believe that TSMC is strong enough to weather the turmoil ahead in the coming months, although it is not clear that others can say the same and the market is highly interdependent. The difficulties that Apple is having in the supply of some key components, despite its highly refined logistics, make this clear.


With regard to China, the figures presented confirm that the country is beginning to be prepared to be more self-sufficient in the production of semiconductors, especially the less sophisticated ones, which represent the bulk of the volume of world production but not of the turnover. , due to its low cost. The problem that arises for a year or two is in the most sophisticated chips, especially if the completion times of the different chip manufacturing plants that are being built are extended further.