On Semiconductor is starating to ramp production from its 300mm fab in East Fishkill as it bounces back from the Covid-19 pandemic with higher prices as lead times increase.
“We delivered record results in Q2 driven by strong execution and broad-based strength and demand. We posted record revenue of $1.67 billion, an increase of 38 percent year-over-year and 13 percent quarter-over-quarter,” said Hassane El-Khoury, CEO of On Semiconductor.
The company continues to reduce its product range and increase prices and has been selling off fabs in Japan and Belgium to focus on 300mm production in the US.
“The demand environment continues to be robust across all end markets. For the second quarter, we posted record revenue for the automotive and industrial end markets,” said El-Khoury. “The sustainable improvements in our gross margin will continue as we rationalize our current portfolio and reallocate R&D investments to high growth and margin accretive new product development. To capture the full value of our products, we continue to evaluate our portfolio to eliminate any price to value discrepancies and focus our manufacturing on our strategic products.”
“We have been looking at our pricing from a strategic perspective, what products and what pricing they need to be in the market to extract the value that we provide for our customers. Cost is a big factor, not just product costs, but supply chain costs, upstream and downstream supply chain costs. Some of the increases that we’ve seen we pass those on to customers,” he added.
The shortages will continue through 2022, he says, and is encouraging customers to move to long term supply agreements to fund its fab capacity expansion. Lead time have gone from 30 weeks last quarter up to 42 weeks.
“We expect that the demand will continue to outpace supply through the first half of next year," he said. "We are working collaboratively with our customers to ensure the uninterrupted supply of our products in the future, having entered into long-term supply agreements with many of them already and actively engaging in discussions with several others.
“Long-term supply agreements or LTSAs are a win-win for both customers and us by guaranteeing supply to the customer, and at the same time, providing better visibility and allowing us to better plan our capital allocation towards capacity expansion with a committed long-term demand outlook,” he said.
He is also looking to avoid the double ordering that inflates demand and leads to over-capacity in the fabs.
“We have been reducing and managing inventory very closely,” he said. “That keeps the inventory on our balance sheet, but allows us to serve strategic customers as we see the demand from the end customer without really accounting for any, call it buffer stocking that you may or may not see in the distribution channel. That's how we're managing, call it tactical. But that's what we need to do right now to make sure that we're not going to suffer from double ordering. So that gives me the confidence given the numbers of inventory that has been reducing and building up on our balance sheet that we are literally tackling end demand one-to-one basis with our direct customers."
He will detail the strategy and capacity plans next week.
“We're not adding capacity for the sake of adding capacity. We are first shifting from a lot of what we call the legacy portfolio and to the strategic growth and adding capacity there,” he said. “300mm is a strategic asset. We have been working with Globalfoundries on the transition [to the East Fishkill]. We have not taken ownership of that fab yet. However, we're working very closely on starting to move volume into that fab.
“We are running revenue and running volume today at East Fishkill. It's a shared fab today with us and Globalfoundries, we have an allocation out of the fab and Globalfoundries has their capacity part of our original agreement. We are already shipping qualified products to end customers that are generating revenue out of that fab. That revenue will keep increasing through '22."
“So when we take ownership, we hit the ground running. I review this regularly as far as how many products have we qualified in the 300mm fab, but more importantly, the customers that have qualified that fab for us to be able to ramp with them over '22 and into '23. So that's all on track. I'm happy with the progress, so that asset is going to be favourable for us in the long run, both from a capacity but also from a cost structure.”
“Obviously we will be talking about utilization once we take ownership of that fab in '23 and through '24. But right now it's more of an allocation because the fab is still not owned by On.”
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