Why is the chip shortage getting worse?

June 07, 2021 // By Nick Flaherty
Why is the chip shortage getting worse?
The chip shortage is getting worse, say manufacturers. Nick Flaherty looks at the reasons behind the worsening supply.

Contract manufacturer Flex is the latest company to highlight the length of the chip shortage around the world. It expects the shortages to continue well into 2022 and even into 2023, which is consistent with recent statements from Pat Gelsinger, CEO of Intel, Lars Reger, CTO of automotive chip supplier NXP and Broadcom CEO Hock Tan.

Lynn Torrel, chief procurement and supply chain officer at Flex in Singapore says chip makers are pushing back forecasts to the end 2022 and into 2023, and the chip shortages are on the agenda at the G7 summit of industrial nations in Cornwall later this week as a key global issue. Lead times for all kinds of silicon devices have been getting longer, and the fire at the Renesas Electronics fab in Japan is taking longer to repair than expected. 

Why are the shortages continuing? Automotive customers slashed their orders when car production stopped in March last year during the pandemic, but a year has gone by. Stoppages at the Samsung and NXP fabs in Texas also caused a shortage, but these are both now back in full production.

Much has been made about the complexity of making chip, with the fab cycle around 12 weeks, with test and packaging adding four to six weeks on top. But orders were placed in Q3 of 2020, so supply should be picking up. The world’s largest chip making foundry TSMC is even reallocating capacity to automotive customers to address the chip shortage.

“The automotive market had been soft since 2018, and at the start of 2020 Covid-19 further impacted the automotive sector,” said CC Wei, CEO of TSMC, which has become the focus for the shortages.

“The automotive supply chain was affected throughout the year, and our customers continued to reduce their demand throughout the third quarter of 2020,” said Wei. “We began to see sudden recovery in the fourth quarter of 2020, but the automotive supply chain is long and complex with its own inventory management practices. From chip production to car production, it takes at least six months, with several tiers of suppliers in between,” he said.

“To support the global automotive industry, TSMC has  taken unprecedented actions, including the reallocation of capacity from customers from other industries who are experiencing stressfully high demand due to the acceleration of digital transformation,” said a spokesperson at TSMC. “With a fixed short-term capacity, TSMC managed to increase 2021 output for MCUs, one of the key components in automotive semiconductor products, by 60 percent over the 2020 level, representing a 30 percent increase over the 2019 pre-pandemic level in this critical product category. TSMC will continue to engage with the automotive supply chain to work through this current shortage.”

The problem is more structural for both the car industry and the chip makers, says Malcolm Penn of analysts Future Horizon who has followed the semiconductor industry for thirty years.

“It takes a year to put capacity in place,” said Penn. “Capacity was on a knife edge before the pandemic and took the pressure off for a month but bounced back with a vengeance. Its just a general shortage that’s been building up for two or three years. The shortage is nothing new, it happens frequently as people don’t invest in capacity and it takes time to build the capacity.”

Wei at TSMC last week was highlighting the company’s plans for $100bn investment over the next three years to reassure customers, but this is just the normal investment required.

“At the end of the day the chip industry needs to spend $60bn a year on new capacity, that’s $180bn in three years, and TSMC has 65 percent of the market. There’s nothing magical about it,” said Penn.

The car makers are also competing with enterprise, consumer and industrial customers where demand has increased. 

“What we do see in broadband is service providers, the telcos in particular, are for sure upgrading. And here, this is a longer cycle of upgrade, and we see them upgrade. And we see the backlog associated with it through 2022,” said Hock Tan, CEO of fabless enerprise chip supplier Broadcom.

“The challenges we have in the supply chain is a constant side challenges is to ensure that we get components, whether it's wafers, substrates, getting our products assembled, tested, and any other small components on a timely basis to make sure that we can keep this thing running,” he said. “We run pretty close to just in time through our entire supply chain [and] we have stretched our lead time so far. But we are comfortable at the lead times we are on. and our customers are comfortable seeing our lead time now. But what we have found rather remarkable over the last quarter is that even if our lead times remain stable, consistent, the volume of bookings we receive every week continues to grow,” he said.

Broadcom is another chip maker with long term strategic deals.

“This is something we have been thoughtfully carefully putting in place with our core strategic customers. We just don't go do it as if it's commoditized. We're very thoughtful about doing it. And we do it in very specific areas where we know for sure that the technology is fairly, fairly difficult complex to manage, and which requires a substantial amount of R&D spending. And we've been doing it for a while now,” he said.

“We've got strategic customers in core businesses. So we just don't do it across the board. And what you pointed out is very, very correct. It's a mutual, then it’s a structure, it’s an agreement with mutual benefit. We have the confidence to invest in R&D and to make capacity investments. And in return, we offer the best leading-edge technology in specific areas in a timely manner to our critical customers. So yes, we have been doing it, and we will continue to thoughtfully do it in a very appropriate manner.”

 Part of the chip shortage problem is the supply chain model for car makers, along with the constant pressure on margins.  NXP has already moved to uncancellable contracts to limit the problems in the future.

“The car makers woke up in November but the capacity was sold out so they are at the back of the queue, “ said Penn. “They have a fixation with zero inventory and just in time doesn’t work for a product with a four month lead time, adding the queuing time and scheduling you are talking four to six months. They are replacing inventory and ordering more as lead times go up so the orders increase and there isn’t the capacity to do that.”

“They were asleep at the wheel and will have to rethink the just in time model,” he said.

Part of the shortage is addressing the backlog of orders, but another signficant part is assessing the real level of demand.

"We're shipping to what we believe with the customers consider is their true real demand," said Tan at Broadcom. "Having said that, we may be delivering just in time, but nonetheless, we do try to fulfill what customer truly want just in the timely basis.  if you look at it long enough, I think the dynamics underlying the fundamental dynamics underlying the semiconductor industry hasn't yet changed. At least I haven't seen it to change."

www.tsmc.com; www.futurehorizons.com

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Picture: 
TSMC Fab 2 in Taiwan

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