Global expansion may usher in a super cycle, beware of the "commoditization" of chips

This article is reproduced from 21st Century Business Herald

Author : Xia Xutian, Jiao Yifei, Shi Hui

Ju Long He noticed that the new car he had seen at the auto show in April had not been put into mass production. As the global vice president and president of China for the Semiconductor Industry Association (SEMI), he recently visited a factory and saw that the entire production line was empty. "The factory manager told me that the factory could not start production due to a lack of chips. "

There are quite a few automobile factories that have stopped production due to chip shortages. Zou Guangcai, deputy general manager of the National New Energy Vehicle Technology Innovation Center, cited data from multiple institutions at the World Semiconductor Conference on June 10, pointing out that the chip shortage will lead to a global production reduction of 1 million vehicles in the first quarter, a reduction of 4.5 million vehicles for the whole year, and a loss of US$60 billion. Chinese vehicle companies also reduced production by 5%-8% in January and February due to chip shortages.

What is even more worrying is that the chip shortage is rapidly spreading from the automotive industry to mobile phones, PCs, data centers and even all electronic manufacturing industries. The insufficient production capacity is also transmitted from wafer manufacturing to packaging and testing, equipment, and even the entire industrial chain such as raw materials. According to a report by Goldman Sachs, as many as 169 industries around the world are affected to some extent by the chip shortage.

Due to the "chip shortage", device manufacturers have been hoarding chips in large quantities, increasing orders, and only asking about delivery time but not price; and as prices soared, many middlemen joined the "speculation" army, which further aggravated the already tight supply pressure.

In response to the chip shortage, a large number of companies are rapidly expanding their production capacity. The production capacity of global semiconductor manufacturers' 8-inch wafer fabs is expected to reach a record high of 6.6 million pieces per month in 2024, and the global total investment in the chip field is expected to further increase to US$140 billion from US$107 billion last year, setting a new historical high again.

For China, in addition to market factors, it also faces suppression from the United States, which is attempting to build a global supply chain independent of China. It recently established the US Semiconductor Alliance and joined forces with its allies to encircle China. Its supply restrictions and supply cuts to Chinese companies have also caused global panic. In the face of suppression, China cannot close itself off or isolate itself, but needs to implement a more open, inclusive, and mutually beneficial international scientific and technological cooperation strategy.

Zou Guangcai told the 21st Century Business Herald that the 2020 coronavirus pandemic has greatly promoted the level of social intelligence and unmanned operations, the demand for the consumer electronics industry has surged, and the peak in demand for chips such as mobile phones, PCs and automotive chips is the short-term reason for the "chip shortage."

Taking automobiles as an example, with the rapid increase in the penetration rate of new energy and intelligent driving, the demand for automotive chips has surged. The average cost of a single automotive chip was about US$400 per vehicle in 2019, and will reach US$600 per vehicle in 2022, which has brought about huge demand for automotive chips.

This is exactly the personal experience of Georges Andary, President of Bosch Automotive Electronics China. In 2016, each new car in the world was equipped with an average of 9 Bosch chips, mainly used for airbag control, braking systems and parking assistance systems. In 2019, this number has risen to 17.

At the World Semiconductor Conference, CCID Consulting released the "2021 Global Semiconductor Market Development Trend White Paper" which pointed out that in 2020, due to the impact of the epidemic, global remote office, remote teaching and other applications broke out rapidly, driving the rapid recovery of communication and computer products in the downstream market, which made the global semiconductor market grow strongly, with a market size of US$440.4 billion, a year-on-year increase of 6.8%, and semiconductor products began to enter a boom cycle.

China has been the world's largest semiconductor consumer market for many years in a row. In 2020, China's market share reached 34.4%, while the United States, Europe, Japan and other regions accounted for 21.7%, 8.5%, 8.3% and 27.1% respectively.

Ju Long pointed out that the post-epidemic digital economy and smart applications have brought about an increase in demand for almost all electronic information products. In 2021, global semiconductor revenue will maintain a strong growth of 15%-20%, and the global semiconductor industry is expected to exceed the US$500 billion mark for the first time.

He introduced that with the application of 5G and the launch of mid- and low-priced models, the demand for smartphone chips is expected to grow by 5%-15% this year; electric vehicles will continue to launch new products after the epidemic to stimulate automobile consumption, and the demand for electric vehicle chips is expected to grow by 10%-20%; driven by remote work and online education, the demand for computer chips will increase by 2%-6%; the post-epidemic digital economy will generate a large amount of data transmission, processing, and storage needs, and the demand for servers and the Internet of Things chips is expected to increase by 7%-12% this year.

"Driven by the digital economy and smart applications, the global semiconductor industry is entering a 'super cycle'. It is expected that the industry will maintain a growth rate of more than 10% in the next three years and is expected to reach US$570 billion in 2022. The global chip shortage and price increases we are seeing now are all the result of this 'super cycle'," said Ju Long.

This super cycle will also greatly boost the performance of most semiconductor companies. The data he provided showed that the revenue of the world's top 15 companies increased by 21% in the first quarter of this year. Among them, Samsung, TSMC, SK Hynlx, and Micron increased by 15%, 25%, 26%, and 31% respectively. The growth rates of Qualcomm, Nvidia, MediaTek, and AMD were as high as 55%, 51%, 90%, and 93% respectively.

Wu Hanming, an academician of the Chinese Academy of Engineering and dean of the School of Micro-Nano Electronics at Zhejiang University, believes that the current insufficient chip production capacity is the biggest contradiction amid the surge in demand . "Production capacity is king, and it is urgent to increase China's production capacity."

He introduced that the chip production capacity of mainland China has developed rapidly, and has surpassed the United States and Japan in recent years, but there is still a big gap compared with South Korea and Taiwan. "Some people were worried about the problem of overcapacity in chip production before, but in fact the real problem is insufficient production capacity. According to the current situation, it will take nearly 8 times the production capacity of SMIC to meet the domestic market."

At the conference, an executive of chip packaging and testing giant Changdian Technology pointed out in an interview with 21st Century Business Herald that the capacity utilization rate of the entire industry chain is very high now. "In the past, design companies needed to make appointments for packaging and testing 10-15 days in advance, but now it takes at least 20 days. The capacity of the entire industry chain is very tight. For example, the equipment we ordered before could be delivered in two or three months at most, but now it takes seven to nine months to deliver. Our raw materials are mainly imported from Malaysia. Although Changdian is a major customer and has the greatest supply guarantee, it is still much slower than before."

He said that the recent epidemic situation has become tense again, and many factories in India and Malaysia have been forced to shut down. "Demand was originally exploding, but supply was shrinking, so everyone rushed to buy and hoard chips, causing a further imbalance between supply and demand."

Ju Long also mentioned that from mature nodes to advanced nodes, there is a supply shortage in the entire chip industry chain. There is a shortage of wafer fab materials such as photoresist. Now even substrates, lead frames, epoxy molding materials in the packaging and testing links, and even display panels are in short supply.

Li Ke, vice president of CCID Consulting, said in an interview with 21st Century Business Herald that the focus of the current insufficient production capacity lies in the foundry, especially the high-end 28-nanometer manufacturing link. The reasons are: the average plant construction period is as long as 18 months, and it takes more than three years to reach full production; the second is the large investment scale. Building a 12-inch plant costs more than 10 billion US dollars, which requires sufficient determination from enterprises.

Zou Guangcai pointed out that the insufficient production capacity is partly due to the large investment, high difficulty, stable supply chain, high supply concentration and high industry barriers . For example, automotive-grade chips require "high reliability, high security and high stability" and need to undergo 2-3 years of rigorous certification before entering the automotive supply chain. They have a 5-10 year supply cycle, so chip companies and automobile manufacturers form a strongly bound supply chain.

On the other hand, China's integrated circuit industry has a weak foundation, and its design tools, product development, wafer packaging and testing, and standard systems rely heavily on imports. For example, more than 90% of China's automotive chips rely on foreign imports, and almost all chips used in key systems are monopolized by foreign countries, with an independent rate of only 5%-10%, which is seriously controlled by others.

Ju Long also introduced that China's semiconductor industry still has a gap with the world's advanced level, and there is a huge gap in the supply and demand of domestic semiconductors: for example, in semiconductor equipment, the Chinese market reached US$17.3 billion in 2020, while domestic equipment sales were less than US$1.5 billion; in semiconductor materials, China's mainland materials market is growing rapidly, and is expected to surpass South Korea this year to become the second in the world. However, data from 2019 showed that China's materials market was US$8.69 billion, while domestic manufacturers could only provide US$1.28 billion in products.

In Li Ke's opinion, in addition to supply and demand, hoarding and speculation based on market expectations are also important reasons for the current "chip shortage".

"The chip shortage is not due to a sudden surge in demand. Last year, the global semiconductor market grew by 6.8%. In fact, in 2010 and 2017, the growth rate was 33% and 22%. Why was there no shortage then but now? The main problem is the connection between supply and demand. Many whole machine companies buy a year's worth of goods at once. There is a lot of stockpiling, hoarding, and even speculation in the market."

Li Ke pointed out that in the past few decades, integrated circuits have been highly internationalized and the industry with the best supply chain management. "At that time, some whole machine companies even proposed the concept of "zero inventory", that is, they did not need to stock chips for a day, and could place orders at any time. At that time, the average company's chip inventory was only 7 days, but now it generally takes one to two months or even a year to prepare inventory.

Ju Long pointed out that this round of "chip shortage" caused by unusual changes in the automotive industry chain. At the beginning of the epidemic last year, due to the decline in automobile sales, a large number of automobile companies canceled chip orders, causing the automotive integrated circuit industry to decline by 6% in 2020. However, after the second half of the year, automobile demand has not decreased but increased, and the overall scale of the whole year has increased by 8%. Automobile companies have increased their orders one after another. However, the previously withdrawn wafer manufacturing capacity has been transferred to other electronics industries, and the latter has also seen a surge in demand. Against this background, chip prices have risen sharply, and many companies only ask about delivery time but not price, and they must get the goods regardless of cost.

"Originally a chip cost only 8 yuan, but now it sells for more than 50 yuan. I heard that some have been sold for 300 yuan." A business person told 21st Century Business Herald that device manufacturers are hoarding goods on the one hand because they are worried about future shortages and that they will not be able to buy them, and on the other hand because they are worried about price increases. It is very likely that by next month the price will have doubled.

The rapid rise in prices has also attracted a group of speculators, who are hoarding large quantities of goods and waiting for the price to rise. "A month ago, I talked to a speculator in Shenzhen, and he felt very aggrieved. You only see that we are making money from hoarding goods now, but you don't see the time when we lost money from hoarding goods in the past," said the company source.

Li Ke stressed to 21st Century Business Herald that we must be highly vigilant against the "commoditization " of integrated circuits. "Like iron ore and oil, semiconductors are China's largest imported product. Their prices have fluctuated greatly recently, and even have some financial attributes."

He pointed out that chips meet some basic elements of international commodity speculation. First, the volume is large enough, with China importing more than 300 billion US dollars; second, there is a certain degree of standardization. All chips, whether CPU or memory, have a certain degree of commonality. At present, we need to pay close attention to the impact of this sign on the electronic information industry.

Georges Andary announced at the conference that Bosch, the world's sixth largest semiconductor manufacturer, had completed its new Dresden wafer factory two days ago. The factory focuses on 300mm wafer manufacturing, and a single wafer can produce 31,000 chips.

It is reported that the factory will start production as early as July, 6 months ahead of schedule; the production of automotive chips will start in September, 3 months ahead of schedule.

"We are rapidly expanding our production capacity. For example, by the end of this year, we will expand the capacity of our factory in Suzhou, China by 50% to alleviate the global chip shortage."

This is not an isolated case. Data provided by Julong shows that global semiconductor manufacturers will continue to increase the production capacity of 8-inch wafer fabs from 2020 to 2024, and the monthly production capacity is expected to increase by 950,000 pieces, an increase of 17%, reaching a historical record of 6.6 million pieces/month. From 2019 to 2024, the number of 300mm wafer fabs in the world will increase from 123 to 161, with a capacity increase of 33%. From a regional perspective, the new 8-inch wafer production capacity in 2021 will be mainly contributed by China, accounting for 18%.

He said that in 2021, semiconductor companies' capital expenditures also increased to a record level. For example, TSMC, Samsung, Intel, SK Hynix, and SMIC are expected to invest $30 billion, $30-32 billion, $19.5 billion, $10.8 billion, and $4.3 billion, respectively, and global total investment is expected to further increase to $140 billion from $107 billion last year, setting a new historical record. The world's largest wafer manufacturing investors are South Korea ($22.3 billion), Taiwan ($19.3 billion), and mainland China ($13.9 billion).

The world is paying more and more attention to semiconductors. The Biden administration of the United States has proposed to invest $50 billion in the US semiconductor manufacturing industry. South Korea plans to invest $450 billion in domestic semiconductor production in the next decade. The European Union has set a goal of producing 20% ​​of the world's semiconductors by 2030. China has invested tens of billions of dollars in the semiconductor industry, but it still lags behind South Korea and others.

"When we talk about the chip shortage, there is both a global chip shortage and a Chinese chip shortage." Ju Long emphasized that the United States is building a supply chain independent of mainland China. The Semiconductor Alliance of America (SIAC), established on May 11 this year, includes almost all major IDM, design, foundry, EDA, and equipment companies in the semiconductor field in the world except mainland China. The new US administration will continue to suppress China in the field of science and technology. In addition to accelerating legislation in the fields of BIS, EAR, ECRA + domestic investment, in addition to the entity list, it will pay more attention to uniting partners to contain China from the global supply chain.

Zou Guangcai pointed out that the United States ignored the development trend of the world and wantonly undermined the security of the global supply chain, which greatly affected the stable development of the integrated circuit industry . "The United States has adopted a supply restriction and supply cut-off method to suppress Chinese companies, which is an important reason for the global panic. This has led to companies hoarding chips in large quantities beyond the norm, disrupting the supply and demand balance of the industry."

Guo Haifeng, deputy secretary-general of the Advanced Manufacturing Professional Committee of the Tsinghua Alumni Association, told the 21st Century Business Herald that semiconductors are an industry deeply embedded in the global division of labor. Decoupling is not in line with the laws of industrial development and will also bring a heavy blow to the United States itself. In the face of suppression, we cannot close ourselves off and isolate ourselves, but must implement a more open, inclusive, and mutually beneficial international scientific and technological cooperation strategy.

Wu Hanming pointed out at the conference that the global circulation of semiconductors is as high as 17 billion US dollars, of which 17 billion is between China and the United States, 81 billion is between China and South Korea, 117 billion is between Taiwan, China and overseas, 90 billion is between China and ASEAN, and 19 billion is between China and Europe. If the world wants to build a completely independent and controllable industrial chain, it means that an increase of 900 billion to 1.2 trillion US dollars will be needed, resulting in a 65% increase in global chip prices.