Chip supply is in crisis across the board, why is production capacity so tight?

From MCU, PMIC (power management chip), display driver IC to MOSFET, from automotive chips, home appliance chips to Bluetooth and touch chips required for wearable devices... Since the second half of this year, the tight production capacity has gradually been transmitted from the wafer end to downstream chip manufacturers, and various chip categories are facing supply pressure. What is the main reason for this round of tight supply? How do design, wafer foundry and IDM manufacturers view this "shortage wave" and what countermeasures will they take?

Chip supply is in crisis

"Simply put, the entire downstream industry chain has been affected, and we are currently unable to supply goods." The head of a wireless communication chip company told China Electronics News, "Some foundries have canceled discounts for old customers that have lasted for many years, and everyone is scrambling to grab production capacity."

The reporter learned that in addition to communication chips, other logic ICs such as MCUs and memory also face varying degrees of supply shortages. MCUs for home appliances, consumer electronics and other fields are particularly worrying for the downstream market. Without locking in supply through long-term orders, it is difficult for downstream manufacturers to find MCU sources that can be purchased directly.

"In the first half of the year, the supply shortage was mainly due to European and American manufacturers, mainly due to insufficient overseas supply. Now it is insufficient domestically, and the entire industry chain is out of stock." Huang Jipo, chairman of Saiteng Microelectronics, told reporters about his observations, "We focus on automotive MCUs. Due to the relatively stable automotive supply chain and our long-term stocking, the supply is relatively stable. However, for consumer MCUs, especially for companies that do not have a good grasp of the market, there is generally less stock. When foundry capacity is very tight, they will face the problem of insufficient supply."

Analog ICs are also affected by this round of "stock shortages", especially PMICs, which are the hardest hit. Although most of the leading analog chip manufacturers are IDMs and have a certain proportion of internal production capacity, the surge in customer demand and the long semiconductor production cycle have led to longer delivery times, exacerbating supply pressures for the downstream market.

"The capacity utilization rate of our internal manufacturing network in the first three quarters was around 70%, and we are currently seeing an increase in customer demand." David Somo, senior vice president of strategy, marketing and solution engineering at ON Semiconductor, told reporters, "From an industry-wide perspective, there is a challenge, that is, the lead time for order production, which sometimes makes it difficult to keep up with the growth in customer demand. For example, from front-end manufacturing to back-end packaging and testing, the entire production cycle takes about 10 weeks. If there is a surge in demand, it will lead to a backlog of orders at the factory, further extending the production turnaround time."

The reversal of supply and demand in the first and second half of 2020 is the main reason

"The current demand for production capacity is indeed very strong, and TSMC is also actively planning according to market demand." TSMC responded to an interview with China Electronics News in a text message, saying, "Factors such as remote learning, working from home, and data center expansion have led to a sharp increase in market demand. Coupled with the upstream (downstream customers)' desire for supply chain security, the market demand for wafer fabs at the front end of the semiconductor industry chain has increased."

As TSMC said, the COVID-19 epidemic, as the biggest black swan event in 2020, has, on the one hand, promoted the development of new business forms such as remote work and the "stay-at-home" economy, and increased market demand for specific chips; on the other hand, it has also led to panic stocking by downstream customers, exacerbating the production capacity pressure of wafer foundry.

When the time came to the second half of 2020, the changes in the economic environment further magnified the impact of the epidemic on the semiconductor supply situation. Due to the obstruction of international logistics in the first half of the year, consumer willingness declined, and many manufacturers were reluctant to stock up. In the second half of the year, the PMI (Purchasing Managers Index) of major economies rose, and market demand rebounded, resulting in a sharp increase in production capacity demand.

"Due to the epidemic in the first half of the year, manufacturers generally had insufficient inventory, and even normal business had to be discounted. Now that the market has rebounded and real demand has emerged, manufacturers' previous pessimistic forecasts for the industry have resulted in inventory that cannot keep up with customer demand." Huang Jipo said.

Somo also pointed out that the reversal of the supply situation in the first and second half of the year was an important driving force behind this "shortage wave".

"The current so-called shortage may be caused by the sharp drop in supply in the first half of the year and the sharp rebound in the second half of the year that was unexpected by many people. In other words, many companies stopped placing orders at the beginning, and then placed large orders to support the later growth demand, which may have led to the current shortage." Somo said.

While downstream demand is rebounding, the supply side is constrained by logistics and production capacity.

"From the perspective of the macro structure of the semiconductor industry, the supply chain of mainland China's industry is still mainly international. The global epidemic is still fermenting, and the logistics of the industrial chain is still in an unsmooth state, which has exacerbated the shortage of supply." Gu Wenjun, chief analyst of Strategy Analytics, pointed out to reporters.

It is worth noting that PMIC and MCU, which are in the most shortage in this round of supply shortage, generally use 8-inch wafer foundry. However, due to cost-effectiveness and lack of equipment, 8-inch production capacity has gradually fallen behind downstream demand. When the downstream market rebounded sharply, the problem of 8-inch foundry capacity shortage became more prominent.

"Since semiconductor equipment manufacturers mainly produce 12-inch equipment, there is a lack of new 8-inch equipment. Production expansion mainly relies on old equipment or refurbished equipment, so capacity expansion is relatively limited," Gu Wenjun pointed out.

Manufacturers actively resolve supply pressure

Due to the combined effects of market rebound, panic stocking, tight foundry capacity and other factors, mainstream semiconductor manufacturers such as Fabless, Foundry and IDM are taking corresponding measures to improve their supply capabilities to downstream customers.

Acquisition, expansion, strengthening upstream and downstream cooperation... As an IDM manufacturer, ON Semiconductor has taken a variety of measures to cope with capacity pressure, including purchasing a majority stake in Fujitsu's 8-inch wafer fab in Aizuwakamatsu, Japan, and acquiring a 12-inch wafer fab in East Fishkill, New York, USA. Currently, both factories are expanding their production capacity to meet the growing demand.

"80% of our components are produced by our factories, and from an ATO (assembly to order) perspective, the proportion is 70%. We are working with manufacturing and packaging and testing partners to continuously increase production capacity and improve supply capabilities," Somo pointed out.

At the same time, major foundry manufacturers are also relieving pressure on downstream customers by expanding production capacity and optimizing capacity utilization efficiency.

"TSMC will continue to optimize the utilization rate of existing production capacity to actively respond to customer needs." A TSMC official pointed out to reporters.

When asked about the "chip shortage" problem, SMIC also stated in its answer on the SSE e-interaction that it will expand its production capacity and platform based on market and customer demand, and continue to improve the company's core competitiveness.

For fabless manufacturers that connect wafer foundry and end customers, forming long-term cooperative relationships with upstream channel supply chains and enhancing their research capabilities in downstream markets are becoming the choice of more and more manufacturers.

"We will strengthen communication with downstream customers and upstream suppliers, leverage the advantages of our local supply chain, and overcome difficulties together with our partners," Huang Jipo pointed out.

Gu Wenjun also said that fabless manufacturers need to address the capacity crisis from both the supply and demand sides.

"On the demand side, we must carefully carry out market forecasts and customer demand analysis; on the supply side, we must strengthen supply chain management and enhance supply stability through various means such as proactively increasing prices to upstream companies and locking in production capacity," said Gu Wenjun.