The automotive chip gap is as high as 40%, TSMC launches super urgent orders

Recently, the shortage of automotive chips has reached the highest level of government. Germany, the United States and Japan have all asked relevant departments in Taiwan to help persuade Taiwanese manufacturers to help alleviate the chip shortage in the automotive industry. According to the latest news, the Biden administration of the United States will hold a video conference with Taiwanese officials in the near future to solve the problem of automotive chips.

In fact, the shortage of chips has been spreading since last year, but it is far from the point of interrupting production. Why is the shortage of automotive chips even more severe?

The gap in automotive chips is as high as 40%

According to relevant reports, due to the shortage of automotive chips, Japanese automakers such as Honda, Nissan, and Toyota, and European and American automakers such as Ford, General Motors, Fiat Chrysler Automobiles, and Volkswagen of Germany have successively reduced or adjusted production.

From the supply side, the reality is far more tense than imagined. According to Taiwanese IC design companies, the global automotive chip market is not in a 10% or 20% gap, but a 40% gap, based on the order volume given by car brands and chip manufacturers in various countries. This wave of automotive chip supply and demand problems will take at least half a year, or even more than a year to solve.

It is understood that chips are used in the car's on-board system, automatic driving system, engine control system, and body control system. At the same time, chips are divided into active chips used for computing, such as various SoC/MCU/CPU, and passive chips that provide support for controllers, such as various capacitors and resistors.

According to previous reports of the suspension of production at Volkswagen Group China and Volkswagen Group South, it was mainly due to the lack of chip supply in the two systems of ESC and engine ECU in the mainland. 

The main reason for the chip shortage is that under the influence of the epidemic, automakers are not sure about sales, resulting in insufficient stocking and insufficient supply of automotive chips. The epidemic was severe in the first half of 2020, and passenger car sales fell sharply. However, due to the good control of the epidemic in China, the growth rate of the national passenger car market from July to November 2020 remained strong. According to data from the China Passenger Car Association, the retail sales of passenger cars reached 2.081 million in November, an increase of 8.0% year-on-year from November last year, achieving the highest growth rate of about 8% in the past two years for five consecutive months.

Under this trend, automotive chips are "stretched to the limit". More importantly, automotive chips are a very sophisticated industry. From production to testing to delivery, there can be no mistakes in any link of the process, so the chip delivery cycle takes at least 6 months. This also means that in the case of insufficient stock, it is difficult to "make up" for the urgent orders in a short time.

The crisis not only exposed the auto industry's poor ability to forecast demand during the pandemic, but also highlighted that as electric and self-driving cars become more popular, the fate of the auto industry will increasingly rely on chips. IHS Markit pointed out that although electric and self-driving car sales account for only 3% of global car sales, electric cars use about three times as many chips as traditional cars. Data shows that chips are increasingly used in cars, including for driver assistance systems and navigation control systems. On average, each car is equipped with 50-150 chips.

It is reported that due to the inability to obtain sufficient chips for auto parts, global automakers may face revenue losses of up to $61 billion this year. In order to solve the urgent problem, the automotive industry has begun to turn its attention to TSMC, the world's largest wafer foundry.

TSMC becomes a "must-fight place"

In fact, not only now, but also in the previous Sino-US trade friction, TSMC, which is in the "eye of the storm", is very critical. And TSMC is well aware of its role. Its founder Morris Chang once said, "TSMC is a very important link in the IT supply chain. When the world is not peaceful, TSMC will become a battleground for geopolitical strategists." Today, the global automotive chip shortage storm has once again confirmed what Morris Chang said.

In this incident, the global economy's high dependence on Taiwan's wafer foundry industry, especially TSMC, has been highlighted. Recent data from market research firm TrendForce shows that 64% of the global wafer foundry market in 2021 is in Taiwan, China, and most of it is occupied by TSMC. In other words, TSMC alone accounts for more than half of the global wafer foundry market.

TSMC, the world's leading foundry, is in a leading position in advanced process technology, special process technology, and advanced packaging technology. Not all semiconductor manufacturers are capable of manufacturing automotive-grade semiconductors, because automotive chips attach great importance to safety performance and have extremely high requirements for manufacturing. Therefore, it is not difficult to understand why governments and car companies have cast "earnest" eyes on TSMC.

In response, TSMC announced on January 28 that it would launch "super hot runs" to squeeze out production capacity by shortening the chip production time and giving priority to related automotive chip factories.

With TSMC's production capacity fully loaded, the act of blatantly letting automotive chips "jump the queue" means that some of the originally scheduled orders have been squeezed out. The market predicts that small and medium-sized design companies, which have already been squeezed out by insufficient production capacity, will face more business uncertainties.

According to Taiwan media reports, international automotive chip manufacturers are reportedly asking foundries to increase prices by 25% to 30% in order to obtain more supply. Analysts believe that the current insufficient capacity of foundries is an established fact. Prior to this, it was reported that foundries such as TSMC increased the price of automotive chips by 15%. If the news that major automotive chip manufacturers intend to increase prices to grab volume is true, the price of foundries may rise again in the second quarter. And the customers who need foundry services in all walks of life will pay for this.

At present, there are reports that some customers have proactively asked foundries to increase their production capacity for "bidding". According to the latest news from Taiwan's Economic Daily, the 8-inch wafer foundry capacity is in short supply, and the quotations continue to rise. It is reported that the client has proactively asked foundries to increase their production capacity for "bidding", including TSMC, UMC, World, Powerchip and other four major Taiwanese manufacturers have relevant supporting measures, allowing customers to reserve production capacity through online bidding, and adopting the "no upper limit on the price increase" and "highest bidder wins" method of allocation. As for the price increase, the industry privately revealed that "it is 20%, 30% or even 50% higher than the current market price (the price increase)".

In fact, the shortage and price increase storm has indeed begun to spread to industries other than automobiles. The latest reports from Credit Suisse and Nomura Securities both pointed out that TSMC has transferred some panel driver IC and CIS chip production capacity in response to the demand for automotive chips, which may lead to a more serious shortage of driver chips. TDDI and DDI prices are expected to increase from March and April.

At present, some panel driver IC manufacturers have revealed that they have received a notice from TSMC that they will reduce their supply. In this regard, industry insiders pointed out that TSMC is currently reducing its wafer input, and it is estimated that the impact will gradually emerge in May. Since TSMC has not stopped supplying, and manufacturers will compensate by increasing other sources, the impact should be limited, but it will still make the already tight supply market even tighter, and the possibility of further price increases for panel driver ICs cannot be ruled out.

Conclusion: TSMC's "taking money from one pocket to fill another" approach can only temporarily solve the current shortage of automotive chips. We cannot predict who will be the next to suffer after the shortage of automotive chips has temporarily stabilized.