A chip shortage that has squeezed global automakers since late last year offered a snapshot of how the Covid-19 pandemic and geopolitical uncertainties have distorted supply chains in the highly globalized semiconductor industry.
The question is: Will it lead to a reshaping of the industry’s global landscape?
It’s a multibillion-dollar question involving massive investment flows and potentially sweeping economic and geopolitical consequences. As technology has advanced, semiconductors have come to dominate not only the auto industry but also almost every part of consumer goods manufacturing as the tiny electronic devices supply the brains for products ranging from computers to mobile phones to toothbrushes.
The shortage is on the radar screens of global leaders, elevating concerns about the risks of foreign supplies. The U.S. and European countries have pleaded for heavy investment to empower domestic semiconductor industries in hopes of reducing reliance on East Asian suppliers. Meanwhile, China has embarked on an ambitious plan to expand chipmaking capacity in response to American tech curbs.
Since the last quarter of 2020, the shortage has shaken auto manufacturers from Germany’s Volkswagen Group to America’s Ford Motor Co. to Japan’s Nissan Motor Co., forcing production cuts.
In China, automakers such as SAIC Volkswagen Automotive Co. Ltd. and Chang’an Automobile Group (000625.SZ) have set up special teams led by top managers to pursue semiconductor supplies.
“No matter how expensive, they’ll buy what they can get,” one auto industry analyst said.
Some experts estimated that Chinese automakers face a 10% to 20% shortfall in supplies of the microprocessors that control engines, transmissions, emission controls, automated driving features and other increasingly tech-heavy vehicle systems.
The China Association of Automobile Manufactures (CAAM) predicted earlier that automakers will be hit by worse shortages in the second quarter and see supplies improving in the fourth quarter. But the association recently issued a more pessimistic message, saying the shortage is likely to drag into the first quarter of 2022.
Unlike previous rounds of such supply shortages, the current shortfall is lasting much longer with broader impacts, said Meng Pu, chairman of chipmaking giant Qualcomm China. “The reason behind it is the growth of demand outpacing supply capacity and the industry’s misjudgment of demand.”
The Covid-19 pandemic triggered the global chip shortage. Discouraged by plunging sales amid pandemic disruptions in the 2020 first quarter, manufacturers dramatically slashed business projections and semiconductor orders. The stronger-than-expected recovery in the second half last year left manufacturers and integrated circuit suppliers unprepared as production couldn’t catch up with surging demand.
Adding to that was escalating frictions between China and the U.S. that threatened Chinese tech giants’ access to advanced chips. U.S. sanctions on Huawei Technologies Co., one of the world’s largest smartphone makers, led to a major shift in the global mobile industry and upset the balance between chip demand and supply, experts said.
Technology development and the rollout of 5G wireless services mean demand for semiconductors will continue surging, leaving manufacturers struggling to catch up. Chip needs for 5G devices will increase by 40% to 80% compared with the 4G era, said Feng Jinfeng of the Shanghai Integrated Circuit Industry Association.
It will take time for the industry to rebalance, but the question is how much time, experts said. One of the biggest uncertainties is geopolitics.
Apart from the mismatch of demand and supply, the shortage reflects the effect of political uncertainties on business confidence and strategic decision-making, experts said.
The perfect storm
The auto industry was hit hardest by the chip shortage. Chang’an, one of the country’s largest automakers, recorded an integrated circuit shortfall of almost 30% at some point in the first quarter, meaning about one-third of the company’s orders couldn’t be delivered, an industry analyst said. Chang’an’s first-quarter delivery fell by nearly 80,000 units amid the shortage, the analyst said.
Globally, automakers cut production by nearly 1 million vehicles during the first quarter for lack of chips, according to data provider IHS Markit.
The troubles reflect an industrywide misjudgment, experts said. Following the broad sales slump in early 2020, automakers in general lowered sales projections and cut orders for semiconductors. Vehicle manufacturers usually don’t hold extra chip inventories for the sake of cost control.
As sales rebounded in the second half, automakers found it difficult to get chips as semiconductor producers prioritized supplies to consumer electronics producers that offered greater profit margins.
According to IHS Markit, the delivery cycle for microcontroller units for autos has been extended from the previous 12 weeks to 26 weeks. Certain devices take as long as 38 weeks.
Manufacturers of personal computers, tablets and game consoles have also felt the pressures of the short supply. Apple Inc. said in April that it expected second-quarter sales to be $3 billion to $4 billion less than if there weren’t supply issues.
The tightened U.S. sanctions on Huawei in the past year shut the Chinese tech giant out of key chip supplies. Huawei accelerated device purchases to build up inventories before the sanctions took effect Sept. 15. The move encouraged other Chinese phone makers including Xiaomi Corp. and OPPO to increase semiconductor purchases in hopes of winning market share from Huawei’s crippled mobile business. The buying spree further worsened the supply shortage.
According to Cinda Securities, major phone makers planned to increase production capacity this year by a combined 10.8% from last year.
“Everyone wanted to buy more to increase inventories, further worsening the tight supply of chips globally,” said Hu Jianguo, deputy chairman of Guangdong Semiconductor Industry Association.
Goldman Sachs estimated that about 169 industries in the U.S. have been affected by the shortage and would suffer 1% to 3% cost increases for semiconductor purchases.
C.C. Wei, chief executive of Taiwan Semiconductor Manufacturing Co. (TSMC), said in April that global semiconductor supplies remained tight amid high demand. Wei projected the shortage would last until 2022.
Surging demand pushed up global semiconductor industry revenue by 10.4% to $466.2 billion in 2020, according to Gartner.
The supply shortfall makes production capacity the top priority of chip companies and may limit the industry’s push for innovation while hurting startups with outstanding design capacity, one industry source said. Many in the chipmaking industry said they expect a major industry revamp in late 2021 or early 2022 that may lead to the failure of many small companies, one industry analyst said.
Reshaping the industry
Over the past three decades, the semiconductor industry has become highly globalized with a long supply chain spanning multiple continents. The U.S. and Europe mainly rely on contractors in East Asia for chip manufacturing while retaining design.
According to Boston Consulting Group, American chipmakers’ share of global production capacity declined from 37% in 1990 to 12% in 2020 while European companies’ share fell from 44% in 1990 to 9% in 2020. Meanwhile, Taiwan and South Korea have grown into global chipmaking giants.
In the first quarter, Taiwanese enterprises accounted for four of the world’s top 10 wafer manufacturers, seizing 66% of the market, while South Korea’s two biggest wafer makers took 19%. The two largest chipmakers on the Chinese mainland — Semiconductor Manufacturing International Corp. and Hua Hong Semiconductor Ltd. — accounted for a combined 6%.
Taiwan’s TSMC and South Korea’s Samsung Electronics currently have the most advanced technologies to produce 7 nanometer chips, while Intel is in development of its 7 nanometer process. Chinese chipmakers are capable of only 14 nanometer technology. The measurements denote the size of transistors on semiconductor chips, and smaller means faster and more advanced.
The chip shortage fueled U.S. policymakers’ concerns over the concentration of global semiconductor capacity and key material supplies, said Jimmy Goodrich, vice president for global policy at the Semiconductor Industry Association.
Under the Biden administration’s American Jobs Plan, $50 billion of subsidies would support domestic semiconductor research and production. In response, Intel said in early May that it would invest $3.5 billion to renovate its production facilities in New Mexico in addition to $20 billion of investments to build two new wafer plants in Arizona.
European policymakers set out similar initiatives aiming to double the global share of Europe-made integrated circuits in the next decade.
Chinese authorities are using preferential policies to attract leading semiconductor companies such as TSMC and Samsung to build plants in China while offering support to empower domestic chipmakers and expand chip production and technology capacity.
According to Wei Shaojun, a professor at Tsinghua University, the number of chip design companies in China reached 2,218 in 2020, more than twofold growth from 2015.
China’s domestic chipmaking capacity still lags behind demand. According to IC Insight, China’s integrated circuit market had a total value of $143.4 billion in 2020, but only $8.3 billion was produced domestically.
Meanwhile, China’s heavy reliance on foreign supplies of advanced devices and chipmaking equipment makes it vulnerable to geopolitical risks. The U.S. trade ban on Huawei nearly crippled the company’s smartphone business by cutting off chip supplies.
China’s semiconductor industry has geared up efforts to reduce reliance on U.S. technologies. Caixin learned that Huawei is seeking to expand its chip business beyond design and build its own manufacturing capacity.
“Regardless of whether the sanctions will be lifted, (we) will not rely on the U.S. to do things in the future,” said an employee at HiSilicon, Huawei’s chipmaking unit.
Separate industry sources said a group of Chinese companies has been working on building a 28-nanometer chip production line without American technologies since May 2020. The facility is set to start operation this year, they said.
The semiconductor industry is set for a major capacity expansion. According to the global industry association SEMI, at least 38 12-inch wafer fabrication plants will be built worldwide between 2020 and 2024, more than half of them on the Chinese mainland and in Taiwan. By 2024, global production capacity of 12-inch wafers will reach 7.2 million units a month, 30% higher than in 2019.
According to the global industry association SEMI, at least 38 12-inch wafer fabrication plants will be built worldwide between 2020 and 2024
The landscape of the global semiconductor industry may change profoundly with the capacity expansion, experts said. The Chinese mainland is expected to become the biggest chip producer after Taiwan and South Korea with 12-inch wafer capacity accounting for 20% of the global total by 2024. By then, the market share of Japan will be 12% and the U.S. 10%, experts said.
But China still faces great challenges in developing advanced electronic devices, especially amid U.S. high-tech curbs. Morris Chang, the founder and former chairman of TSMC, said it will take at least five years for the mainland to compete with Taiwan and South Korea in advanced chipmaking.
A U.S. semiconductor expert said it will take at least two years for China to achieve complete self-reliance in 40 nanometer semiconductor production and five years for 28 nanometer technology as the country’s capability in lithography still lags behind.
Government policy support is set to expand China’s chip manufacturing capacity. Boston Consulting Group forecast last year that the global share of China-made semiconductors will rise to 24% by 2030, nearly double from 2020.
Despite countries’ push for self-reliance, experts warned that pursuing completely independent chip supplies is unrealistic. The industry is so complicated and globalized that it can maintain innovation only through collaboration in the highly specialized world supply chain, said Goodrich at the Semiconductor Industry Association.
“Advocating a fully self-sufficient local supply chain in the semiconductor industry is a dead end,” Goodrich said.
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