Raphael Thys
Bob Krysiak, independent consultant and former EVP at STMicroelectronics
Read Time: 5 Minutes
The semiconductor business has experienced shortages before, but the one that started because of the pandemic in March 2020 is much deeper, particularly in Europe and the Americas. So what happened? Amid the pandemic, demand dropped, orders were canceled. Asian factories went into a slowdown, and many closed as companies tried to figure out how to operate safely and with significantly reduced demand.
Many Stumbling Blocks
In parallel, automotive companies, a significant portion of the semiconductor industry’s customer base, canceled their backlog and decided to burn off both finished goods inventory and use semifinished inventory to build what they could. Weak demand and COVID safety concerns forced the semiconductor industry to operate at a much-reduced capacity, driving utilization rates to historic low levels.
During the lockdowns and the massive shift to work from home, many companies and consumers rushed to buy PCs and tablets in numbers not seen for many years. Plus, with schools closed, the demand for the already scarce gaming platforms increased. In September 2020, the automotive market started to recover and orders started piling up, but the OEMs and Tier 1 suppliers had burned through their inventory. The entire supply chain was empty. Companies had no parts but plenty of orders. A sort of panic ensued, leading to double booking. However, the largest broadline providers to the automotive market, including ST, Infineon, ON, and NXP, had already cut production, and the time to restart production and deliver parts is measured in months.
Making matters worse, production at TI, NXP, Infineon, and Samsung was negatively impacted by the weather in Texas. The power outages created another panic. The Renesas fire caused a loss of at least six weeks of production, a lot of it for automotive and important microcontroller products. There were also worries in Taiwan over a potential water crisis.
All this caused the market to panic and customers to try even harder to increase orders. In the end, this is the industry’s worst crisis since 2008-09. But it’s not all bad news: bookings are good, and salespeople can relax because customers want everything they can get and will argue less over price.
Semiconductor Industry Structure
Looking at the industry structure, a key success factor is a company’s market share. In this industry, no one company has more than a 15% share of the market. It’s fragmented, and no one entity controls every application. Samsung can provide parts for appliances; Hynix can provide memory for cloud computing.
But if a company doesn’t have power components or micro controllers from Renesas, ST, or NXP, it can’t build a system. Even if one supplier has most of the parts, some other product can be missing. Qualcomm and Broadcom can be well served by TSMC, but if customers can’t get MOSFETs from ST or microcontrollers from Microchip, it’s impossible to ship a product. The core technologies may be available, but no one has enough market share to ship the entire bill of materials for any one system. The industry is undergoing consolidation but it is still relatively slow, so it remains fragmented and specialized, making interdependence worse.
Supply chains are global, but fragile. Firms have worked to optimize production using just-in-time and lean systems that reduce working capital and thus lower inventory. They’ve become extremely efficient and are designed to relentlessly reduce costs but are very sensitive to extreme events.
Due to the criticality and the interdependency at product level, it can create a headache for customers even if one plant gets into trouble. It takes hours to produce a car, minutes to produce a smartphone, but more than four months to produce a microcontroller chip. The silicon process is such that it can’t be sped up. There are physical limits to the speed at which chips can be produced.
The semiconductor industry is learning how to operate in this new era, rushing to add capacity and pushing plants and supply chains to the maximum. Meanwhile, customers are learning the hard way that chips aren’t commodities.
Moreover, former U.S. President Donald Trump’s trade war with China had a huge impact on the forward thinking of companies. It will continue to create pressure on supply chains. That’s why Samsung, TSMC, and others are being forced by American customers to open new plants in the Americas and why the European Union is trying to force the semiconductor industry to shift more to Europe.
Semiconductors Going Forward
So when will this end? What’s strange is no one really knows. My guess is it will be at least until the end of 2021, and could stretch to Q1 2022. However, the automotive industry will only start to recover in 2022 as it suffers from the twin problems of the pandemic and the shift to electric vehicles and the need for even more semiconductors. Autos are not likely to see the same sales levels of 2018 until 2023.
This will be a great year for the chip business, which will grow at more than 20% as well as at double digits in 2022. The inflationary pressures we are starting to see as a result of the rebound from the pandemic, with capital spending increases of 30% in 2021, will eventually combine to create a natural brake on the market, normalizing supply and demand. One day, and we rarely ever know when, orders will be canceled or pushed out. This is something the industry deals with after every major growth period. What goes up quickly must eventually come down.
About Bob Krysiak
Bob Krysiak is currently an independent consultant. Prior to this, he spent more than 30 years as an executive of STMIcroelectronics, most recently as corporate vice president. His experience ranges from design engineering and project management to serving as senior general management reporting to the CEO. His key areas of expertise include semiconductors, SoC, ASIC, product marketing, consumer electronics, and hardware architecture.
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