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In response to the current tight supply of semiconductors, Germany's SNV (Stiftung Neue Verantwortung, a German non-profit think tank dedicated to the current political and social challenges posed by new technologies) has selected four different cases: automotive chip shortage, ABF substrate supply shortage, back-end equipment shortage and wafer manufacturing disruption, explaining the different reasons behind the different shortages in the semiconductor supply chain, and proposing some solutions.
Case 1: Shortage of automotive semiconductors
With a pessimistic demand outlook due to COVID-19, automakers decided to cancel chip orders in the first and second quarters of 2020. These wafer capacities , which were "freed" at foundries and IDM, quickly received orders from consumer electronics companies as demand from the industry soared. When demand for cars increases faster than expected, automakers quickly run out of chips because they employ an instant supply chain model, often trying to avoid inventory. During that time, automakers were unable to quickly acquire the necessary chips: high fab utilization, long manufacturing cycles, and limited resources. In the fourth quarter of 2020, when automotive suppliers ran out of chips, they found that foundry and IDM were almost all on site, and there was simply no excess capacity to meet the automaker (or any other customer). This, combined with the fact that automotive chips (including the production process) must meet stringent safety requirements, limits the number of factories that automotive chip suppliers can rely on, putting further pressure on an already strained supply chain during times of scarcity.
Image source: Network
Case 2: Chemical shortages
Front-end and back-end manufacturing relies on hundreds of different chemicals and materials. The absence of a single chemical creates a domino effect along the entire value chain and can interrupt the entire manufacturing process – as in the case of ABF substrates. ABF substrate is essential for every chip that uses a laminated package. AbF substrates are used to connect different components within a chip and are widely used in chips for products such as graphics cards, servers, smartphones, and notebook computers.
In addition to the tight supply of ABF substrates caused by the surge in demand for gaming consoles and graphics cards, two fires (October 2020 and February 2021) occurred in major substrate supplier Xinxing Electronics, and the low yield problem (less than 70%) of three different suppliers (Xinxing Electronics, South Asia Technology, Jingshuo Technology) led to further shortages. Forecasts at March 2021 indicate that supply will be short of at least 25%, delivery times will be extended to more than a year and prices will rise. The shortage is expected to worsen (33% supply shortage in 2022) and is likely to continue until at least 2023, with some sources even predicting that the shortage will not ease until 2025. Major customers such as AMD, TSMC, Samsung and Intel are planning strategic investments and working with suppliers such as Shin Hing Electronics and Ibiden to secure their ABF substrate supply. Three factors contribute to the shortage of ABF substrates: conservative capacity investments, limited sources and concentration of processing locations.
Since substrates are a low-margin business, substrate suppliers have been hesitant to expand their production capacity. This, in turn, has led to years of underinvestment in additional capacity. When the market is faced with both external shocks and soaring demand, suppliers don't have room to produce more products because they are already operating at full capacity. ABF substrate supplier Shin Hing Electronics experienced two fires at its factory, which caused some customers to turn to a smaller supplier, South Asia Technology (with a global market share of 6%). However, South Asia Technology cannot meet the needs of all customers who purchase ABF substrate from Xinxing Electronics. At the same time, the main suppliers of ABF substrates are located in Taiwan (Xinxing Electronics, Jingshuo Technology, South Asia Technology) and Japan (Ibiden, Shin Kong Electric Industry). Natural disasters or epidemic-related lockdowns in these areas pose significant risks.
Case 3: (Backend) equipment shortage
Expanding the capacity of an existing fab (back-end or front-end) is faster than building a new fab (18 months vs. 3 years). However, supply constraints on certain types of manufacturing equipment pose a challenge to short-term capacity expansion. One example is a lead bonding machine, typically used for encapsulation of mature process components such as microcontrollers (a process step in back-end manufacturing). Riyueguang Group, the largest chip packaging company, reported that lead bonding accounted for 80% of its chip packaging processes, while the time to obtain lead bonding equipment from market leader Kulicke & Soffa rose to 40-50 weeks (Q1 2021). As a result, due to limited resources and conservative capacity investments, equipment shortages caused by the interaction of these two factors make short-term back-end capacity expansion take longer.
Packaging companies maintain close relationships with their equipment suppliers (strong lock-in effect), so it is not feasible to quickly procure equipment from elsewhere. In recent years, the capacity investment of mature nodes has been very limited. As a result, equipment suppliers are increasingly focusing on equipment from advanced process fabs (12-inch wafers) rather than equipment from mature process fabs (8-inch wafers). Due to the lack of equipment for mature nodes, the sudden demand for mature nodes cannot be met. As long as equipment suppliers can't meet the demand for chip-making machines, foundries and packaging companies can't expand their capacity.
Case 4: Wafer fabrication interruption
In February 2021, Samsung, NXP and Infineon had to temporarily halt plant operations for weeks due to a power outage caused by a major snowstorm in Austin, Texas, resulting in lost production and hundreds of millions of dollars in lost revenue. Power outages damage not only production equipment, but also components in the equipment infrastructure, which can affect the service life of the facility. Blackouts have exacerbated disruptions in an already strained supply chain. External shocks, such as blackouts, disrupt not only wafer fabrication, but also the entire value chain, mainly due to two factors: limited sources and long manufacturing cycles. Customers at Samsung foundries cannot easily move their production to different foundries because chip designs are always based on process nodes at specific companies. Since wafer fabrication takes an average of three months, a considerable amount of production is lost in such external shocks and delivery times are rapidly extended.
Adapt to the challenges posed by fluctuating demands
These four cases illustrate the interplay between the many factors that lead to various shortages in different process steps and inputs. The inability of the global semiconductor value chain to adapt quickly to the sudden increase in demand is largely due to three factors, all of which are rooted in the fundamental characteristics of semiconductor manufacturing, namely high barriers to market entry, high fab utilization, and limited sources.
High barriers to market entry (high capital intensity + high knowledge intensity) and resource-limited challenges (high knowledge intensity + high division of labor).
Workforce + Strong Lock-in Effect) will not change anytime soon along the entire value chain.
However, the high utilization of plants in operational objectives (because of high capital intensity) and conservative capacity expansion due to fluctuating demand and uncertainty are not static – but they are really difficult to change. The contradiction between high utilization of factories and the ability to respond to rapidly changing demand has led to many cycles of boom-bust cycles in the semiconductor market. Additional capacity or new plants will only be invested if expansion can bring economic benefits – that is, when high utilization rates can be achieved quickly. So when the demand for chips is greater than the supply (factory capacity), new factories are built, and shortages and hoarding have already occurred. Fabs make more money when supply is scarce (fab utilization is high), while their customers don't have the motivation to pay for excess capacity. If the government simply tries to solve it by subsidizing and building more fabs, it will not fundamentally change this dynamic, because future fabs will also face economic pressure to achieve high utilization.
Since it takes at least a year to expand an existing plant and about three years to build and upgrade a new one, visibility into demand is critical to semiconductor manufacturing. The current shortage has the potential to alter the business relationship between fabs and customers to improve the visibility of demand and make the value chain more resilient. Some foundries are negotiating long-term agreements and advance payments from customers for future plants in exchange for per-customer wafer capacity guarantees. On the other hand, the non-cancellable and non-refundable chip orders are made.
The inherent characteristics and dynamics of the semiconductor value chain show that given the sudden increase in demand, simply increasing capacity will not be a successful strategy to make the supply chain more resilient and flexible.
The cycle of supply and demand in semiconductor production
Image source: SNV
Ability to withstand external shocks
These cases demonstrate that the global semiconductor value chain is vulnerable to external shocks, such as natural disasters, human error and regional blockades, mainly due to the single or limited source of semiconductors, the high concentration of processing sites, and the long manufacturing cycle.
Long manufacturing cycles are a structural feature of the complex process of semiconductor manufacturing that cannot be changed. But with regard to the high concentration at the processing site (the high division of labour across cross-border value chains) and the single or limited sources of resources along the entire value chain, these are indeed potential to change. Both of these scenarios can and should be addressed through diversification, especially as natural disasters become more frequent due to global warming. As noted in Case 3, external shocks are not limited to interruptions in the manufacturing process. An accident at one chemical supplier can lead to a serious shortage of the entire value chain.
Identify which companies in the supply chain are indispensable due to the high degree of division of labor and lock-in effects, so that customers can rely on a single or limited source of supply as the first step in the solution. Thus, the possibility of alternative sources (at least in the long run) could be explored or incentivized for diversification of these "quasi-monopolistic" firms. Similarly, if a region accounts for the majority of a production step (cutting-edge wafer fabrication in Taiwan) or provides some critical input, most companies located in that region are highly likely to experience production disruptions when an external shock occurs.
Even in the long run, such diversification is not always possible, so semiconductor customers, such as automakers, must be prepared for chip supply disruptions. The first step is to increase transparency across the value chain while strengthening relationships with suppliers and strategic inventories that produce key chips — measures that appear to have helped Toyota keep its cars in production far longer than most of its competitors in the face of chip shortages. (Proofreading/Hidden Drei)