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The Dip in Chips: How the Semiconductor Industry is Responding to the Global Supply Chain Crisis – Futurum Tech Webcast
by Fred McClimans | June 3, 2021

In this episode of the Futurum Tech Webcast, my colleague Ron Westfall and I assess the major developments and key takeaways from the ongoing global semiconductor supply chain crisis. Our discussion focused on:

  • Why there are global semiconductor supply chain constraints and its impact across a wide spectrum of industries and the ongoing challenges with aligning production cycles with the required materials and natural resources.
  • How policy making focused on global trade has become vital to attaining supply chain stability across the semiconductor and networking spaces.
  • The U.S. Congress’s proposed CHIPS for America Act and what its implications are for the semiconductor industry upon potential passage.
  • Why the automotive and medical equipment industry verticals are leading the charge for expanded U.S. government investment in U.S.-based semiconductor R&D and the time frames for building new semiconductor production facilities.
  • The plans and progress of the major semiconductor foundries in building and scaling their operations in the U.S.

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Other insights from Futurum Research:

All Eyes are on Semiconductor Companies Amid Chip Shortage — Investors Should be Looking at These Four Lesser-known Names

Exploring The Role Of Supply Chain In Recovery And Digital Transformation Investments

Supply Chain Management is an Essential Business Priority in an Uncertain World

Transcript:

Fred McClimans: I’m Fred McClimans and welcome to this edition of the Futurum Tech Webcast. Today, we’ll be talking about chips, semiconductors, the silicon chips, and the dips that they’re taking in availability. Joining me today is my fellow colleague and analyst, Ron Westfall. Ron, welcome to this edition of the webcast.

Ron Westfall: Well, thank you, Fred. Definitely looking forward to this very exciting topic.

Fred McClimans: So, before we dig into it, I just do want to remind our listeners that we’re going to talk about some things that might pertain to financial performance of a few companies, but please don’t take anything that we mention as a suggestion or any type of implied insight or information about investing. This webcast is for informational and educational purposes only. We hope you enjoy it, but don’t take any advice from us when it comes to where you want to invest your money.

So, looking at this whole issue, Ron, just kind of from a high level perspective, what we’re seeing here right now is quite literally a shortage of chips, of silicon chips, the chips that go into everything from a car to maybe your toaster at home, your IoT enabled toaster device, certainly into your mobile devices, into your networking equipment. These computer chips are essential to everything that we do. And right now, we’re seeing a shortage in availability of some types of chips.

Now, I do want to be clear that this is not an issue that pertains in any way to Moore’s law, the doubling of transistors in a device or anything like that. And we’re not talking here about the cutting edge sub-seven nanometer chips that are out there and all the hype that you hear about each vendor out there trying to get one little node level lower from seven nanometers down to six or five or four. That’s not what we’re talking about. What we’re talking about here are just a lot of the everyday run of the mill chips. They’re not necessarily high performance, some of them are specialized. There’s nothing really unique about them though, in any way, except that they’re just not available.

Now, part of that is because of some short-term issues. We know there are some supply chain disruptions that have taken place over the last couple of years. Some of those perhaps influenced or induced by some of the trade conflicts. Certainly some of the issues pertain on a short-term level to some of the pandemic restrictions in terms of organizations being able to fully staff their fabrication facilities and their shipping and distribution systems. But the issues go deeper than that. It’s as if we’re facing some high level concerns here that are kind of exposing now some of the bigger underlying issues such as the lack of capacity, just simply the lack of manufacturing capacity to produce the level of chips that we need, which gets us sort of the second point of that, which is some of the forecasting that I think people have been doing for the past few years hasn’t really anticipated the rapid rise and the adoption of computer technology into everyday living. And that is putting a little bit of an additional constraint on there.

Now, there are some issues in terms of where fabrication plants are located. These plants that actually manufacture a semiconductor chips. They’re not cheap and they don’t get spun up overnight. They are also not necessarily where we need the chips to be from a consumption perspective. For example, in the United States here, we have a lack, clearly a lack of fabrication facilities for these products. So, with that, Ron, I kind of want to probe into this subject a little bit here and just start with some very high level questions here. What are the industries that are seeing the impact of this right now? I know I’ve heard some automobile manufacturers, I believe Apple, Cisco, a few other companies have mentioned that yeah, this chip issue is becoming a real concern for us, but where are the industries that you think are feeling this the most right now?

Ron Westfall: Yeah, excellent question, Fred. And I think you hit on a couple of the major ones that are generating the headlines, in that clearly the auto manufacturing segment is the one that really is causing the most disruption at least for the consumers out there. Going back to causes that are distinct to this I think is going to be very important to keep in mind is that supply chain management has always been integral to every major business out there across all the verticals. And now it’s going to become a top priority for all the executive decision makers out there regardless of which segment they’re in. Certainly consumer electronics has been heavily impacted and that certainly includes anybody manufacturing smart devices such as Apple.

And I think another one that is also alarming is the medical devices segment. That’s another one that has created its own set of headlines. In fact, those two combined, automotive and medical devices, are the ones that are lobbying Congress heavily for what is called the CHIPS Act, to have the federal government fund more domestic support and research support for manufacturing facilities based here in the US.

And I think we can trace this specific crisis to the COVID-19 pandemic. First of all, there was obviously a dialing back of the economy and across many sectors. And as a result, for example, the automotive sector, they had to cancel orders or delay orders for semiconductor technology.

Fred McClimans: But you would think that would create sort of a surplus of units not shipped perhaps.

Ron Westfall: Well, yes. That was the case for a couple of quarters back in 2020. However, there were some other things that came up in the meantime, and one of them is the geopolitical tensions with China where the administration’s decisions resulted in, for example, US manufacturers not being able to use chips manufactured by SMIC, the Semiconductor Manufacturing Corporation. And that I think was certainly a factor.

But another one that’s important is the fact that Huawei and ZTE, when they saw the writing on the wall that they were going to have their chip supplies restricted because of these geopolitical concerns, they definitely upped their orders, and that kind of sucked up the availability for chips in that sector. So when things started returning to normal, when we got into recovery mode, suddenly there was a specific chip shortage because of that. And there was the usual issues concerning natural disasters. There were two fires in Japan that resulted in shortages specifically related to sensor technology. And also we had the Texas winter episode. So, aggregate together, we had a rather unique perfect storm if you will of events that caused a greater than usual supply chain shortage of chips. And it can’t really just be traced to one thing. It was some of the usual issues combined with unique issues. And so, even when there was that dialing back of chip orders in the mid 2020 timeframe, it didn’t make any difference when things started getting into the upswing again.

Fred McClimans: It sounds as if the short-term impact, go back to beginning of 2020 or even 2019 time period when a lot of the trade issues were still really hot and heavy, you’ve got the situation here where the system’s already strained, couple of fires in Japan. The winter in Texas, that shut down a lot of the manufacturing just across the board down there. I remember reading about that, the impact of shutting something down, that happens very quick, but spinning things back up again, that takes a little bit longer.

So I can see these short-term issues here, but from a long-term perspective, I mean, this is something where we’ve known that the demand for chips has been steadily increasing to the point where it’s at that supply level, and in some cases, going a little bit over. And that to me seems to be the more problematic issue because we can get the various companies together, the various the tech sectors, we can get the various governments together, and we can figure out how do we make sure that we’re maximizing our manufacturing capability right now. How do we make sure that we’re allocating the right resources in the right place to address that short term issue?

But the longer term issue, that’s a more systemic issue that we’re facing here, that essentially says, if you’re going to fix this, it’s not just about supply chain management necessarily. Maybe it’s about completely reconfiguring the supply chain to take high risk elements out of that equation and to make sure that you’re manufacturing and the components you’re manufacturing, and again, remembering, it’s not just bring components in, manufacture chip, there are step-by-step manufacturing processes that take place across the board. And certainly even when you talk about expanding capacity, you can’t just go out and buy a fabrication facility at your Best Buy. That’s something that takes a lot of specialized equipment and years to build and assemble here.

It sounds like we really are at that point now, and maybe the CHIPS Act helps this a bit in the US. It says, look, let’s really rethink the supply chain and the manufacturing process to make sure that we do have more product that is locally sourced that might be a little bit more resilient to some of these short-term issues. Is that a viable alternative? Is that really where we need to go with this?

Ron Westfall: Well, I think it’s already happening and I think that’s an excellent point. In fact, for example, TSMC, the world’s largest chip manufacturing firm is already committing to building more facilities here in the US, the Arizona plant certainly comes to mind, but there are other ones as well, and they have already allocated $28 billion in spending to quite simply diversify and fortify their manufacturing operations capability. And so that’s one example. Also Samsung, same thing. They’re committing to using more US-based facilities. And equally important, you have Intel also committing to expanding facilities here that are based in the US.

And so, it’s interesting that, that the CHIPS Act is still going through the legislative process and it’s allocating potentially up to $52 billion, but we don’t know if that will happen. In fact, it’s unusual for these acts to not even become a legislation or the amounts that were initially proposed get watered down. And that’s fine in this case because I think the market is already showing that this is a clear demand, that this is a wise investment, that in some ways it’s a no-brainer. And so, whatever federal government funds are allocated toward this can be helpful.

There is always the intangibles of improving things such as ocean shipping regulations such as improving air transport of the technology. Certainly supporting the infrastructure that surrounds the actual plants wherever they’re built. And so, there’s more to it than just the pure manufacturing, the silicon itself. And you’re right, it takes up to five years to build one of these plants.

And if so much as a moat of dust gets caught in the manufacturing process, you have to shut the whole facility down sort of like a Gattaca type of scenario. So it shows you how specialized, shows you how sensitive the manufacturing process is. However, these investments are definitely warranted, and I think, yeah, help is on the way. It says it’s going to require patience, and I think it’s something that will definitely prove a wise investment not just over the next five years, for example, but for decades afterwards.

Fred McClimans: That was a great movie reference that you snuck in there on Gattaca, by the way. That was a good one. When you’re talking about companies like Samsung and TSMC committing to invest more in the US, I can’t help but think back just a couple of years ago to when Foxconn was going to do the same and opened up massive $10 billion manufacturing and assembly facilities here in the US, and they never quite materialized, I think kind of highlighting the political issues that we kind of face when we see these announcements and then try and actually make them go from concept to an actual implementation that’s successful in the long run.

And certainly with the CHIPS Act, yes, I think that is needed. We definitely need more money invested into the manufacturing and fabrication, the fab facilities here in the US. But at the same time, there’s going to be that political pushback that says, at what point does this industry start to look a little bit too subsidized? At what point does a company start to use the money that they’re pulling in to expand their existing operations, things that they would have done normally anyway, versus completely new implementation that has long-term benefit. But even still, there’s that issue of subsidization and maybe nationalized control over the manufacturing capabilities. I think that’s going to be a tricky one.

Have you seen any of the, or heard any of the conversations in that area yet? Do you think that’s something that’s real or is it really something that is just kind of on the side but will weather that without any issues?

Ron Westfall: Oh, that’s always in play. I mean, look no further than the auto manufacturing segment. We saw what happened during the 2008/2009 recession crisis, and the auto manufacturers were bailed out, that caused a lot of resentment and political blow back. General Motors got referred to as government motors because it was viewed as unfair favoritism toward a specific company, whereas other organizations and companies had definitely either filed for bankruptcy or had to really bite the bullet without subsidies.

Fred McClimans: How do you allocate the subsidies equally, fairly? And then at the same time, when you start doing this, when the CHIPS Act passes eventually, crossing fingers here on this, and that money goes into the system, that’s a major US-centric build that has to be felt and reacted to by our European allies as well as Taiwan, China. Think about what those organizations do as they start to realize, well, if you’re going to build up and subsidize that industry, we’re going to build up and subsidize our industry. And we may not give you access to all of the technologies that you need sort of as a bargaining chip there, no pun on chips intended.

Ron Westfall: It can’t be helped. It’s a fine balancing act. All governments in various ways help domestic industries, I think China is already there when it comes to helping their domestic industries through various means that aren’t necessarily direct subsidies. Favorable loan terms, massive projects in other countries that helped drive business that normally wouldn’t be there, etc, etc. I mean, this is not a US only issue. But I think regardless of what the CHIPs Act ends up being, that’s assuming there is some direct subsidy, those will be in place. The companies that are involved will have to bear that in mind. Sometimes even these subsidies get turned down because of these very issues. We don’t want to have this boomerang on us, like, great. We got this subsidy in the US but now we can’t sell to X and Y because of it.

Fred McClimans: … with coronavirus, the vaccine development, where some companies said we’re willing to actually take funding to help develop this. And others said, no, look, we’ll accept the purchase order down the road for this, and you can lock that in now, but we’re not going to take your money to actually do our R&D. It’s going to be a tricky field I think, to navigate there.

Ron, I kind of want to wrap up with sort of one last topic area on this. If all of this works, if we get the money, if the semiconductor industry worldwide gets their act together and we figure out how to rework the supply chains, how to minimize risk, how to do all this sort of thing. We’re still years away for the fabrication facilities in the US to really materialize. And hopefully when they do, they adopt some of that off-grid mentality so that they’re not subjected to some of the gas or oil pipeline ransomware attacks, they’re not subject to the weather in Texas, you know how brutal that can be, or hurricane season and so forth. Looking through all of that, we’re still facing a shortage here over the next six, 12, 24, 36 months, perhaps.

And I’ve got to believe that some of that just comes down to, again, the issue of capacity planning, not being intrinsically linked to reasonable forecast in terms of demand. Nobody 10 years ago really expected that the EV industry would take off as it has. Perhaps people really didn’t anticipate the development of 5G and IoT and all these other systems that are just really screaming into the market at an accelerated rate. Accelerated in part by the pandemic, and we know that the majority of enterprises, they have completely revisited their digital transformation plans and accelerated their plans in many areas, which puts an increased demand on the market that the supply just hasn’t been designed to keep up with here.

But from an enterprise perspective, I mean, you know the chip manufacturing industry inside and out, are there particular things that enterprises should be thinking about right now to say, here’s our plan, here’s how we want to transform our industry, here are the technologies that we’re going to adopt, or maybe even here the technologies we’re going to manufacture. Should they be considering now what does the actual availability of product look like for that? And do you think that that has a material impact on some of these organizations? I mean, should there be a chip availability component in a digital transformation strategy plan?

Ron Westfall: I think that’s going to become integral now. Certainly when it comes to any major organization that is selling consumer electronics, anybody who is reliant certainly on semiconductor technology, I think it’s going to become that issue that we touched on earlier, supply chain management becomes a priority area. It’s not a tier two aspect in terms of how a company sets out its fundamental business plans. It’s virtually impossible to anticipate the black Swan events when they will happen.

Obviously the COVID-19 pandemic was very specific and, but we can do now is I think organizations are doing this. They are adjusting to the jewel geopolitical realities, that China-based manufacturers and their sphere will be off limits to many of the non-China manufacturers, certainly across North America, key pockets of Europe and Asia. And so I think that’s going to be in place regardless of which administration or which government is in power across many of these countries that are acting on this. So, that I think is something that’s being baked in already. And I think it’s also, I’ll try to figure out how to more optimize the timing of ordering semiconductors. I think the auto manufacturing segment can be faulted for dragging their feet when uptake was coming up again back in Q3 of 2020. That was kind of a human decision-making factor.

And it’s like, yeah, let’s really invest in how to avoid or at least mitigate that type of issue where it’s the human indecision or not responding more rapidly than say an AI engine would in terms of managing supply chain. So I think we can definitely bet on more inputs from AI engines, from ML, automation capabilities being involved in this now. So that can point to improved outcomes to complement all the other factors that we discussed and are also in play beyond our discussion. That is being able to quite simply have a better read on other parts of the organization that are impacted by this. And that is introducing automation on an organization-wide level, being able to leverage cloud resources on a much more agile basis, etc.

So all these things are coming together and can point toward improved efficiencies in this area. And who knows, that could even impact how long it takes to build a fabrication facility. Maybe instead of five years, it’d be less than five years using technologies such as this. So yeah, I think those are some of the key considerations.

Fred McClimans: That’s a great point about the use of technology there. We have these technologies out there. We’re seeing great strides in the sensor-based data coming off manufacturing facilities, off the supply chain resources from the extraction process to the transit and distribution process, all the way through the end system. We can now track these various data points to get real time first source to last customer read on the supply chain and distribution chain. Take all that data in there and you use some of the AI based analytics and machine learning algorithms out there to really understand what’s going on and predicatively model scenarios, to say, well, here’s what we want to do, we’ve got enough data now, let’s actually do some predictive modeling here to figure out which of the following is the best business approach for us, which of the following delivers the best manufacturing production, etc., down the road.

So, I expect to see somewhat in line with the omniverse discussion that we had a couple of weeks ago with Nvidia, the ability to literally model out a business. And maybe that’s something we see here, we see some of this semiconductor industry and some of the demand issues being addressed by some really sophisticated AI-based technology that says, yeah, let’s run a thousand different scenarios about how you get your business from a to Z and figure out the way to do that and include all the various risk elements that we see now coming up in the semiconductor space.

So, Ron, I want to thank you very much for sitting down for this chat discussing chips and the dips in availability in the semiconductor industry. So with that, thank you very much our loyal listeners out there, our listeners and viewers for watching this edition of the Futurum tech, boy, this is going to be a tough one, Futurum Tech Webcast. Thank you very much, we’ll see for the next edition.

About the Author

Fred is an experienced analyst and advisor, with over 30 years of experience in the digital and technology markets. Fred launched the equity research team at Samadhi Partners and provides marketing strategy through the Wasabi Rabbit digital agency. He previously served as an EVP and Research Vice President at HfS Research, launching its Digital Trust practice and coverage of emerging “trust-enabling” technologies. Read Full Bio.