What a difference a year makes.  This time last year, the COVID-19 pandemic had just struck in China and the world was struggling to keep semiconductor supply chains open.  China’s factories were struggling to get staff back to work and reopen after Chinese New Year, and even if goods could be produced, it was hard to ship them due to a shortage of flights.

Fast forward a year, the semiconductor industry is booming and we now have supply chain issues due to demand outstripping supply despite foundries and OSATs reporting record results.  We still have COVID-19 but we are learning to live with it even whilst countries are still in lockdown and vaccination programs are being rolled out in countries worldwide.  All the leading foundries and OSATs are reporting full utilization. Lead times are increasing drastically and in some cases, prices are also increasing.  The problem is not just at the foundries and OSATs, but even getting semiconductor raw materials is an issue due to drastically rising material prices and increasing lead times.  Prices for basic materials used in semiconductor manufacturing are rising. The gold price has risen around 15% in the last year whilst copper has almost doubled in price since March 2020.

Shortage of Semiconductor ICs for the Automotive Industry

Overall, this has led to a shortage of semiconductor devices across the market. The most publicized is the shortage of semiconductor ICs for the automotive industry causing automotive plants worldwide to have temporary shutdowns or reduce production. This reduction in output is forecast to cause up to US$60 billion loss in revenue for the global automotive industry this year.  This issue started a year ago when automakers around the world closed their facilities and cancelled orders for automotive chips due to the COVID-19 outbreak.  It led to semiconductor manufacturers diverting manufacturing to other sectors which were booming, like data centers and home consumer devices driven by the work and study from home culture.  In the meantime, demand for automotive has come back especially driven by China, and the automotive industry didn’t predict the recovery.  With the sudden increase in demand, orders from automakers increased substantially. However,  demand for consumer electronics, especially smartphones, continued to be strong simultaneously, leading to orders competing for the same semiconductor capacity.  The issue is not only the lack of capacity, but also the lack of planning by automotive companies, which reacted late to ordering parts, as semiconductor chips need a lead time of up to 6 months.  While many automotive suppliers have been hit by shortages, Toyota, the originator of Just in Time (JIT), said it is not impacted. The company said it has stockpiled enough parts as part of its business continuity plans including regular risk assess to its inventory levels.

Even though foundries such as TSMC and UMC have offered to increase capacity to support the demand, it will take many months to bring it online and is not helped by increases in equipment’s lead times. Therefore, it looks like the strong demand for semiconductors is now expected to last, not just in the first half of 2021, but throughout the whole year.

M&A Activity

The strong merger and acquisition activities seen in the second half of 2020 led to US$118 billion being spent, making 2020 a record year and spending has continued into 2021.  Lumentum agreed to acquire Coherent for US$5.7 billion before both MKS instruments and II-VI also entered into a three-way battle for Coherent which now valued up to US$6.5billion.  Renesas has agreed to acquire UK chip designer Dialog in a deal worth around US$5.9 billion.  Sensor manufacturer Teledyne will acquire thermal imaging sensing company, Flir Systems, for around US$8 billion.  Qualcomm announced it will buy server CPU start-up developer Nuvia for US$1.4 billion, whilst Applied Materials increased its offer for Kokusai Electric to US$3.5 billion after it failed to get regulatory approval from China by its December deadline.

Capital Expenditure

With the strong semiconductor market outlook, many companies have announced or are planning to increase capacity and start building new fabs in 2021. Both TSMC & Samsung are looking to build new Fabs overseas. TSMC last year approved plans to build a 5nm Fab in the US in Arizona, which is expected to open in 2024.   TSMC has also recently announced it will set up a subsidiary in Japan to expand its 3D material research.  Samsung is reported to be looking to spend US$17 billion on a new US fab with Texas being the most likely site.  UMC, Vanguard and ASE have also announced plans to increase capacity this year.  It is a good time to invest in new manufacturing facilities with the US, Europe and Japan governments all looking at offering incentives to attract local manufacturing Fabs. The governments look to offset the current dependence on Taiwanese, South Korean and Chinese production, which the pandemic and recent semiconductor shortage have highlighted.

It is looking like the Year of the Ox should be a good year for the semiconductor industry as the world’s population starts to get vaccinated. Let’s hope that life can start to get back to normal and travel can resume at least by the end of the year

About the Author

Mark Dyson
Head of Global Subcon Manufacturing of Osram Optoelectronics