For an industry that’s been in the doldrums since the 2009 recession, the words “strained capacity at chip players across the industry” are, ironically, welcome. The electronics components market has enjoyed an extended period of ample supply, and only a shortage or an unexpected surge in demand will spur the market into proactive purchasing for the long term.
Last week, news agency Reuters, citing a Commercial Times article, reported the world’s No. 3 chip foundry, Taiwan's United Microelectronics Corp (UMC), will raise the prices it charges some clients by 5 to 15 percent amid heated demand. The article continued:
Clients who order less than 5,000 foundries monthly from UMC will see their prices rise by as much as 15 percent, the report said.
UMC will demand that larger clients fill an entire season's worth of orders, according to the report, while previous price discounts of up to 5 percent will be rescinded.
The move comes amid strained capacity at chip players across the industry, according to the report, with larger domestic rival Taiwan Semiconductor Manufacturing Co Ltd (TSMC) unable to step in to meet the additional demand.
A separate report in Taiwan's Economic Daily News said that UMC and TSMC's clients are offering to pay between 3 and 5 percent more for the chips, also due to strained capacity and fierce industry demand.
The reports did not say specifically which clients would be affected.
UMC, along with TSMC and GlobalFoundries, account for a significant portion of the industry’s semiconductor output. According to IC Insights, the top 13 foundries in the world represented 91 percent of total foundry sales in 2013. Constraint at any one of the top foundries could indicate an uptick in demand for semiconductor products. In addition to serving start-up and fabless semiconductor companies, UMC, TSMC and GlobalFoundries manufacture for companies that own fabs such as AMD, Broadcom, Freescale Semiconductor and Texas Instruments, according to Hoover’s.
Given the foundries’ dominance in the chip market, could the UMC announcement signal good times ahead for the component industry? Global distribution companies, which interface continually with customers on the demand side and component makers on the supply side, have a broad view of industry activity. Of the distributors that were interviewed for this article, no one recommended popping champagne corks just yet. However, there are certain segments of the chip market that are experiencing delivery constraints, executives say, and in general the channel is bullish on the rest of the year.
Avnet Inc. is the world’s largest global distributor with $25.5 billion in 2013 sales. As a publically traded company Avnet tends to be circumspect in its forecasts. (Avnet will announce its FY 2014 results on Aug. 6). Distributors do not buy directly from foundries; however they do buy from all major semiconductor companies.
“I think in a general sense capacity utilization is increasing and all the forecasts are predicting capacity utilization could approach what is considered to be full,” said Alex Iuorio, senior vice president, supplier management and business development for Avnet Electronics Marketing Americas. For 2013, he said, capacity utilization was around 82 percent; it is expected to increase 90 percent by the end of this year. Iuorio explains that “full” is a relative term, allowing for foundries to shift production from line to line. “If we are talking in the 90s, that’s essentially full,” Iuorio said.
At the same time, the semiconductor industry hasn’t been adding capacity at the rate of years past – fabs are expensive to build and technology is advancing more rapidly than ever before. For 2013, Iuorio said, capacity grew at an estimated 2 percent; with 4 percent and 5 percent forecast for 2014 and 2015, respectively. “Those are all pretty reasonable numbers given a stable environment,” he added.
But there are a number of factors that can influence lead times and pricing, Iuorio points out. “Everybody has a sense that something is going on, and that off on the horizon we will see lead time extensions and price increases,” Iuorio said. “The one thing I can say is [Avnet] is getting a lot of questions regarding its monthly Market and Technology Trends report. The number of questions we have gotten recently is staggering.”
For example, he said, lead times on discretes and memory have been moving out. There are various reasons lead times may stretch in any given product category, Iuorio explains. Some products are dominated by a few big players and a capacity shift by any one player will disrupt supply. As semiconductor companies shift to smaller geometries, their supply of legacy products could be disrupted.
“It could also be the same amount of demand is being bounced around to different players,” he added. In the memory market, customers are shifting to DDR-2 and DDR-3 SDRAM and supply is constrained.
“It seems to me that there is something on the horizon and we are waiting [for it] to materialize,” he said. “We are seeing smoke—not fire—and [as a distributor] we can do things to hedge our bets. We can pipeline materials; we can extend our supply line so we can get what customers need; we are doing the right things by leveraging our franchise relationships -- at no cost to our customer -- to insulate them against the potential of shortages. If you have the ability to do those things, why wouldn’t you do it?”
Too many fabless companies?
Lindsley Ruth, executive vice-president in the Office of the President at leading global distributor Future Electronics Inc., has a different perspective on UMC and its brethren. “I think if you go back in years past —it was Jerry Sanders that said ‘Real men own fabs’ – you will see that before foundries such as UMC were established the semiconductor market had a high barrier to entry. With the growth of [companies such as] UMC, it lowered the barrier to entry for semiconductor companies. All you need are a few engineers and you can take your design to a foundry. So the startup costs have lowered substantially. That’s brought on a proliferation of startups especially in analog, where the profit margins are higher. They rely on the foundries to produce the chips.”
“I have been concerned about this for some time—this includes companies that are fabless or fab-lite—when [the foundries] hit capacity issues, who is going to get support? Most likely, it is the most profitable and the larger companies. The companies that are left out are small-volume and companies that are not that committed to the foundry. It’s an interesting predicament and if demand remains robust and I think we are going to see [the capacity] situation get worse before it gets better. This has been building over the last few years and is not a surprise to anyone.”
Future, which like Avnet sells globally, is seeing pockets of component shortages, Ruth said. “We are seeing steady growth in the industrial market segment – better than average – and in automotive. That’s due to the increased electronics content in cars; and we are seeing accelerated growth related to IoT, especially in sensors. I think it will be a better than average year—at least better than most people expected.
Supply and demand in the open market
Independent distributors buy and sell components that are considered excess by their owners. Independents rely on a large extent on supply and demand imbalances in the supply chain to provide inventory and influence pricing. “Fab utilization is one of the things we try to keep abreast of,” said Brian Ellison, president of the Americas for independent distributor America II Electronics Inc. “Historically when you start to see fab utilizations get to 90-percent-plus you start to see lead times on the whole stretch out. We believe supply and demand has passed parity and we are seeing customers place orders beyond lead times." Customers often turn to independents for spot shortages. "We are seeing more scheduled orders," Ellison said, "and it seems customers are getting more confident – no one is holding inventory like they did before.”
Independents are not restricted by franchise agreements and are therefore flexible on price. Prices – and availability -- in the open market largely depend on what’s available and how much is in demand. Ellison said America II product managers report Altera prices have increased 15 percent since April; Xilinx lead times are stretching out beyond 16 weeks; Micron DDR-3 lead times have extended beyond 20 weeks; and some Freescale products are out beyond 24 weeks. Like Avnet, America II is seeing shortages in some memory products.
All the distribution execs say they watch signals other than fab capacity for indications of demand and will continue to do so. In general, the channel seems to be cautiously optimistic.
“Overall, I’d say there is substantial growth everywhere except in the Americas,” Ellison said. “When you see higher capacity utilization and lead-times going out…there are no alarm bells going off, but we are paying close attention.”