The burgeoning semiconductor shortage of 2021 hit chipmakers “like a ton of bricks,” according to one distributor. Of course, that’s not the phrase semiconductor suppliers would use.
But the supply chain is in the midst of a perfect storm. A convergence of events is creating what’s expected to be a shortage of CPUs, MPUs, memory, and discretes until at least calendar Q3. There were signs in October and November when chipmakers, expecting a seasonally soft Q4, eased back production and channel inventory. They were “comfortable” with current inventory levels in their supply chains, several said.
In the meantime, driven by the move toward electric vehicles (EVs) and incentives from the Chinese government, automakers there began stocking up on electronics in December. Globally, automakers overall saw an upsurge in demand as they shook off the quarantine effects of Covid-19. In Q3, chipmakers expected to see most vertical markets move up and to the right. Chip consumption in the consumer electronics sector also rose in Q4.
What the industry didn’t reckon with was the capacity of standalone foundries which manufacture for numerous brand owners and industries. Dale Ford, ECIA’s chief analyst, said Q4 came in a lot stronger than expected across all component categories the association tracks. In December, ECIA’s monthly component index, which has a baseline of 100, saw all component categories except inductors remain above 100.
“Based on our measurements Q4 was strong with only that one exception,” Ford said.
“Look at the sales for the fourth quarter of everybody that was out there," said Arrow Electronics Inc. CEO Mike Long, on Arrow’s Q4/2020 earnings call. "It was largely a good quarter, right? So, not a surprise that you’re seeing some shortages given the uptick.”
The automotive industry, which is currently facing a severe shortfall of chips, competes with other industries in terms of fab capacity. Consumer electronics companies gobble up high volumes of chips more frequently than automotive manufacturers. High-volume customers are first in line when supplies run short. General Motors and Ford are effectively competing against Apple and Samsung as high-value customers.
“There are no easy fixes to the capacity constraints owing to the long and complex manufacturing processes of semiconductors, which makes capacity building a capital-intensive and time consuming affair,” said IHS Markit in a statement. “The shortage is expected to last until the third quarter 2021, when reallocation of capacity from semiconductor foundries and possibly some cooling off of consumer electronics demand should provide greater supply security.”
Trade embargos have discouraged U.S. companies from using fabs in China. “Since China launched its initiative to make their own chips everyone went in to booking capacity at wafer fabs so there was a huge gap for companies that use fabs for MCU production,” said Dylan Chew, global director of purchasing at Fusion Worldwide. Foundries such as China’s SMIC aren’t really options for U.S. companies, said Ford.
Voilà! A chip shortage in the making.
Then and now
In calendar Q3, many chip suppliers to the automotive industry were “comfortable” with their in-house and channel inventory levels. Some, in fact, had drawn them down. ON Semiconductor told analysts in November its days of on-hand inventory were 133, down 7 days from Q2. The chip company also planned “to run factories at the current level of utilization, despite expected higher revenue levels in the fourth quarter.”
Still, chip companies were forecasting an upturn in demand. In the third quarter, ON’s distribution inventory had decreased by approximately two weeks as sales through the distribution channel “increased significantly quarter-over-quarter.” ON also expected its automotive customers to be running at pre-Covid levels starting in Q4.
In Q3, NXP said it had maintained “stringent discipline” of its channel inventory and would maintain its target channel inventory at 2.4 months of supply. Internal inventory was reduced “pretty dramatically” in Q3 to 84 days.
It’s fair to say Q4’s steep demand caught many chip companies by surprise.
Electronics distributors exist for that very reason – their inventory covers upside and downside forecasts from OEM customers. Chip companies focus on customers that buy direct from their factories. In Avnet Inc.’s fiscal Q2 earnings call, CEO Phil Gallagher said the distributor was meeting customer demand but saw lead times stretch dramatically. The automotive market, he added, is taking “anything they can get right now.”
During Arrow’s earnings call Long separated auto from other markets served by distributors. “Yes, we’re seeing some shortages. I believe at this point, it’s a little overblown. Customers are placing their orders out longer than they have in the past. So, we’re getting more visibility past 90 days.”
“We’re also seeing suppliers asking us to give them greater visibility,” he added. “And I believe the market is reacting well to that. And that can minimize a lot of the problems that are being talked about out there.”
The industry has responded well to burgeoning shortages, Long said. “So, my view is, yes, it could be hand to mouth for a little while, but I think things are going to largely make it through the night. And, I believe everybody is digging to make that happen, and they will.”
Other distributors are seeing some spillover from the automotive shortage. Avnet reported lead times were stretching on 32-bit high-end microcontrollers (MCUs) predominately driven by the automotive market. That encompasses a wide range of chips, Gallagher said. “We say 32-bit but there are tons of different packages and whatnot, and it's 16 to 52 week lead times. We see it spreading [in to] FPGAs, power, some analog components, power devices, and op amps.”
Sixteen-bit [MCUs] is starting to leak out a little, Gallagher said, with lead times stretching four to six weeks from where it was several weeks ago. Some of the 8-bit are starting to extend lead times as well. “So, it's a bit of a moving target, but it definitely seems to become a bit broader, okay, then we saw even in the October timeframe,” he said.
Fusion, an independent distributor, saw signs of Chinese companies stocking up late last year. “There has been some speculation in the open market,” said Chew. “All it takes is for one big customer to place a big order and move everything sideways.” China’s Covid recovery began earlier than other nations’ and saw early on that the automotive demand was going up.
“A lot of OEMs took inventory positions in semiconductors and now automotive parts are in a shortage,” said Chew.
Many chip companies announced price hikes in December as the industry prepared to shift toward 300-mm wafers from 200 mm. Semiconductor capex in 2020 was robust. However, major foundries such as TSMC and Samsung still run 200-mm fab lines.
“The economics of chip design and production drive attractive, lower-cost solutions produced at larger process geometries on 200-mm wafers,” according to an ECIA market summary. “Many IoT and 5G chips are built on 200 mm, as are many analog processors, power management devices, MEMS devices, image sensors, RF components, etc. As demand for these components has grown, 200-mm capacity has become constrained.”
High demand gives component makers the opportunity to increase prices further. Fusion, in its most recent market report The Greensheet, reports MCUs face rising costs and lead times due to automotive demand.
A majority of microcontroller manufacturers announced their updated pricing plans in December, effective Jan. 1, Fusion said. Three key players, STMicroelectronics, NXP, and Renesas increased pricing by a minimum of 10 percent across their product lineups.
Prices for Renesas’ legacy series products were also increased. Renesas cited the increased costs of raw materials and inventory holding, longer lead times for materials, and government restrictions as causes for the price adjustments.
In addition, Fusion reported, distributors are already noting extended standard lead times growing to 30+ weeks across the board. STMicro’s 32-bit MCUs (ST32 series), for example, have experienced lead time stretches since Q3 2020. In addition, supply for 16-bit and 32-bit MCUs has worsened because of the increased automotive demand ramping up in Q4 2020. Finally, the MCU shortage is now affecting more brands and series, including NXP’s MC56F8, MC9S08, MCF5, MCIMX6, FS32K, and SPC56 series.
NXP distributors specified that 2000 of its products with increased pricing belong to automotive applications alone. As a result, current lead times for its automotive-related series range from 30 to 50+ weeks. Supply is not expected to improve in Q1 2021 but may bounce back in Q2, given there are no further issues with wafer allocations.
Xilinx in early February said it doesn't plan to raise its prices. Xilinx’s chips are made by foundry giant TSMC. The Taiwanese government has asked TSMC and United Microelectronics to prioritize auto chips if the foundries are able to add capacity.
In an interview with Nikkei Asia, Xilinx CEO Victor Peng warned that the automotive chip shortage could be prolonged due to constraints in other parts of the supply chain. "[It] is not just wafers in the foundries. Chip-packaging substrates are also a challenge. It's [also] getting to the point that other kinds of discrete components are somewhat of a challenge."
In the second part of this series, we’ll look at the fear of double-ordering and recommendations for managing the semiconductor shortage.