From MCUs, PMICs (power management chips), display driver ICs to MOSFETs, from automotive chips, home appliance chips to Bluetooth and touch chips required for wearable devices... Since the second half of this year, tight production capacity has gradually been transmitted from the wafer end to downstream chip manufacturers, and various chip categories are facing supply pressure. What is the main reason for this round of tight supply? How do design, wafer foundry and IDM manufacturers view this "out of stock wave" and what countermeasures will they take?

Chip supply is in short supply across the board

"To put it simply, the entire downstream industry chain has been affected, and we are currently unable to supply goods." The person in charge of a wireless communication chip company told China Electronics News, "Some foundries have canceled discounts for old customers that have lasted for many years, and everyone is rushing to grab production capacity."

The reporter learned that in addition to communication chips, other logic ICs such as MCUs and memories are also experiencing supply shortages to varying degrees. MCUs for home appliances, consumer electronics and other fields are particularly anxious for the downstream market. Without locking in supply through long-term orders, it is difficult for downstream manufacturers to find MCU sources that can be purchased directly.

"The supply in the first half of the year was mainly insufficient for European and American manufacturers, mainly due to insufficient overseas supply. Now it is insufficient domestic supply and the entire industry chain is out of stock." Huang Jipo, chairman of Saiteng Microelectronics, told reporters his observations, "We focus on automotive-grade MCUs. Since the automotive supply chain is relatively stable and we have long-term stocking, the supply is relatively stable. But for consumer MCUs, especially companies that lack a grasp of the market, the stockings are generally less. When the foundry production capacity is very tight, they will face the problem of insufficient supply."

Analog IC has also been affected by this round of "out of stock", especially PMIC, which is the "hardest hit area". Although most of the leading manufacturers of analog chips are IDMs and have a certain proportion of internal production capacity, the surge in customer demand and the long semiconductor production cycle have resulted in extended delivery times and intensified supply pressure on the downstream market.

"The capacity utilization rate of our internal manufacturing network in the first three quarters was around 70%, and we are also seeing an increase in customer demand." David, senior vice president of strategy, marketing and solution engineering at ON Semiconductor Somo pointed out to reporters, "From an industry-wide perspective, there is a challenge, that is, the lead time of order production, which is sometimes difficult to keep up with the growth of customer demand. For example, the entire production cycle from front-end manufacturing to back-end packaging and testing takes about 10 weeks. If there is a surge in demand, it will lead to a backlog of orders in the factory, further extending the production turnaround time."

The main reason for the reversal of supply and demand situation in the first and second half of 2020

"The current demand for production capacity is indeed very strong, and TSMC is actively planning based on market demand." TSMC said in a written reply to an interview with China Electronics News, "Factors such as distance learning, working from home, and data center expansion have led to a surge in market demand. This, coupled with (downstream customers') desire for supply chain security, has amplified the market's demand for wafer fabs at the front end of the semiconductor industry chain."

As TSMC said, the COVID-19 epidemic, as the biggest black swan event in 2020, has on the one hand promoted the development of new business formats such as remote working and the "stay-at-home" economy, increasing market demand for specific chips; on the other hand, it has also led to panic stocking by downstream customers, exacerbating the pressure on wafer foundry production capacity.

When the time came to the second half of 2020, changes in the economic environment further amplified the impact of the epidemic on the semiconductor supply situation. Due to the obstruction of international logistics in the first half of the year, consumption willingness has declined, and many manufacturers have low willingness to stock up. In the second half of the year, the PMI (Purchasing Managers Index) of major economies trended upward, and market demand rebounded, leading to a sharp increase in production capacity demand.

"Due to the epidemic in the first half of the year, manufacturers generally had insufficient stockings and even discounted normal business. Now that the market has rebounded and real demand has emerged, manufacturers' previous pessimistic forecasts for the industry have resulted in stockings that cannot keep up with customer demand." Huang Jipo said.

Somo also pointed out that the reversal of the supply situation in the first and second half of the year was an important driver of this "out of stock wave".

"The current so-called out-of-stock phenomenon may be caused by the sharp decline in supply in the first half of the year and the sharp rebound in the second half that was unexpected by many people. In other words, many companies stopped ordering at first, and then placed large orders to support later growth demand, which may have led to the current out-of-stock situation." Somo said.

While downstream demand rebounds, the supply side is limited by logistics and production capacity.

"From the perspective of the macro structure of the semiconductor industry, the supply chain of mainland China's industry is still mainly international. The current global epidemic is still fermenting, and the logistics of the industrial chain is still unsmooth, which aggravates the shortage of supply." Gu Wenjun, chief analyst of Xinmo Research, pointed out to reporters.

It is worth noting that PMIC and MCU, which are most in short supply in this round of tight supply, generally use 8-inch wafer foundries. However, cost-effectiveness and lack of equipment have caused 8-inch production capacity to gradually lag behind downstream demand. When the downstream market rebounded sharply, the problem of shortage of 8-inch foundry production capacity became more prominent.

"Since semiconductor equipment manufacturers mainly produce 12-inch equipment, there is a lack of new equipment for 8-inch equipment. Production expansion mainly relies on old equipment or refurbished equipment, so capacity expansion is relatively limited." Gu Wenjun pointed out.

Manufacturers actively resolve supply pressure

Under the superposition of multiple factors such as market rebound, panic stocking, and tight foundry capacity, mainstream semiconductor manufacturers such as Fabless, Foundry, and IDM are taking corresponding countermeasures to improve their supply capabilities to downstream customers.

Acquisitions, production expansion, strengthening upstream and downstream cooperation... As an IDM manufacturer, ON Semiconductor has taken various measures to cope with production capacity pressure, including purchasing a majority stake in Japan's Fujitsu's 8-inch wafer fab in Aizu-Wakamatsu, and acquiring a 12-inch wafer fab in East Fishkill, New York, USA. Currently, both factories are expanding production capacity to meet growing demand.

"80% of our components are produced in our factories, and from an ATO (assembly-to-order) perspective, the proportion accounts for 70%. We are collaborating with manufacturing and packaging and testing partners to continuously increase production capacity and improve supply capabilities." Somo pointed out.

At the same time, major Foundry manufacturers are also relieving pressure on downstream customers by expanding production capacity and optimizing capacity utilization efficiency.

"TSMC will continue to optimize the utilization of existing production capacity to actively respond to customer needs." The relevant person in charge of TSMC pointed out to reporters.

When asked about the "shortage of cores" issue, SMIC also stated in the Shanghai Stock Exchange e-interactive answer that it will expand production capacity and platform development according to market and customer needs, and continue to improve the company's core competitiveness.

For Fabless manufacturers that connect wafer foundries and end customers, they have become the choice of more and more manufacturers to form long-term cooperative relationships with the upstream channel supply chain and enhance their research capabilities on the downstream market.

"We will strengthen communication with downstream customers and upstream suppliers, give full play to the advantages of the local supply chain, and overcome difficulties with our partners." Huang Jipo pointed out.

Gu Wenjun also said that Fabless manufacturers should deal with the production capacity crisis from both the supply and demand ends.

"On the demand side, market forecasts and customer demand analysis must be done carefully; on the supply side, supply chain management must be strengthened, and supply stability can be enhanced by proactively increasing prices to upstream and locking in production capacity," Gu Wenjun said.

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