Shifting sand for silicon
The semiconductor shortage is having a seismic effect on global industry. But a secondary trend — tech giants bringing design and development of chips in-house — could have a longer lasting impact
The global semiconductor market is in a state of flux, with shortages having an adverse impact on major industries such as automotive, mobile phones, personal computers and servers. Production numbers are being cut and supply warnings issued. As things currently stand, it is a problem that is likely to endure well into 2022.
At the same time, we are seeing a generational shift in how the semiconductor market operates, the ramifications of which could change the face of the sector altogether. We’ve seen a number of technology’s leading names, including Apple, Tesla, Amazon and Facebook, bringing much of the design and development of computer chips in-house. It marks a dramatic change, of course, moving away from the tried and tested route of buying chips off the shelf from top-tier semiconductor players Samsung, TSMC and Intel.
Wayne Lam, Senior Director at CCS Insight, says the trend for custom silicon represents a “genie out of the bottle”. “Both Apple and Tesla went down similar paths; starting off sourcing the chips from Samsung and Nvidia respectively and then deciding to vertically integrate with their own designs.
“This strategy is clearly to achieve market differentiation by ‘owning the whole stack’ from silicon to pixels on the screen. Expect more brands to become more active in owning their entire stack and look for ways to stand out, differentiate and compete more effectively.”
The shortage of chips is a well-documented issue, but Lam says that the trend for in-house design and development and the dearth of semiconductors should very much be viewed as two entirely separate issues. The actions of Apple, Tesla and the like are unlikely to have any discernible effect on availability, in the short-term at least.
“From the perspective of the global semiconductor supply chain and manufacturing capacity, the move from third-party chips to in-house chips has largely a net-zero effect as chips that otherwise would be purchased are now directly sourced by the OEM (Original Equipment Manufacturer),” he says.
“However, depending on the OEM, this dis-aggregation of scale — meaning previously either Samsung or Nvidia had the scale to secure manufacturing capacity — will likely create more logistical challenges as foundries like TSMC has to juggle the same demand for chips not from only a handful of clients but a larger group of clients.”
Madhav Durbha, Vice President, Supply Chain Strategy at Coupa Software, says: “These companies aren’t bringing chip design in-house in order to ease their supply chain challenges. They’re doing it because every company wants its own ‘secret sauce’ for the specific needs it has, and bespoke chip design can help to achieve that.
“However, what will help reduce the shortages is the investments being made by the chip manufacturers such as Intel, TSMC, and Samsung among others to increase their manufacturing capacity. This is not a short-term fix by any means — as it takes such a significant length of time and billions of dollars to get the manufacturing capacity in place. Even where capacity exists, the lead time to make a chip from raw materials is about 85 days.”
But while some of technology’s biggest companies want more control of their chipsets, actually building their own facilities to own the manufacturing process isn’t on the cards.
“Manufacturing semiconductor chips is an extremely capital intensive process, and most big tech companies will steer well clear of building their own foundries. It’s likely that chip manufacturing will continue to remain the realm of the established players given the extraordinarily high barriers of entry, and the scale advantage that the big players have,” says Durbha.
“A more pragmatic approach for these companies is to strive to become preferred customers of the foundries by sharing better visibility into future order patterns, respect the contractual terms by making timely payments, and building executive contacts at the foundries.”
In addition, says Durbha, companies should be bolstering their digital technologies to get an end-to-end view of their supply chain processes and navigate through future disruptions.
“Being informed, nimble and prepared will be vital for companies looking to weather the supply storms ahead. In case of constrained supply situations such as what is seen with chips right now, companies that catch trends early can get a lock on the short supply.”
Unsurprisingly, there are geopolitical issues at play in the semiconductor market, with China and the US at the centre, with the fall-out being that Chinese outfits are frozen out of market when it comes to the advanced, bespoke chips that US businesses are looking to develop.
“SMIC, China’s leading semiconductor foundry, is being prevented in acquiring new manufacturing tools and technologies to advance to process nodes like 10nm, 7nm and 5nm. This essentially would keep SMIC from competing with TSMC, Samsung and Intel,” says Lam.
“The semiconductor industry has to be viewed from a larger supply chain perspective. Critical technologies developed by the likes of ASML in the Netherlands are essential to be able to keep on the leading edge of silicon technology. Currently, China is being barred from those toolsets and technology.”
The future two or three years are likely to be bumpy and Lam says that the current course is not a particularly positive one for the semiconductor ecosystem. It will, he believes, take intervention from the powers-that-be to create a more balanced market. With so much self-interest, the likelihood of that is up for debate.
“The wider trend I expect is to see the widening of the gap between the top silicon manufacturers (TSMC, Samsung and Intel) and the rest of the pack (i.e. Global Foundries, UMC, SMIC).
“As it takes scale to keep investing in new technologies, only the top players can afford to keep up that game of investment. What that would mean is that leading-edge silicon fabrication will be more centralised within that handful of top players while the rest of the industry will attempt to pick up the more mature products.
“Clearly, this widening of capability is not ideal for a healthy semiconductor industry but there doesn’t seem to be a way out at the moment unless governments get involved and promote more competition in the top segment of the industry.”
The forward forecast
IDC expects the semiconductor market to grow by 17.3% in 2021 versus 10.8% in 2020. According to IDC, the industry will see normalisation and balance by the middle of 2022, with a potential for overcapacity in 2023 as larger-scale capacity expansions begin to come online towards the end of 2022.
Growth is driven by mobile phones, notebooks, servers, automotive, smart home, gaming, wearables, and Wi-Fi access points, with increased memory pricing. IC shortages are also expected to continue easing through 4Q21 as capacity additions accelerate.
“The semiconductor content story is intact and not only does it benefit the semiconductor companies, but the unit volume growth in many of the markets that they serve will also continue to drive very good growth for the semiconductor market,” said Mario Morales, Group Vice President, Enabling Technologies and Semiconductors at IDC.
Despite the current Covid-19 wave, consumption remains healthy. IDC reports that dedicated foundries have been allocated for the rest of the year, with capacity utilisation at nearly 100%. Front-end capacity remains tight but fabless suppliers are getting the production they need from their foundry partners.
