Semiconductors are enablers that support the rise of technologies such as artificial intelligence (AI) and IoT. Though tiny in size, these wafer-like circuit chips are instrumental in raising low-latency and reliable connectivity with the 5G and 4.0 industrial revolutions, compounded in this pandemic-stricken landscape.
Last year, global semiconductor revenue increased by 5.4% to US$442 billion, according to the International Data Corporation (IDC). This growth is fuelled by demand for smart devices and cloud services as more activities took place remotely. This year, revenue is expected to grow further, even as demand for notebooks and TVs likely return to pre-pandemic levels, as the world seeks out telecommunications and networking devices to propel 5G, WiFi6/6E deployment.
Automotive industry bears the brunt
Currently, global demand for chips outstrips supply much to the chagrin of many industries players. Indisputably, the industry’s hardest hit is the automotive industry, even though its applications account for about 10% of global chip production, versus PCs and laptops that account for 32%.
With the automotive industry rivaling other industries for chips, car production has waned. Progress in autonomous driving will likely be hampered too. Since last year, automakers like General Motor, Ford, Nissan and Toyota have been forced to scale back on car production, with consulting firm AlixPartners estimating that global car production to be set back by some 2.5 million units by the end of the year. One of the latest automakers to halt production is Hyundai, despite earlier reports that the South Korean automaker has accumulated a stockpile of chips. This month, a couple of its plants had to delay production because of chips shortages. Other affected industries include consumer electronics, healthcare and gaming. Samsung, for instance, has announced that the launch of its latest smartphone will likely be delayed.
Foundries to expand capacity as countries raise self-sufficiency
It is estimated that the semiconductor market will reach US$476 billion this year, as economies begin to pick up with more vaccinations being administered worldwide. According to TrendForce, demand for end devices will result in hiked demand for components such as power management (PMIC) and display driver IC (DDI). This is coupled with surged demand in high-end CPUs and cloud services including IaaS, SaaS and PaaS.
Already, Shanghai-based SMIC, the fourth largest foundry in the world, reported a record-high US$4.2 billion in revenue in 2020. This represents a 24.8% growth from the preceding year. Net profits jumped twofold to reach US$3.91 billion.
Last year, the company was blacklisted by the US as China continues to raise stakes in its semiconductor industry to ramp up on domestic capacity. Last month, SMIC announced that it would build a US$2.35 billion plant using funds from Shenzhen’s government. The government has also called on local chipmakers to merge to better compete on the international front.
Given a persistent shortage, Chinese companies have since been stockpiling chips. In March, China imported a record-high 58.9 billion semiconductor units amounting to US$35.9 billion, according to China’s General Administration of Customs. China’s first-quarter imports totaled 155.6 billion units, up 33.6% from the previous year. Earlier, Beijing announced that import levies would be waived for semiconductor components until 2030. One of the beneficiaries of increased semiconductor imports is China’s telecom industry, which grew by 20.6% last year based on revenue. This is aligned with the country’s plan to ramp up on 5G base stations nationwide and raise digitalisation in sectors like energy and manufacturing.
Hailed as an enabler to transform transportation, manufacturing, healthcare and so forth, 5G deployment has a significant impact on economies. Not to be outdone by China, the Biden administration has recently called for US$50 billion funding to boost its chip industry essential to 5G rollouts and promoting self-sufficiency; US’ manufacturing capacity has declined from 37% in 1990 to just 12% today, according to the US Semiconductor Industry Association (SIA). To address a semiconductor shortage, President Biden recently held a virtual meeting with representatives from semiconductor companies such as Intel as well as Asia-based TSMA and Samsung Electronics.
Currently, about 72% of global semiconductors are produced in Asia, with Taiwan’s TSMC and South Korea’s Samsung Electronics leading in high-end chips below 10 nanometers. In the first quarter of this year, TSMC reported a 19.4% growth in net profit driven by strong chip demand. To alleviate a worldwide shortage, the world’s largest semiconductor manufacturer TSMC will be spending US$100 billion to expand capacity through 2023.
Now more than before, the US and Europe rely heavily on Asian foundries like TSMC and Samsung Electronics for chips. Yet, TSMC and Samsung Electronics are dependent on semiconductor capital equipment vendors in the west for equipment and machinery to manufacture advanced chips. In fact, Samsung Electronics is reportedly procuring core semiconductor production equipment from the US and the Netherlands, with emphasis placed on procuring from Netherlands’ ASML, the world’s sole producer of extreme ultra-ultraviolet (EUV) lithography equipment, to raise capacity. However, chip productions have long lead times and the impact of ramped-up production will not be felt immediately.
Amid growing shortage last year, the industry witnessed several high-profile mergers and acquisitions. More is being done to court tech giants like Google, Apple and Amazon as they continue to accelerate their cloud computing and AI ambitions. Just last month, Intel unveiled a new plan to enter the foundry business with two new fabs in the US. While this move might seem strategic amid global chip shortages, catching up with dominant foundries like TSMC and Samsung Electronics might prove to be a tall order for Intel, in the short term at least.
Nevertheless, increased 5G commercialization and accelerated digital transformation efforts worldwide will no doubt be a strong stimulus for high-performing semiconductors. It is suffice to say industries worldwide will continue to buy out semiconductors, with demand far exceeding supply until at least next year.