Talk about why there is a global "chip shortage"

Since 2020, the chip shortage problem has gradually intensified, and the shortage of mobile phone chips and automotive chips has skyrocketed, which once caused panic in the industry.

Recently, SEMICON CHINA 2021 opened in Shanghai. Zhou Zixue, Chairman of the China Semiconductor Industry Association and Chairman of SMIC, said that the current tightness of semiconductor supply is the highest in nearly 20 years. The entire machine industry has never been affected by such a serious shortage of semiconductor supply in history. The current global semiconductor supply is still in a very tight situation, especially in the automotive industry.

As the epidemic situation gradually stabilizes, the demand for all products such as smartphones, automobiles and game consoles has increased unprecedentedly, squeezing manufacturing capacity.

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In 2020, global semiconductor market sales reached US$439 billion, a year-on-year increase of 6.5%. According to statistics from the China Semiconductor Industry Association, China's semiconductor market sales reached 891.1 billion yuan in 2020, a year-on-year increase of 17.8%.

The sudden surge in demand has caused all production lines to be fully loaded, and several industry giants have warned that the chip shortage will last longer than expected.

Chip shortages in mobile phones, cars, game consoles and other fields

The 2020 pandemic has caused the global technology industry supply chain to be extremely unstable. Demand has increased but production capacity has not kept up. The market panic caused by shortages has caused everyone to join the chip "stockpiling" camp. In addition, the United States has implemented a comprehensive "supply cut" to Huawei, forcing Huawei to make a large amount of reserves in advance, which has occupied TSMC's 5nm production capacity for a considerable period of time.

Huawei’s “lesson learned” has also caused panic among other mobile phone manufacturers, and no one dares to say that they will not be the next.

As a result, major mobile phone manufacturers also joined the "stockpiling" ranks, and Xiaomi, OPPO and others also began to actively place orders with wafer foundries to grab production capacity, which made the already tight chip production capacity even more overwhelmed.

In addition to mobile phones, the shortage of automotive chips is also particularly serious. Since the fourth quarter of last year, many automakers have successively reported insufficient chip supply, and auto industry giants such as Germany's Volkswagen, the United States' Ford, and Japan's Toyota have successively announced production cuts. Research firm IHS Markit pointed out that the chip shortage may lead to a global production reduction of nearly 1 million vehicles in the first quarter.

In the context of insufficient global foundry capacity, automotive semiconductors are significantly affected by capacity squeeze. Compared with automotive chips, chip manufacturers are more willing to allocate production capacity to smartphones and 5G-related fields with greater profit margins, and the automotive chip supply problem has never been effectively alleviated.

Research shows that the most in-demand automotive semiconductors are currently produced in 12-inch wafer fabs with 28nm, 45nm and 65nm production lines. At the same time, 8-inch wafer fabs with processes above 0.18um are also being squeezed out of production capacity.

Not only that, even game consoles are not immune. It is understood that Sony's PS5 is also affected by the "chip shortage". Public information shows that the processor equipped with the PS5 is designed by AMD of the United States and manufactured by TSMC in Taiwan, China. This explains why you have to fight to buy a game console.

Behind the “chip shortage”

The reason behind the "chip shortage" is first of all various natural and man-made disasters.

The epidemic has already caused setbacks in the supply chain, and coupled with the earthquake in Fukushima, Japan, Renesas Electronics, which ranks third in the global automotive chip market share, temporarily suspends its production line.

Subsequently, heavy snowstorms in Texas, the United States, caused the local power supply system to fail, and chip giants such as Samsung, NXP, and Infineon announced production suspensions at their local factories.

Water shortages in Taiwan also pose risks to the chip industry, which particularly needs fresh water. The water levels of several reservoirs in central and southern Taiwan are already below 20%.

Natural disasters have to some extent exacerbated the imbalance between global chip supply and demand, but the reasons behind the "chip shortage" are far more than that.

Nikkei Chinese previously reported that the global semiconductor shortage started with the U.S. government's sanctions against Chinese companies. Chip foundries such as SMIC became targets of sanctions, resulting in a drop in production and a concentration of orders on companies such as TSMC. However, TSMC's full production capacity was unable to cope with the demand, and the rapid recovery of demand in various industries around the world exacerbated the supply shortage.

In September 2020, Reuters reported that the Trump administration was considering whether to include SMIC on the "Entity List". As soon as the news came out, SMIC's customers began to look for alternative manufacturers. On December 18, 2020, the Bureau of Industry and Security of the U.S. Department of Commerce officially announced that SMIC would be included in the "Entity List". Without the permission of the U.S. government, SMIC will not be able to further obtain the technology and products of related U.S. companies.

SMIC's US customers account for more than 20%, including well-known companies such as Qualcomm and Broadcom. According to data from Toppu Industry Research Institute, in the fourth quarter of 2020, SMIC ranked fifth in the revenue ranking of the world's top ten wafer foundries, with a market share of about 4.3%, and its influence should not be underestimated.

How to solve the “chip shortage”

When will this chip shortage end? Some industry insiders said that the chip shortage may ease in the second half of 2021.

At the national level, the country attaches great importance to the chip industry. Earlier this month, Tian Yulong, member of the Party Leadership Group, chief engineer and spokesperson of the Ministry of Industry and Information Technology, said in response to a reporter's question that chip integrated circuits are the cornerstone of the information society and an important foundation of information technology. The high-quality development of the chip industry is related to the development of the modern information industry and industrial chain. Tian Yulong said that the Chinese government will provide strong support at the national level to jointly create a market-oriented, legal and international business environment and an ecological environment for industrial development.

Subsequently, SMIC obtained the approval of the US government and resumed the supply of semiconductor equipment to SMIC. On March 3, SMIC announced that it had signed a purchase order of approximately US$1.2 billion with ASML, a Dutch semiconductor equipment supplier, to purchase deep ultraviolet lithography machines (DUV). This will help SMIC expand production in mature processes and solve some of the problems of tight production capacity.

On March 11, the semiconductor industry associations of China and the United States announced that they would jointly establish the "China-US Semiconductor Industry Technology and Trade Restrictions Working Group". It is reported that the establishment of this working group will establish an information sharing mechanism for timely communication between the semiconductor industries of China and the United States, and exchange policies on export controls, supply chain security, encryption and other technologies and trade restrictions.

The two associations expressed the hope that the working group will strengthen communication and promote deeper mutual understanding and trust. The working group will follow fair competition, intellectual property protection and global trade rules, resolve the concerns of the semiconductor industries of China and the United States through dialogue and cooperation, and jointly work to build a robust and resilient global semiconductor value chain.

Through this cooperation between China and the United States, the issue of chip globalization may be further resolved.

Some industry insiders said that the high demand for chips is expected to continue until the end of 2021, and will remain relatively tense throughout the first half of the year.