Chips Are Scarce – Despite Full Use of Production Capacity

The current supply bottlenecks of semiconductor manufacturers mainly affect »legacy« process nodes. Not only because capacities are being expanded primarily in the advanced nodes, explains Christophe Bianchi, EMEA High Tech and Semiconductor Director at Ansys in an interview.

?   Which semiconductors and process nodes are currently most affected by supply problems?

!   Christophe Bianchi:

The supply crisis in semiconductors has been less dramatic for advanced nodes (7 nm, 5 nm, and even 3 nm processes) as these typically correspond to high-volume, high-priced products and where clients are used to build inventory and reserve capacity in advance; thus, making it a more predictable, less fluctuating segment. This is also an area where leading manufacturers have invested significantly over the past decade.

But, with an expected CAGR of 6 to 7 %, there just hasn’t been as much capacity added for the mature nodes (28 nm and above) that represent more than 50 % of the installed capacity worldwide.

These nodes are typically used for discrete power management and power supply units, communication devices and microcontrollers. This is a domain where there is significant overlap between the automotive and the consumer electronics sectors and the capacity shortfall was most harmful to the automotive industry as it lacks the agility to easily switch supplier – partially due to more stringent and lengthier qualification processes – and did not have enough inventory to absorb the long lead time to redistribute/expand the manufacturing capacity.

Semiconductor capacity utilisation has been consistently high – at or above 80 % – in the past decade, and in 2020, this utilisation was close to 90 %, and with higher utilisation rates, there tends to be significantly increased lead time. For the next 24 to 36 months, most wafer manufacturers projects are to remain at almost full capacity with firm orders already booked way into 2024.

?   Why is the shortage hitting the automotive industry the hardest?

!   Bianchi: One of the many consequences of the pandemic in 2020, was the surge in demand for consumer electronics, PCs and communication devices. This increase in demand was met with reduced chip production, as the industry had expected demand to remain stable or even decline in some cases. In addition, car sales fell dramatically and semiconductor demand from the automotive sector shrank by around 15 %.

In the second half of 2020, when the automotive sector recovery happened faster than anticipated, the manufacturing industry had already allocated all capacity to other sectors and could not meet the automotive sector’s demand.

With its complex supply chain and just-in-time manufacturing practices, the automotive industry is particularly sensitive to supply shortfall.

Although it only represents 9 to 10 % of the worldwide chip demand, this crisis of the auto industry is a very sensitive topic for US and European consumers and politicians, as this sector employs more than 10 million people worldwide.

All indicators seem to agree that the overall chip shortage will ease by the fourth quarter this year, but some industries, such as the automotive industry, have longer supply chains and for these it could take much of 2022 to get back to normal.

Additionally, as most of today’s chips‘ final assembly and testing takes place in the Far East (Malaysia primarily), there is still some uncertainty as Covid variants may still have an impact on productivity there.

?   What is the situation in Europe and in European semiconductor factories?

!   Bianchi: The EU commission aims to deploy as much as 145 billion euros over the next two to three years to install a full semiconductor value chain. But as much as the automotive sector was badly affected by the crisis, the European semiconductor players are benefiting from the situation with an all-time high capacity utilisation, a healthy backlog of orders for the foreseeable future and the ability to increase prices in a market where supply calls the shots.

?   What can companies do if their semiconductor manufacturer cannot deliver on time? What strategy would you recommend?

!   Bianchi: Governments and local authorities around the world are currently supporting the industry with investment funds to promote chip production in their own countries. At the same time, industry and policymakers are looking for more independent and redundant supply chains that are more resilient overall. This should result in more chip producers, and the scale up of existing suppliers to help mitigate the issue in the future – with public/private funding supporting the efforts.

In the short term, however, the crisis could reverse where customers place orders with multiple suppliers because they cannot estimate supply reliability and thus misrepresent actual demand by ordering from multiple sources to avoid their own chip shortages. This artificial inflation of orders puts additional pressure on chip manufacturers, who often lack the information to prioritise their shipments to meet actual, short-term demand.

Second-sourcing is however not a simple task as lead times for chip production averages from 4 months for products already in production. Increasing capacity by moving a product to another manufacturing site usually adds another six months. Whilst switching to a different manufacturer typically adds over one year to adapt to the new manufacturing processes.

Moving from »just in time« to stocked-up inventory is probably not the proper answer for the automotive industry. To anticipate and prepare for future supply shortages, the semiconductor industry and its automotive clients need a more direct connection to match supply and demand more accurately and more predictably.

Now aware of this supply-chain critical dependency, automakers are already moving to a vertically integrated model including chip production, taking direct responsibility for multi-year, high-volume contracts to make sure there are no future capacity constraints.

Moreover, as all OEMs are fast converting to electric vehicles, with increase ADAS capabilities and a growing semiconductor content, the need for high volume, and more complex chips manufactured on advanced process nodes will help shape the global chip manufacturing landscape.

?   What lessons do you think should be learned from the current chip crisis?

!   Bianchi: Given the complexity, inter-dependence, and high capital expenses associated with semiconductor manufacturing, the risk of a disparity between supply and demand will remain high, with all industry sectors competing for capacity at semiconductor foundries.

While the European Commission's plan is to increase semiconductor production capacity on the continent from 10 % to 20 % by 2030, the competitiveness of companies will also depend on their ability to optimise the rate of return and use of resources to ensure rapid time-to-market.

Whether it is about setting up new factories or developing existing ones, it must be done with a combination of technological innovations and mastery of a complete value chain, from manufacturing to the end use of components on high growth sectors. Today, effective management of the electronic component manufacturing chain relies on the ability to anticipate and analyse the underlying factors that can impact the level of output and performance. These factors are by nature very dynamic (mechanical and thermal stress, connectivity, etc.), which is why new technologies are essential to optimise production flows. Numerical simulation provides the agility and power to test components against thousands of scenarios in a virtual environment. It thus makes it possible to guarantee that the products, once deployed, will meet the needs for reliability, performance and durability in their respective fields of applications.