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July 8, 2022updated 03 Aug 2022 10:33am

Chip industry giants may have to scale back multi-billion dollar factory plans

Financial and political pressures could hinder ambitions to build chip factories outside Asia

By Matthew Gooding

Chip company stocks took a tumble this week after memory producer Micron Technology signalled that the end could be nigh for the global chip shortage, which has driven record profits for many businesses in the sector. The coming downturn is inconveniently timed for manufacturers planing to spend billions on new chip foundries, or fabs, to increase manufacturing capacity and expand the semiconductor supply chain, which is currently heavily reliant on producers based in South East Asia.

While this diversification is likely to prove beneficial in the long run, financial and political uncertainties could see some of the biggest schemes scaled back.

Chip manufacturing is dominated by companies in South East Asia (pic PonyWang/iStock)

US-based Micron, the third biggest producer of memory chips in the world, said that it expects revenue for the current quarter to be $7.2bn, well down on the $9bn which had been forecast by financial analysts Refinitiv. The company said falling demand, driven by a combination of high inflation, China’s continued Covid-19 lockdowns, and the war in Ukraine, means it will cut the number of chips it manufactures in the 2023 financial year, which starts in September. “I think the extent of the shift has definitely been bigger than anyone was anticipating in the ecosystem,” Micron’s chief business officer, Sumit Sadana, told Reuters. “These changes are rippling through the ecosystem now.”

The market for memory chips is often an early indicator of which way overall demand for semiconductors is heading, and the Micron news appeared to spook investors, with the share price of many of the industry’s biggest names, including TSMC, Intel and ASML, falling to their lowest point in a year, though all have recovered slightly since. “We believe that demand has weakened considerably and we’ve seen that even in the areas that have been significantly constrained,” said Nikolay Todorov, from financial analysis firm Longbow Research. “Micron will essentially start or signal that the semiconductor cycle is turning.”

TSMC and Intel are among the companies with multi-billion dollar investment plans, but may now be having a rethink.

The semiconductor supply chain’s dependence on Asia

The semiconductor industry shortages have been easing for several months, according to some industry analysts.

Speaking to Tech Monitor in March, Dan Hutcheson, from semiconductor industry analyst firm TechInsights, said that while there were still problems in specific markets, such as automotive, “the supply situation is really not a problem anymore at the macro level.” Hutcheson explained: “If you look at the total size of parts that are being shipped and the volume, the dollar volumes of the market size, everything, there’s no signs that there’s a chip shortage there.”

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Though the shortage may be coming to an end, it has sustained rapid revenue growth for many companies in the industry for the last two years. It was triggered by a boom in demand for electronics during the Covid-19 pandemic, and highlighted that much of the world’s semiconductor supply comes from South East Asia.

The situation is particularly acute when it comes to advanced chips used in data centres, high performance computing and high-end consumer devices like smartphones, where only two companies – TSMC and Samsung – have manufacturing capabilities. Last week, Samsung announced it was the first company to launch a three nanometer production line, which will make chips that are smaller, faster and more efficient than anything currently on the market, and TSMC is expected to follow with its own 3nm process later this year.

A report from Boston Consulting Group shows that 92% of advanced chips are made in Taiwan, where TSMC is based, with the other eight per cent being produced by Samsung in South Korea. Most older chips, on larger process nodes, are also made in Asia.

The wider chip manufacturing supply chain is also heavily dependent on businesses based in the region, according to the BCG report.

The US, Europe and other countries are keen to become more self-sufficient when it comes to semiconductors to avoid future supply chain problems, and as such are offering incentives to manufacturers to set up new factories.

Semiconductor companies are building capacity

The US, which only manufactures 10% of the chips it uses, has earmarked up to $52bn in subsidies for chip production as part of the CHIPS act. The bill was approved back in January 2021, but is currently being held up in Congress while funding is secured.

Both Intel and TSMC have pledged to invest in the US on the back of the CHIPS act. Intel is spending $20bn on two new factories in Arizona, and a further $20bn on a site in Ohio, while TSMC is putting $12bn into a site in Arizona. Last month another Taiwanese business, GlobalWafers, said it was planning to open a $5bn fab in Austin, Texas. Meanwhile, Samsung has designs on its own $17bn plant in Texas.

Intel also has plans for Europe, with the European Union member states keen to bolster the continent's semiconductor capabilities through the European Chips Act, a €43bn funding package announced earlier this year. The subsidies available through the act helped convince Intel to commit to invest $80bn in Europe, including $17bn to a new leading edge fab in Germany which will be open by 2027.

While this will reduce reliance on Asian-made chips to some extent, Alan Priestley, vice president analyst at Gartner, says new factories will only solve part of the problem. "It will increase capacity in the Western world, but most of the capacity that's coming up is on leading edge nodes," he says. "The problem is that devices that use leading chips need other chips to function, which are built on legacy no nodes. No-one is investing in 22nm or 28nm fabs, so that stuff is still going to be done in Asia."

The growing market for connected devices will also require more chips built on these legacy process nodes, says Mike Orme, who covers the semiconductor market for GlobalData. "The real challenge lies in looking ahead to the billions of smart connected edge devices requiring microcontrollers and sensors, the vast bulk of which can be made using 40nm process technology and above," he says. "But these are produced at very low margins compared to the leading edge stuff, so sufficient extra capacity has not been created outside China."

Priestley says the prevalence of these older chips, as well as the need for memory chips, which are mainly built in South Korea, means it will be difficult for Europe and the US to reduce their reliance on Asian companies. He adds that building so-called sovereign supply chains around chips is an impossibility because so many of the finished products chips go into are manufactured in the Far East. Indeed, more than a third of devices containing semiconductors are made in China.

"The chips are only one part of the story," Priestley says. "They have to be converted into the products people and businesses want to buy, and that process isn't being done in the same countries where the consumers live. You have to invest in other manufacturing capacity, too, [to build chip sovereignty]."

Political pressures hinder semiconductor industry plans

The slow progress of the CHIPS Act could also hinder efforts to expand the semiconductor supply chain. Though the legislation has been passed in principle, politicians have yet to agree to the full $52bn in funding, with Republican and Democrat figures both questioning whether the government should be backing foreign companies to such a great extent.

"There's quite a strong faction in congress objecting to subsidising TSMC and Samsung to build fabs in the US to thereby compete with Intel and, more generally, to using taxpayers money to subsidise companies making billions in profits," says Orme.

As a result, Intel says it will wait to commit fully to its new US fab in Ohio until the CHIPS act has passed, while TSMC has claimed it will not be able to go ahead with its planned US expansion unless it receives subsidies, citing higher operating costs in America versus its native Taiwan.

Gartner's Priestley says the stand-off could lead to some of the big investment plans being put on ice. "Work has already started on Intel's Arizona fab, but it seems to be trying to hold Ohio as a gun to the politician's heads," he says.

"Intel needs Ohio eventually, but in the current situation [with the market slowing down] a delay for six months might be the worst thing for them," he adds. "And maybe they just put one or two buildings up rather than the eight they initially planned. The world has changed in the last six months, and things are not as rosy as they had appeared. The wider economic situation is changing the dynamics of the market."

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