In an industry as cyclical as semiconductors, there is always either too much or too little supply. For the companies that design and use microchips, the past 30 years have been a constant exercise in securing the right amount of them to satisfy demand but not tying up too much money in inventory.
But that time-tested see-saw may be teetering out of balance. At a time of year that is usually low season for electronics, the industry is in the throes of one of its worst shortages.
The most visible fallout has been in the car industry, with manufacturers from Ford to Volkswagen shuttering plants or cutting production because they lack crucial semiconductor-based components. But the squeeze is also affecting other sectors that compete with carmakers for these electronic parts, which are used in products as diverse as 5G smartphones, television sets and factory automation equipment.
The natural reaction of chip manufacturers’ customers is to order more and build inventory to shield themselves.
While carmakers were still cutting orders until November last year, companies that have more experience in working with chip manufacturers directly have been doing just that.
For the past three quarters, Taiwan Semiconductor Manufacturing Company, the world’s largest contract chipmaker, has been telling investors that its customers are building more inventory than the historical seasonal average. In the second and third quarter last year, that drove inventory levels higher than seasonal average. In the fourth quarter, traditionally a seasonal peak, inventory levels were depleted below the seasonal average despite those efforts.
Now, even as the shortage persists, industry executives said inventory levels are on the rise again.
The changed pattern was initially kicked off by the shock disruption of global supply chains by the coronavirus outbreak a year ago. That led to the forced closure of almost the entire manufacturing sector in China for weeks. But even long after factories are back to normal, companies continue to fret about supply chain security.
The US government’s efforts to contain China as a technology power through trade barriers, heavy use of export controls and sanctions have added to the sense that supplies could be blocked any time and supply chains are becoming more unpredictable.
Huawei, the Chinese technology group, was the first to build large stocks of semiconductors. It was seeking to secure its survival after being cut off from chips containing US technology under sanctions that took effect in September last year. A little later, Washington restricted exports to Semiconductor Manufacturing International Corporation. That meant China’s largest chipmaker was no longer a viable supplier for many of its customers, in effect blocking a chunk of semiconductor manufacturing capacity out of the market.
“We expect customers to prepare higher levels of inventory than [the] historic seasonal average for a longer period, given that the industries continue to need to ensure supply chain security,” TSMC chief executive CC Wei told investors last month on the company’s most recent results.
Securing “supply is more important than anything else in today’s situation,” he said. “We don’t think that it’s really going to revert back to historical levels of inventory.”
Many analysts agree. “If Covid does not go away completely and the US-China tech war continues, supply chain security concerns could indeed contribute to higher inventory levels in the longer term,” said Sebastian Hou, head of technology research at CLSA, the brokerage, in Hong Kong. “The macro environment also supports that.” Hou said with interest rates at record lows, it is less difficult to fund higher inventory levels.
Moreover, the pandemic and US-China trade friction are not the only factors at play. The auto chip shortage illustrates a key risk in the almost limitless spread of semiconductors into new areas: we are seeing a collision of needs and business models from industries not previously connected with each other.
“The carmakers operate on a just-in-time model which disincentivises inventory. That is the opposite of the close and carefully managed relationships between fabless chipmakers and foundries,” said an executive at a Taiwanese contract chipmaker. “The more that kind of thing happens, the more it will disrupt things inside our industry as well.”
kathrin.hille@ft.com
Source: Economy - ft.com
