The impact of the semiconductor crisis is being devastating. In fact, it has much deeper ramifications than users can guess if we just look at the extent to which it affects us directly. Chip shortages have made getting a state-of-the-art graphics card or video game console, among other electronic devices, a real feat, but this is only the tip of the iceberg.
And it is that consumer electronics is by no means the only industry on which much of the burden of this crisis has fallen. Automotive companies, appliance manufacturers and any other industrial sector whose production depends to a greater or lesser extent on semiconductors are also being deeply burdened by the shortage of chips. In fact, that companies like Toyota or General Motors have been forced to reduce the production of cars in some factories due to the deficit of these components clearly reflects the challenge we face.
If we want to understand how we got to this situation, why it is so difficult to solve it and for how long it will last, we necessarily have to investigate on several fronts. At the end of the day, the causes of this crisis are multiple, and tackling it in all probability will require working in several areas in which many actors will be involved, and not only semiconductor manufacturers, as might be expected at first.
A crisis cooked over low heat and thanks to the concurrence of many ingredients
The deep deficit of integrated circuits in which we have been mired for more than a year began to develop long before this crisis gave its first signs of life. Users may have the feeling that the reason why it is so difficult to buy some devices without falling into the clutches of speculators is that fewer chips are being manufactured, but the reality is much more complex.
This statement by Jorge Cui Liu, Smart Devices Product Manager of Huawei CBG Spain, clearly reflects the germ of this challenge: «The global shortage of integrated circuits is a reality generated by the high demand for devices last year, and this year continues. We are investing a lot in new factories with Intel, which is one of our main collaborators, precisely to try to respond to this high demand”.
“The global shortage of integrated circuits is a reality generated by the high demand for devices last year, and this year continues”
Jorge’s words reveal the factor that has undoubtedly triggered the semiconductor crisis: a marked imbalance between supply and demand. This approach invites us to analyze what has happened with both parameters, so I suggest that we start with the one that is closest to users: demand.
The day-to-day life of a large part of the world’s population was suddenly altered in March 2020. Community transmission of the SARS-CoV-2 virus was raging and many millions of people around the world were forced to spend much more time at home to protect themselves from this infectious agent. We all have this very much in mind because, although the situation has fortunately improved, we have not yet overcome the pandemic.
The most fortunate people presented the opportunity to give some normality to their daily routine by working and studying from home, but this turning point required many of them to invest in new technological equipment. The PC market reflects this trend with overwhelming clarity, so we can turn to it to illustrate the impact of the increase in demand caused by the pandemic just from March of last year.
“During the second quarter we are experiencing very strong growth. I cannot offer you breakdown figures because we do not make them public by region, but I can tell you that in the world market during the month of April we grew 40% compared to the previous year”, Emmanuel Fromont, Acer corporate vice president, confessed to me in June 2020 and President of Acer EMEA. At that time, market studies were already beginning to show that the demand for computers and other electronic devices was skyrocketing. And a year later this trend has not changed one iota.
During the first quarter of 2021 the global PC market has grown by 55%
According to the consultancy IDC, during the first quarter of 2021 the global PC market has grown by 55% if we compare it with the same period of the previous year. It is a real beast. Of course, there is life beyond computers, so we can pay attention to another of the most elusive devices for users in recent months: graphics cards.
The demand for this component has been overwhelmed by the cryptocurrency mining boom, which has been fed both by dedicated hardware, such as ASIC chips, which are integrated circuits specifically designed for mining, as well as graphics cards. GPUs are less efficient in this usage scenario than ASIC chips, but many miners have not hesitated to stock up on graphics cards to solve their own needs, unleashing a shortage that has shattered the illusion of many players who had decided to renew. the graphics card of your PC.
Fortunately, graphics card manufacturers have already begun to take action. NVIDIA in particular has chosen to lower the hash rate of the GeForce RTX 3080, 3070 and 3060 Ti graphics cards that are currently being manufactured to make them much less attractive to cryptocurrency miners. However, there is another ingredient in the recipe for increased demand for semiconductors that we cannot ignore.
And is that the deployment of new technologies that require advanced integrated circuits, such as the implementation of 5G networks or the launch of new data centers designed to support cloud services, among other options, has also had a very profound impact on the increase in demand for highly integrated chips. And its production is complex, as Jesús Sánchez Paniagua, Intel’s Director of Consumption for Southwest Europe recently explained to us :
“There is a very important difference between the manufacture of semiconductors for high-performance processors or for other industries”, Jesús Sánchez, Intel Consumer Director
“The semiconductor market is experiencing a huge explosion that affects multiple sectors, but there is a very important difference between the manufacture of semiconductors for high-performance processors or for other industries. The integrated circuits that are needed for many of these industries impose less demanding manufacturing requirements than those necessary for highly integrated devices, such as microprocessors for computers, ”Jesus declared during our conversation.
The statement of this Intel executive invites us to inquire into the reasons why the semiconductor industry is not being able to cope with the increase in demand for these components. And the first of them comes from afar. In recent years only four companies have proven capable of manufacturing integrated circuits using highly advanced technology nodes: TSMC, Samsung, Intel and GlobalFoundries. And the latter two have lagged relatively behind.
That the production of the most sophisticated integrated circuits is in the hands of only a few companies is a problem because, as we are seeing, if the demand increases significantly it is very difficult for them to be able to satisfy it. In this context, TSMC plays an absolutely leading role because in its client portfolio companies with the size of Apple, NVIDIA, AMD or Qualcomm, among many others, rub shoulders. And all of them turn to this Taiwanese semiconductor manufacturer because it currently has the most advanced technological nodes (it has already announced that in 2022 it will start mass production of chips with 3 nm photolithography).
In addition, to curl the loop, the conflict between the United States and China since 2018 has inflicted commercial sanctions on the Asian giant and has triggered a crossing of tariffs and blockades between the two countries. However, China has clearly been the hardest hit as some of its chipmakers use US-sourced technologies, which has caused its integrated circuit production capacity to suffer, further deepening the crisis. The Huawei veto that we have talked about so much in recent years is the most flagrant proof of this conflict.
The production model of semiconductor manufacturers does not make it easy
The current context of very high demand for integrated circuits has put all semiconductor manufacturers on the ropes, and especially those that produce for other companies, such as TSMC or Samsung. From the outside, we could think lightly that what they have to do is manufacture more, multiplying the shifts or taking any other measure that allows them to produce more chips. But it is not at all that simple.
The most advanced photolithographic processes cannot be accelerated on demand because they involve extremely complex procedures
The production capacity of these companies was already touching the limit before the crisis began, so going beyond is a real challenge. The technological equipment that is necessary to use to produce integrated circuits, especially if it is the highly integrated chips that Jesús Sánchez, from Intel, mentioned above, is very sophisticated. And the most advanced photolithographic processes cannot be accelerated on demand because they involve extremely complex procedures that are carried out in a facility that must meet very demanding requirements.
Even so, given the circumstances, the main semiconductor manufacturers have confessed that they are doing everything in their power to increase production within the moderate margin of maneuver they have. The strategy that GlobalFoundries is using illustrates beautifully how complex this landscape is. And it is that this company has asked its engineers to implement any strategy that allows them to increase production, even if it is minimally.
What has transpired is that two of the measures that have been introduced in the production chain consist of deferring some maintenance tasks of the equipment and accelerating the movement of wafers through the manufacturing lines. The profit is small, but under the circumstances this is better than nothing. Although this strategy is limited to GlobalFoundries’ factories in the United States, Germany and Singapore, there is no doubt that the other semiconductor manufacturers are pursuing a similar policy.
But this is not all. As might be expected, this context has caused integrated circuit manufacturers to prioritize the production of those chips that provide them the most benefits, which are usually the most advanced because they have a higher marketing price. And this philosophy has had a negative impact on the production of integrated circuits that are manufactured in veteran technological nodes, which usually feed such demanding industries as the automotive industry or household appliances, among others.
This is precisely the strategy that has caused, as I mentioned in the first paragraphs of this article, that Toyota and General Motors, and probably many more brands, have been forced to reduce production in some of their factories. And it has had consequences. Car manufacturers have complained to their governments, and the weight that this industrial activity has in the global economy has caused the United States, Germany and Japan, which are the three countries that make the most cars, to put pressure on Asian semiconductor manufacturers, and especially to TSMC and Samsung, to give priority to the production of the chips required by the automotive industry.
Mark Liu, TSMC’s CEO, had no choice but to jump into the fray : “We have been forced to renegotiate our agreement with some of our clients at the request of governments, who have asked us to prioritize the manufacture of the chips used by cars because they are important to the global economy, “says the head of the world’s largest semiconductor manufacturing company.
The pressure on integrated circuit manufacturers is fostering competition between the different industries they serve
The pressure that integrated circuit manufacturers are being subjected to is fostering competition between the various industries they serve as they all demand more attention from you. Some of those affected by the pressure from the automotive industry are the manufacturers of smartphones and computers, which places semiconductor producers in the position of establishing manufacturing quotas that leave all their customers satisfied, something that according to the circumstances seem very difficult to meet.
The ballot before them is so difficult to solve that some semiconductor manufacturers have confirmed that they have had to start auditing their customers’ orders to prevent some of them from hoarding production. And it is that, apparently, they have detected that there are companies that are asking for chips above their real needs in order to supply themselves for a medium term in which nothing seems to indicate that this crisis will subside.
Starting a new semiconductor factory is slow and very expensive
Everything we have seen so far places us in front of an unappealable reality: we need more semiconductor factories. If the ones we have are not able to meet the current demand because, despite their efforts, they have only managed to increase production marginally, it is clear that it is essential to put more in place. The problem is that doing so requires investing a lot of time and a lot of money.
“An avant-garde chip factory takes no less than four years to be fully operational”, Ignacio Mártil, Professor of Electronics at the Complutense University of Madrid
According to Ignacio Mártil de la Plaza, professor of Electronics at the Complutense University of Madrid and an accomplished expert in semiconductors and photovoltaic solar energy, “a state-of-the-art chip factory takes no less than four years to be fully operational.” This slap of reality strongly reflects that we have no margin to resolve this crisis in the short term. At least if we stick to the production of the highly integrated chips required, among others, by the telecommunications, professional and personal computing, and mobile phones industries.
In addition, the investment that must be made is enormous because the facilities must meet very demanding requirements. Clean rooms in which semiconductors are manufactured must incorporate air filtering systems capable of retaining really tiny particles in suspension in order to minimize the level of contamination and not damage the chips. And the photolithographic equipment used to produce them from silicon wafers is very sophisticated and expensive.
At the end of last March Pat Gelsinger, Intel’s new CEO, announced that the company he directs will invest approximately $ 20 billion to develop two new factories on its campus in the town of Ocotillo, Arizona (United States). United). And probably the cost derived from the development of these facilities will be even higher because it is possible that this figure does not include the subsidy that Intel will surely receive from the state to cover a part of the investment.
It is evident that in the short term more factories will not be added to the existing establishment, unless they have been planned for several years and their construction has begun before the crisis. However, this has not prevented the most industrialized countries on the planet from beginning to orchestrate a strategy to limit their dependence on the production of integrated circuits beyond their borders. The United States, China and the European Union have openly declared their intention to start up new semiconductor factories in order to increase their chip production capacity.
Thierry Breton, the former French economy minister and current internal markets commissioner, has assured that the European Union plans to invest 800 million euros to attract TSMC, Samsung or Intel to the old continent and co-finance the construction of a cutting-edge semiconductor factory. This statement is aligned with the confirmation by Intel and Apple that both want to strengthen their position in Europe by starting up new semiconductor factories equipped with highly advanced technological nodes.
In any case, we cannot count on these factories in the short term, so they cannot participate in the dissolution of the current crisis. Pat Gelsinger, Intel’s CEO, predicted at the end of last April that the huge investment that needs to be made to start up new integrated circuit factories and the time that must be invested in this process will cause the chip deficit It lasts for two more years , so it seems unlikely that the imbalance between supply and demand that has put us in this situation will expire before 2023. It is time to arm yourself with patience. And wait.
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