Mon, Aug 22, 2022 page9

• A new normal is dividing the global chip industry

  • By Tim Culpan / Bloomberg Opinion
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  Semiconductor stockpiles are at a record high and a global economic downturn is unlikely to change that picture.

  However, an increasingly tense geopolitical environment and continued supply chain friction is dividing the largest from other semiconductor manufacturers, which could affect how well they survive.

  The technology cold war between the US and China that gained steam under the administration of former US president Donald Trump and was exacerbated by the COVID-19 pandemic has reset expectations for how much product should be kept on the shelves. The global shortage of some chips peaked last year after customers that included automakers cut orders only to desperately need them a few months later.

  At the same time, the popularity of streaming video services such as Netflix Inc, which were forced to expand their server capacity, and greater use of gadgets from companies like Sony Group Corp created competition for limited manufacturing capacity.

  Inventory days, a measure of how long it takes to sell and replace stockpiles, have never been higher at dedicated chip foundries Taiwan Semiconductor Manufacturing Co (TSMC), United Microelectronics Corp (UMC) and Semiconductor Manufacturing International Corp. Those three companies are ranked Nos. 1, 3 and 5 in global made-to-order market share — accounting for 67 percent of the total. Data from Samsung Electronics Co, the second-largest foundry, are not analyzed here because the company does not provide data for its contract chip business. Data for fourth-ranked GlobalFoundries Inc only dates back two years.

  Digging deeper, we can see that manufacturers outside TSMC and possibly Samsung are still holding on to higher stockpiles as sales slow. At the end of June, inventory at TSMC, which accounts for about 55 percent of the foundry market, was equal to 40 percent of that quarter’s revenue. Its rivals collectively had a figure of 57 percent.

  Even though semiconductor demand has not declined, it is weakening as consumers tighten their belts and companies including Apple Inc freeze hiring or cut staff. Those chipmakers that focus mainly on older technology for mainstream use — such as components used in smartphones, computers and televisions —are seeing a more dramatic slowdown.

  TSMC and Samsung, the industry leaders, are enjoying more robust outlooks for their foundry services because they can offer customers superior manufacturing processes for higher-end applications like artificial intelligence and 5G mobile communications. This competitive advantage offers a greater financial buffer, reducing the risk of holding higher inventory.

  Easing the danger for the other players are long-term supply deals including those made public in recent years by both UMC and GlobalFoundries. The latter earlier this month announced a new deal with Qualcomm Inc that guarantees a total of US$7 billion in revenue from the Californian designer of chips used in smartphones through 2028, slightly more than GlobalFoundries’ entire sales last year.

  While TSMC has not disclosed similar agreements, assurances that its capacity will find buyers are somewhat implicit in the company’s business model and aggressive spending plans, with management repeatedly stating that the US$100 billion it is investing over three years is based on consultation with customers in anticipation of their needs.

  A raft of new policies, including a US$52 billion spending package from the US Congress, is aimed at making it easier and cheaper to expand capacity in America and Europe. TSMC, Samsung, GlobalFoundries and foundry newcomer Intel Corp are all set to benefit.

  Yet investors remain unconvinced that all this spending will support earnings. Most foundry stocks have declined over the past year, even with continued double-digit revenue growth, in large part because the high rate of spending on new facilities heightens concerns that capacity will outstrip demand if a global recession hits. That is a reasonable concern, as semiconductor sales tend to closely track macroeconomic indicators such as growth in GDP.

  However, the new normal — a sustained higher rate of stockpiles — is also likely to worsen the divide between the biggest companies with better technology, and other chipmakers who are highly dependent on demand for mainstream products. This changing landscape will likely mean that the strong get stronger, and the weaker struggle to hold on.

  Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News.

  This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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