Shortages – Again
As we have noted a number of times, the tech press is ripe with commentary on shortages in the CE space. Components from MLCCs to open panel displays have been singled out as seeing price increases based on shortages or higher prices of raw materials, intermediates, or end-products, and recently shortages have been blamed for production slowdowns or temporary factory closures in the automotive space, due to a lack of silicon components. As we have also noted, the fear that a company will not be able to meet expected demand can cause buyers to over order, with the thought that supplier allocations will bring delivered amounts close to ‘real’ expectations. Not only does this tighten these markets, but it gives suppliers the opportunity to continue to raise prices, not just because raw material prices are increasing, but because they know that buyers will pay up to guarantee supply.
At a more basic level, silicon foundries are in an ideal position, as long as they are not constrained by wafer and other semiconductor process materials. Semiconductor capacity works on a sliding scale in that common silicon components are usually produced on the same node, with each node having a calculable industry capacity and cost. Not all products need to be fabricated on 7nm of 5nm nodes, which get lots of press, so there is considerable demand for 28nm and larger nodes, where capacity is less constrained.
But this all falls apart when foundries are running at full capacity, which many are, and they are no longer looking to fill capacity at each node. At this point foundries are looking to see which customers are the most ‘in need’, which translates to who will pay the most for capacity at each node. A number of well-known automobile manufacturers have either indicated that they were facing possible temporary line shutdowns or have already closed lines on an interim basis. Most blame a shortage of silicon-based components and governments in countries where the automotive industry represents a sizeable piece of GNP are beginning to get involved. That said, the world’s largest foundry, Taiwan Semiconductor (TSM) has taken it upon itself to alleviate the shortage.
TSM has responded to requests from various governments and agencies, and has agreed to put orders for its automotive chip customers first and move them up to SHR (Super Hot Run) status in order to help to alleviate these shortages. While this seemingly altruistic step will possibly help a few of TSM’s larger automotive customers, it will also make it more difficult for 2nd tier customers to get orders run, which will put those customers into an evaluation process that would try to identify the lost revenue and operational cost of shutting down production, against paying a higher price for foundry time. In addition, it seems that along with moving automotive customers to the front of the line comes a 20% increase in price, so if the big boys are already paying an additional 20% to get product made, we have to assume that 2nd and 3rd tier customers would be paying a bit more, regardless of what their analysis tells them.
For those that would be in jeopardy if they shutter a line until component supplies can catch up, they have little choice but to accept the 20% boost and then another add-on to get TSM’s attention, which only serves to both embolden foundries as to what they can charge and escalate the rapidity and severity of price increases. None of this is surprising, however the basis for this (we hate to use the word) ‘inflationary’ cycle, is a virus, which hopefully will begin to have a lessening effect on the global population over the next six to nine months. This leaves plans on both sides of the supply/demand seesaw in limbo. As a CE supplier, do we continue to expect that accelerated demand will continue and build inventory toward those goals? As a component supplier do we add capacity to meet what might be a more permanent demand increase?
Luckily we don’t have to make those decisions, but what we do have to deal with is the end-user price increase that are already affecting CE products, and at what point, even without a change in virus status, they would affect demand. We do not expect companies that are in such advantageous positions to hold back increasing prices for noble reasons, but as price increases filter through inventory and production costs, they just make the ‘other side’ of the cycle more exaggerated and potentially more devastating The equation then becomes one of whether management goes for higher profits in the near-term, knowing that things could get messy if and when things return to ‘normal’, or whether they look at the last year as an anomaly and maintain a less aggressive pricing policy. We can’t answer the question, but having been in the business through a number of CE cycles, while we would like to think that the latter would be the case, its hard to imagine the CEO of a company sitting down with the board and trying to explain why they are not taking advantage of potential price increases above their material costs. We guess that answers the question…
At a more basic level, silicon foundries are in an ideal position, as long as they are not constrained by wafer and other semiconductor process materials. Semiconductor capacity works on a sliding scale in that common silicon components are usually produced on the same node, with each node having a calculable industry capacity and cost. Not all products need to be fabricated on 7nm of 5nm nodes, which get lots of press, so there is considerable demand for 28nm and larger nodes, where capacity is less constrained.
But this all falls apart when foundries are running at full capacity, which many are, and they are no longer looking to fill capacity at each node. At this point foundries are looking to see which customers are the most ‘in need’, which translates to who will pay the most for capacity at each node. A number of well-known automobile manufacturers have either indicated that they were facing possible temporary line shutdowns or have already closed lines on an interim basis. Most blame a shortage of silicon-based components and governments in countries where the automotive industry represents a sizeable piece of GNP are beginning to get involved. That said, the world’s largest foundry, Taiwan Semiconductor (TSM) has taken it upon itself to alleviate the shortage.
TSM has responded to requests from various governments and agencies, and has agreed to put orders for its automotive chip customers first and move them up to SHR (Super Hot Run) status in order to help to alleviate these shortages. While this seemingly altruistic step will possibly help a few of TSM’s larger automotive customers, it will also make it more difficult for 2nd tier customers to get orders run, which will put those customers into an evaluation process that would try to identify the lost revenue and operational cost of shutting down production, against paying a higher price for foundry time. In addition, it seems that along with moving automotive customers to the front of the line comes a 20% increase in price, so if the big boys are already paying an additional 20% to get product made, we have to assume that 2nd and 3rd tier customers would be paying a bit more, regardless of what their analysis tells them.
For those that would be in jeopardy if they shutter a line until component supplies can catch up, they have little choice but to accept the 20% boost and then another add-on to get TSM’s attention, which only serves to both embolden foundries as to what they can charge and escalate the rapidity and severity of price increases. None of this is surprising, however the basis for this (we hate to use the word) ‘inflationary’ cycle, is a virus, which hopefully will begin to have a lessening effect on the global population over the next six to nine months. This leaves plans on both sides of the supply/demand seesaw in limbo. As a CE supplier, do we continue to expect that accelerated demand will continue and build inventory toward those goals? As a component supplier do we add capacity to meet what might be a more permanent demand increase?
Luckily we don’t have to make those decisions, but what we do have to deal with is the end-user price increase that are already affecting CE products, and at what point, even without a change in virus status, they would affect demand. We do not expect companies that are in such advantageous positions to hold back increasing prices for noble reasons, but as price increases filter through inventory and production costs, they just make the ‘other side’ of the cycle more exaggerated and potentially more devastating The equation then becomes one of whether management goes for higher profits in the near-term, knowing that things could get messy if and when things return to ‘normal’, or whether they look at the last year as an anomaly and maintain a less aggressive pricing policy. We can’t answer the question, but having been in the business through a number of CE cycles, while we would like to think that the latter would be the case, its hard to imagine the CEO of a company sitting down with the board and trying to explain why they are not taking advantage of potential price increases above their material costs. We guess that answers the question…
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