Global chip shortage swaps power to manufacturers
SAN FRANCISCO — Since 1989, Microchip Technology has operated in an unglamorous backwater of the electronics industry, making chips called microcontrollers that add computing power to cars, industrial equipment and many other products.
Now a global chip shortage has elevated the company’s profile.
Demand for Microchip’s products is running more than 50% higher than it can supply.
That has put the company, based in Chandler, Arizona, in an unfamiliar position of power, which it began wielding this year.
While Microchip normally lets customers cancel a chip order within 90 days of delivery, it began offering shipment priority to clients that signed contracts for 12 months of orders that couldn’t be revoked or rescheduled.
These commitments reduced the chances that orders would evaporate when the scarcity ended, giving Microchip more confidence to safely hire workers and buy costly equipment to increase production.
“It gives us the ability to not hold back,” said Ganesh Moorthy, president and CEO of Microchip, which Thursday reported that profit in the latest quarter tripled and that sales rose 26% to $1.65 billion.
Such contracts are just one example of how the $500 billion chip industry is changing because of the silicon shortage, with many of the shifts likely to outlive the pandemic-fueled dearth.
The lack of the tiny components — which has pinched makers of cars, game consoles, medical devices and many other goods — has been a stark reminder of the foundational nature of chips, which act as the brains of computers and other products.
Chief among the changes is a long-term shift in market power from chip buyers to sellers, particularly those that own factories that make the semiconductors.
The most visible beneficiaries have been giant chip manufacturers like Taiwan Semiconductor Manufacturing Co., which offer services called foundries that build chips for other companies.
But the shortage has also sharply bolstered the influence of lesser-known chip makers such as Microchip, NXP Semiconductors, STMicro-electronics, Onsemi and Infineon, which design and sell thousands of chip varieties to thousands of customers.
These companies, which build many products in their own aging factories, now are increasingly able to choose which customers get how many of their scarce chips.
Many are favoring buyers who act more like partners, by taking steps like signing long-term purchase commitments or investing to help chip makers increase production.
Above all, the chip makers are asking clients to share more information earlier about which chips they will need, which helps guide decisions about how to lift manufacturing.
“That visibility is what we need,” said Hassane El-Khoury, CEO of chip maker Onsemi, a company previously known as ON Semiconductor.
Many of the chip makers said they were using their new power with restraint, helping customers avoid problems like factory shutdowns and raising prices modestly.
That’s because gouging customers, they said, could cause bad blood that would hurt sales when shortages end.
Even so, the power shift has been unmistakable.
“Today there is no leverage” for buyers, said Mark Adams, CEO of Smart Global Holdings, a major user of memory chips.