Chip shortage creates new power players
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 longterm 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 lesserknown chip makers such as Microchip, NXP Semiconductors, STMicroelectronics, 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.
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.
Marvell Technology, a Silicon Valley company that designs chips and outsources the manufacturing, has experienced the change in power. While it used to give foundries estimates of its chip production needs for 12 months, it began providing them with five-year forecasts starting in April.
“You need a really good story,” said Matt Murphy, Marvell’s CEO. “Ultimately the supply chain is going to allocate to who they think are going to be the winners.”
It’s a substantial change in psychology for a mature industry where growth has generally been slow. Many chip makers for years sold largely interchangeable products and often struggled to keep their factories running profitably, particularly if sales slumped for items like personal computers and smartphones that drove most chip demand.
But the components are essential for more products now, one of many signs that rapid growth may linger. In the third quarter, total chip sales surged nearly 28% to $144.8 billion, the Semiconductor Industry Association said.
Years of industry consolidation has also wrung out excess manufacturing capacity and left fewer suppliers selling exclusive kinds of chips. So buyers that could once place and cancel orders with little notice — and play one chip maker off another to get lower prices — have less muscle.
One effect of these changes was to make chip factories more valuable, including some older ones owned by foundries. That’s because new manufacturing processes have become so costly that some chip designers aren’t shifting to the most advanced factories to make their products. The result has been a demand crunch for less-expensive production lines that are 5-10 years old.
So some foundries, in a major strategy shift, are beginning to put more money into older production technology. TSMC recently said it would build such a plant in Japan. Samsung Electronics, a key foundry rival, has also said it was considering a new “legacy” factory. But those investments will take several years to pay off.