With most of the developed world stuck at home, it has been a good year for chipmakers (no, not those kind of chips). Developers and manufacturers of semiconductors saw a massive bump in demand in 2020, buoyed by the “stay at home” orders issued by governments and the consequent increased computer usage. TSMC, the world’s biggest supplier of computer chips, saw its profits climb 23% in the last three months of the year, up to $5.1 billion.
The launch of Apple’s new iPhone – with chips provided by TSMC – helped the Taiwanese company into the year-end. But even when that bump-up is accounted for, the underlying trend is undoubtedly strong. Consumption of just about everything digital shot up last year – from remote working and learning to servers and gaming. TSMC, as with others in the semiconductor business, had a part to play in all of it.
Before the pandemic, there were worries that TSMC would be hit by rising US-China tensions, after the Trump administration banned sales to Huawei, one of its best customers. But demand for semiconductors during the pandemic has been so strong suppliers cannot keep up. Talk now is of a global shortage of microchips, affecting the automotive industry in particular.
More advanced cars need more (standard) chips, but manufacturers have been reserving capacity for their bigger tech customers and their needs for more sophisticated, higher profit chips. The shortage has left car manufacturing crippled, with Volkswagen, Nissan and Honda all forced to cut production. Problems are so pronounced that TSMC called it their “top priority” to solve shortages for carmakers.
Solving it will be a tall order. The chip industry at large is seeing shortages in every area, with analysts expecting supply gaps to last into 2022. Underlying these shortages are many technical issues. For example, scaling up chip production is slow and expensive, and access to the raw materials is limited. With demand for 5G phones and high-tech gear sky-rocketing, chipmakers have invested in equipment to make newer and better chips which they can sell at higher margins.
But demand for older chips is still growing, and since making older models is less lucrative, producers have not kept pace. Indeed, supply disruptions are being most acutely felt are in older technologies using standard chips.
Some big industry players were already beset by difficulties. Intel, the star of the first tech boom, this week fired CEO Bob Swan after product delays and deep-seated issues that have knocked the company off its perch. Intel is one of the few chip companies to do both design and production in house, using techniques pioneered while incoming chief Pat Gelsinger was the company’s technology officer. Its “Tick Tock” method of production – which allowed for faster and faster technical upgrades – was thought of as cutting edge ten years ago. But the company has now fallen so far behind other players like TSMC that there are suggestions it should cease its manufacturing arm altogether.
If Intel were to focus just on design (“fabless” as it’s known among the cognoscenti), it would hardly help the global chip shortage. While there are multiple chip designers in the global market – ARM in the UK, NVIDIA and AMD in the US – manufacturers are comparatively few. TSMC and Samsung are the largest in this area and the most technically able, but 2020 has highlighted the dangers of overly concentrated global supply lines. And with a lasting global shortage, there is an even greater incentive to branch out.
For governments, the chip supply issue is now a national security issue. Over the last four years we have seen private technological superiority become an explicit point of national security in the context of US-China tensions. China, it should be said, is some way behind in chip production technologies, and has to rely on TSMC for most of its supply. But even in the US, there are serious concerns that it may be left without a leading chip manufacturer to count on.
With governments around the world investing heavily in the wake of COVID, technological infrastructure is one area likely to see a big boost. With chip design and production now also a cause for national security concern, we could well see chipmakers receiving subsidies in the post- pandemic recovery. In addition, the coming ‘green revolution’ in tech needs plentiful supply of chips – for everything from electric cars to newer, less energy-intensive servers. ARM is currently developing in this direction, and its past association with Apple has shown it can compete with the likes of Intel and AMD.
Even without fiscal expansion, chipmaking is sure to see more investment. There have been concerns throughout the pandemic and ensuing recession that businesses would be reluctant to increase capital expenditure (capex) toward boosting productivity. TSMC’s latest results show a huge increase in capex – with the company clearly using this period of strength to expand its production.
However, it would be misleading to focus entirely on the end production of chips. European tech companies like ASML and Infineon, for example, are not directly producers or designers but still sit on top of the chip pyramid. ASML makes the equipment that TSMC and Samsung use to produce their chips, meaning it has done extremely well from the growing global chip demand.
What we are seeing in the chip industry is a confluence of many underlying trends. There are technological changes on the supply side, which are slow moving and are currently limiting production. Then there is a longer-term demand story, including environmental and technical factors, which are pushing demand structurally higher. And finally, there is the pandemic, providing a sudden sharp boost. All of these factors point to chip demand outpacing supply for the foreseeable future. So, while the pandemic has become a welcome catalyst for ever-more digital capability and convenience, we cannot expect the past decade’s trend of technology improvements without price increases to persist. With global chip-making industry operating at full capacity, and still demand outstripping supply, producer pricing power is as strong as it has ever been.
