Over the last six months, technology companies like Dell, Nokia, and AT&T Mobility have announced adverse impacts on their respective abilities to meet consumer demand due to semiconductor chip shortages since.
Shortages have adversely affected financial performance of the above companies the last two quarters.
Chip shortages have also affected vendors’ abilities to deliver equipment to carriers like AT&T Mobility resulting in AT&T Mobility being unable to upgrade its network quickly enough to meet consumer cries for better performance, all of this taking place in the world of semiconductor manufacturing – a cyclical business requiring long lead times.
Depending on who you listen to, for example, investment bank J.P. Morgan or UMC the Taiwanese chip maker specializing in contract manufacturing of customer designed integrated circuits for semiconductor applications, the chip shortage is either almost over, or its going to get worse.
J.P. Morgan and DRAM
In early June 2010, J.P. Morgan announced the semiconductor shortage was largely over.
According to J.P. Morgan, as quoted in Barron’s, the only component in short supply within the semiconductor universe is dynamic random access memory (DRAM). DRAM is important to wireless handsets, especially to the emerging smartphone market.
In my opinion, J.P. Morgan misled industry.
J.P. Morgan’s announcement was meant to help curb any panic and stem financial bleeding of companies like Nokia, Dell, AT&T Mobility… I speculate based on the bank’s previous investments in these companies.
J.P. Morgan claimed to have interviewed companies in the personal computing supply chain and based on such interviews chip shortages were over thanks to a reduction of lead times partly due to reductions in demand.
Then, in mid June, Taiwan’s UMC announced it believed semiconductor demand will outstrip supply in the next few months as reported by The Inquirer (view cached version of article, here) and also by Reuters.
This news, while good for chip manufacturers, contradicts J.P. Morgan.
Contradictions against J.P. Morgan only get worse.
Components shortage reaches critical stage
Most recently, iSuppli also reported a number of key commodity electronic components are now in critical short supply, which is causing prices to rise while delaying deliveries of components to customers.
iSuppli states that since June of this year, lead times for components such as power MOSFETs and rectifiers has entered the 20 week range.
iSuppli’s information released July 2 does more than support UMC’s position; it says the current shortage never ended. Indeed, J.P. Morgan was wrong.
Tablet PC disrupts semiconductor balance well into 2011
Meanwhile, chip manufacturers are rapidly trying to meet marketplace needs through increasing production, but over the last several months, OEMs have begun adjusting their chip orders downward as OEMs obtain new retail sales projections.
Assuming you believe there will be a surge in demand for computers and smartphones (coupled with the knowledge of iSuppli’s findings regarding shortages) we are now in the midst of a critical shortage which I believe will continue well into 2011.
This is because, initially, analysts had wild expectations for the iPad but not the tablet industry because the tablet industry did not yet exist.
Factor in the iPad and the tablet PC and you are looking at unprecedented demand for chips. (I doubt iSuppli has even factored in the tablet PC industry)
In addition to Apple, companies like HTC, Acer, Samsung, Foxconn and RIM have each announced their own tablets.
Even Verizon announced intentions to work with Google to launch a tablet.
Additionally, it is believed the tablet PC will replace e-readers and netbooks. (Read: ‘Apple iPad vs. netbooks, notebooks, smartphones‘)
The long road ahead
As this shortage does continue in the semiconductor industry, it seems the only actions that can be taken by OEMs such as Acer, Nokia, Dell, HP… might be to either find new sources or demand existing suppliers hold sufficient inventories to satisfy orders. For the latter, the question becomes: what might they do differently this second time around?
There are limits to how much a semiconductor manufacturer can do to meet demand surges aside from ramping up production in its own facilities.
In other words, the only thing chip makers like GlobalFoundries, Intel, NXP Semiconductors, Freescale Semiconductor, Samsung, Infineon… can do is build more manufacturing capacity.
This takes time and costs money.
Enter China with a card up her sleeve
An opportunity for China exists to step in and meet the demand surge while establishing itself on the global semiconductor manufacturing stage.
In April 2009, Cellular-News reported 60% of China’s semiconductor manufacturing capacity was idle due to an existing chip glut.
Then, in May 2010, Computerworld reported that China’s largest chip manufacturer, Semiconductor Manufacturing International Corporation (SMIC), reported losses despite heavy demand.
SMIC’s losses are primarily due to existing global industry players fighting for their territory resulting in cleaning China’s clock.
However, China now has an opportunity to help meet current demands, and those demands anticipated in 2011.
The world’s most populous nation is comparatively new to the semiconductor manufacturing business when compared to companies like Freescale Semoconductor and others.
However, China has been in the game long enough to know how tough the business can be.
Besides, China has functioning factories with stranded capacity.
If China has not learned anything from fighting with competitors like Infineon or GlobalFoundries, then the nation and its vendors deserve to lose.
However, China’s semiconductor manufacturing sector can do something none of the other competitors can do easily; undercut competitors’ pricing.
I feel China will become a major contributor becoming the semiconductor industry’s largest outsource supplier of integrated circuits.
Given China’s track record for emerging victorious in technology battles (especially telecom technology); I predict China will become one of the dominant suppliers of chips in the global technology sector in two years.
If I were Intel; GlobalFoundries, NXP or any one of the other major players, I would be re-evaluating my strategy now.
VentureOutsource.com, July 2010