Chip makers from Taiwan to the United States are cranking up production to address semiconductor shortages that have hammered carmakers and other customers, as they try to emerge from the coronavirus pandemic.
Now that unprecedented surge in investment is fuelling fears the semiconductor industry will overshoot, adding so much capacity in the years ahead as demand subsides that profits will take a hit.
In the latest sign of concern over demand, Texas Instruments (TI), one of the largest makers of chips, warned that revenue for the third quarter could fall short of some analysts’ estimates. Sales will be US$4.4 billion to US$4.76 billion in the period ending in September, the company said, compared with analysts’ prediction of US$4.59 billion. The company’s shares fell about 4 per cent in extended trading.
The forecast was particularly puzzling because it came after TI, the world’s largest maker of analogue and embedded processors, reported a 41 per cent surge in second-quarter revenue. It led to a barrage of questions from analysts on why the company is not more optimistic and whether we are seeing the first signs of a slowdown in the notoriously cyclical industry.
The entrance to US chip maker Texas Instruments’ plant in Richardson, Texas, is seen on June 9, 2021. Photo: TNS
Management cautioned that TI could not anticipate whether demand is peaking or whether growth at the current levels is sustainable.
“Our job isn’t to predict the future, it’s to prepare the company so we can handle anything and we’ve done that,” chief financial officer Rafael Lizardi said in an interview. “Some would argue that this time it’s different, but that’s a dangerous argument.”
Like other chip makers, TI has posted multiple quarters of double-digit percentage revenue growth, boosted by demand for a wide variety of devices that contain its tiny electronic components. The rapid run-up has caused speculation among analysts and investors that some of the orders reflect panic buying by customers who have grown anxious they will not be able get enough supply. Such behaviour in the past has caused crashes.
“TI posted yet another puzzling earnings report,” said Raymond James analyst Chris Caso in a note after the earnings report. “Revenue for the quarter significantly beat guidance, but it guided revenue flat, without much explanation for the conservative guidance.”
Caso indicated that “management likely suffers from a lack of confidence at the macro level, despite what clearly continues to be tight supply conditions at both TI and the semiconductor industry at large”
Lead times, the gap between ordering a semiconductor and taking delivery, increased to 19.3 weeks in June, a week and a half longer than in May, according to research from Susquehanna Financial Group. That gap, already the longest wait time since the firm began tracking the data in 2017, is now more than five weeks longer than the previous peak in 2018.
TI itself said the amount of in-house inventory fell to 111 days in the quarter, well short of the 130 to 190 days the company likes to have on hand. The company’s lead times have stretched for an increasing number of products.
The entire chip industry is cranking up investments to meet the surging demand.
Taiwan Semiconductor Manufacturing Co (TSMC), the world’s top chip maker, has pledged to invest US$100 billion over three years, including in a new fabrication plant in the US.
South Korea’s Samsung Electronics and SK Hynix will lead more than 510 trillion won (US$442 billion) of investment in semiconductor research and production in the years to 2030 under a national blueprint devised by President Moon Jae-in’s administration.
Employees of ASML are seen working on the final assembly of the company’s Twinscan NXE: 3400B extreme ultraviolet semiconductor lithography equipment, with its panels removed, in Veldhoven, the Netherlands. Photo: Reuters
Senior industry executives, such as Intel Corp chief executive Pat Gelsinger, have predicted long-term growth for the industry at well above historical levels. They argue that chips are simply in more devices that never needed them and that will mitigate some of the historical slumps when the industry primarily supplied the computer and mobile phone industries.
This week, ASML Holding, the leading provider of equipment to make chips, said orders for machines that make high-end semiconductors rose to a record as TSMC and Samsung get in line for key machinery. That gear, however, will not be producing chips until next year, at the earliest.
ASML chief executive Peter Wennink said the ongoing efforts by several governments to build chip capacity at home will boost orders for semiconductor equipment.
US Secretary of Commerce Gina Raimondo says there are improvements in the supply of chips to carmakers and other sectors. Photo: Reuters
The company has historically underestimated how quickly the industry would grow in the past 15 years and Wennink said it is working to boost manufacturing to keep up.
TSMC chief executive C C Wei said in an earnings call last week that he expects the company’s capacity to remain tight throughout this year and into 2022.
There are signs the shortages are easing.
This year, US Commerce Secretary Gina Raimondo brokered meetings between semiconductor manufacturers, their suppliers and their customers including carmakers. She said this week there are improvements and that companies such as Ford Motor Co and General Motors Co are getting “a bit more of what they need”.