Just as demand in the automotive industry began to recover from the pandemic, it hit a roadblock. In December 2020, Volkswagen (VW) became the first carmaker to sound the alarm of a chip supply crunch that has forced automakers worldwide to cut or halt production.

“We are now feeling the effects of the global semiconductor bottleneck,” said Murat Aksel, the member of VW’s board responsible for purchasing and procurement, in a statement on December 18, 2020. 

But that was just the beginning. Other global carmakers, including General Motors, Honda, Nissan and Daimler, have subsequently curtailed production due to the chip shortage. In February, consultancy AlixPartners forecast that the global auto industry could see sales fall by up to $60.6bn this year as a result.

“The shortage and the Covid-19 pandemic have each demonstrated how much we rely on semiconductors,” says Ajit Manocha, the president and chief executive of Semi, the global industry association for the electronics manufacturing and design supply chain.

Mr Manocha points out that home working, factory automation, sequencing of the Covid-19 genome and the vaccine rollout have all been enabled by chip-based devices and technology. As economies reopen, demand for chips is expected to remain strong, with many semiconductor manufacturers planning huge new investments. 

Strong chip demand

In 2021, the global semiconductor market is projected to grow by 10.9% to $488bn, as demand for memory, sensors and optoelectronics drives growth, according to World Semiconductor Trade Statistics (WSTS). In January alone, global semiconductor sales reached $40bn, an increase of 13.2% on the same month of 2020.

These strong demand dynamics, coupled with supply chain constraints highlighted by the current crisis, has led semiconductor firms to plan significant investment into manufacturing capacity.

Taiwan Semiconductor (TSMC), the world’s largest contract chip maker, which takes designs from companies like Apple, Qualcomm and Huawei and manufactures them, has the most ambitious investment plans in the industry. The company has projected that it will spend a whopping $25bn-28bn on capital expenditure (capex) this year, which is up to 63% more than in 2020. 

Some 80% of TSMC’s capex will be dedicated to advanced processing technology such as 3-nanometer, 5-nm and 7-nm chips, which provide higher performance and lower energy consumption than less sophisticated models.

While neither of the two other largest semiconductor spenders of recent years – South Korea’s Samsung and US-based Intel – have provided guidance on their capex for 2021, both are planning to build new US manufacturing plants, also known as “fabs”.

According to a letter seen by Nikkei Asia, TSMC chief executive CC Wei told clients that the company plans to invest $100bn into advanced semiconductor technologies over the three years through 2023.

“We are seeing a structural and fundamental increase in underlying demand driven by key long-term growth megatrends including 5G and high-performance computing,” Mr Wei said in the letter.

Leading edge competition

As semiconductors are used in everything from smartphones and games consoles to industrial equipment, they are the foundation of our modern digital infrastructure, and crucial to technological development. 

Huge capital investment is needed to keep developing and producing the most advanced chips, which at present are 5-nanometer (nm). These chips have smaller transistors  than  less sophisticated designs enabling higher performance and lower energy consumption. 

Only TSMC and its South Korean rival Samsung currently produce 5-nm and 7-nm chips at scale, while US chipmaker Intel is not expected to produce 7-nm at its own fabrication facilities, or “fabs”, until 2022. The two East Asia-based companies combined are forecast to represent 43% of global semiconductor capex spending this year, according to market intelligence firm IC Insights.

But Intel has laid out ambitious capex plans too. On March 23, Intel announced plans to invest $20bn in two new fabs in Arizona, which is expected to create thousands of high-tech and construction jobs.

Intel CEO Pat Gelsinger said in a statement that these investments are setting “a course for a new era of innovation and product leadership” at the company, as it aims to become a major provider of foundry capacity in the US and Europe for its global customers.

“We are excited to be partnering with the state of Arizona and the Biden administration on incentives that spur this type of domestic investment,” he added, stating that Intel plans to announce further capacity expansions globally within the year.

Samsung is currently considering four US sites – two in Arizona, one in New York and another in Texas – for a new $17bn chip manufacturing plant. 

Elsewhere, the world’s second largest memory chipmaker, SK Hynix, expects to spend $8.9bn on capex this year, while data storage giant Western Digital has forecast it will increase semiconductor capex by 82.4% compared with 2020, according to market intelligence firm Semico Research. GlobalFoundries has announced that it too will invest $1.4bn to raise output at its three factories in the US, Singapore and Germany.

Technological revolution

As future technological development in areas such as artificial intelligence and quantum computing rest of their underlying chips, companies are investing to stay ahead of the competition.

Apple, which is based in Silicon Valley, the US tech hub named after the metal from which chips are made, recently announced plans for a European Silicon Design Center in Munich, Germany. The company will invest more than $1bn in the next three years, adding hundreds of employees to its existing local workforce of almost 1500 engineers, to focus on future wireless technologies.

Tim Cook, Apple’s CEO, outlined his excitement in a statement on March 10, saying that the company’s Munich engineering team will explore “the new frontiers of 5G technology, to a new generation of technologies that bring power, speed, and connectivity to the world”.

The automotive industry is another in which new technology is driving adoption of micro chips. Matteo Fini, who leads the automotive supply chain team at data provider IHS Markit, says that “shifts in the auto industry, such as electrification, automation and enhanced infotainment systems, are going to make carmakers even more reliant on chips”.

“Semiconductor content in electric powertrains is currently over four times higher than an internal combustion engine,” he adds. 

Despite a focus on technologically enabled vehicles,  the automotive industry accounted for 12.2% of global semiconductor demand in 2019, while communications and computers combined to make up more than 60%, according to WSTS. The relatively smaller share held by automakers led them to be hit hardest when the supply crunch took hold.

“When fabrication capacity tightens, as in the current shortage, the larger customers in other sectors that account for more production have priority,” says Bettina Weiss, chief of staff and global smart mobility lead at Semi. 

After automotive suppliers cancelled chip orders in the second quarter of 2020, when vehicle production came to a near standstill due to Covid-19, chipmakers shifted fab capacity to meet high demand for home computing and network equipment. But the prolonged shortage of chips since then has highlighted the need to massively increase capacity.

Supply constraints

“The complexity and global interdependence of the semiconductor supply chain cannot be understated,” says Ms Weiss. “Firms in key countries across continents contribute different materials and expertise in design, equipment, manufacturing, assembly and testing.”

Due to the complexity of the chip manufacturing process, Mr Manocha says that it takes several weeks to set up in an existing fab, and can take anywhere from several quarters to a couple of years to bring new capacity online. 

The vast majority of installed capacity is currently concentrated in east Asia, which accounts for three-quarters of the global total, according to data from Boston Consulting Group and the Semiconductor Industry Association (SIA), a US trade body. A combination of government incentives, the presence of industry leaders such as TSMC and Samsung, and the contracting of East Asian manufacturers to produce designs of multinational tech companies has helped to entrench the region’s dominance.

Since 1990, the US’s share of global semiconductor manufacturing capacity has fallen from 37% to just 12% last year, while Europe’s share declined from 44% to 9%. Mainland China expanded its share from almost nothing to 15% over the same period, a figure that is expected to rise to 24% in the next decade.

 “While semiconductor companies have made some shifts and diversification of their supply chains on account of the US-China trade conflict, the tightly interwoven nature of the global supply chain limits the ability to pull on strings for fear of seeing what else will unravel,” says Ms Weiss.

According to data from greenfield investment monitor fDi Markets, China has historically been the leading destination globally for foreign investment in the semiconductor sector. 

Between 2017 and 2020, some 55 greenfield foreign direct investment (FDI) projects have been announced in China’s chip industry – about half of which were into manufacturing. In the same period, the UK raked in 26 projects, followed by the US (22), India (22) and Taiwan (20).

Despite China’s dominance, some semiconductor companies have begun diversifying their supply chain. In January, Intel invested $475m to expand its manufacturing site in Ho Chi Minh City, Vietnam, where it will increase production of 5G products and core processors. 

Meanwhile, TSMC is currently constructing the world’s most advanced 3nm chip production plant in the southern Taiwanese city of Tainan, which is due to begin operation in the second half of 2022. Continued production activity in Asia has only added fuel to the calls by advocacy groups to improve the US domestic chip industry.

“With global demand for semiconductor manufacturing capacity projected to increase 56% over the next decade, we believe it is critical to strengthen US semiconductor supply chains by investing in domestic chip manufacturing incentives and research investments,” says David Isaacs, SIA’s vice president of government affairs.

“The semiconductor industry delivers the greatest growth, innovation, and cost savings when it leverages well-balanced, resilient global supply chains,” he adds.

Chip nationalism

While semiconductor manufacturing capacity is needed to increase globally, Mr Manocha says that the chip shortage has “intensified the spotlight on strengthening production” in both the EU and US.

“The recent picture of President Biden holding a chip during the announcement that he would seek $37bn in funding to boost domestic semiconductor manufacturing speaks volumes on the focus on the strategic importance of these tiny devices,” he adds.

President Biden’s efforts add to the existing CHIPS for America Act passed by Congress in June 2020, which laid out plans to invest tens of billions of dollars in semiconductor manufacturing incentives and research initiatives. As part of the EU’s Digital Compass plan, the bloc aims to double its share of chip manufacturing output to 20% of the global market by 2030.

China is engaging in renewed efforts to develop domestic capacity too, following the US’s decision in December 2020 to put its largest chipmaker SMIC on a blacklist. In March, it was announced that SMIC will jointly invest with the government of the southern Chinese city of Shenzhen in a factory costing $2.35bn.

As demand and supply dynamics of the industry combine with governmental incentives to invest, semiconductor giants are intent on expanding their manufacturing capacity this year.

In 2021, capex is expected to grow by 13% to reach $127bn, according to market intelligence provider Semico Research.

For the automakers caught in the storm, the chip crunch has added to existing concerns about the resilience of the industry’s prevailing just-in-time production model – where parts are delivered to factories exactly when they are needed.

“Carmakers are deepening partnerships with the semiconductor industry to have more influence on technology direction and the pace of development, along with seeking greater visibility into the global supply chain,” concludes Ms Weiss.

This article first appeared in the April/May print edition of fDi Intelligence.