Cover Story: Navigating the chip shortage and supply chain disruption

This article first appeared in The Edge Malaysia Weekly, on July 11, 2022 - July 17, 2022.
Cover Story: Navigating the chip shortage and supply chain disruption
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THE supply chain bottlenecks have resulted in the unprecedented global chip shortage since mid-2020, fuelled by factory shutdowns caused by the Covid-19 pandemic and soaring demand. Manufacturers in the semiconductor industry were particularly hit hard by the shortage, which saw it impacting production ranging from automotive to consumer electronics and household appliances.

Local players in the semiconductor sector, however, say the chip shortage is not homogenous as it has varying impact on different classes of semiconductors. Players interviewed appear to have adapted or adjusted to changing demand, underscoring their agility to pivot.

Over the past two years, the world’s top three chip giants — Intel, Samsung and Taiwan Semiconductor Manufacturing Co Ltd (TSMC) — have been aggressively ramping up output and pouring money into researching new manufacturing techniques and materials.

But the new capacity will not be ready overnight. A semiconductor fabrication plant, commonly called a fab or foundry, requires many expensive devices to function.  And more importantly, it takes time — generally, two to three years — to build a completely new fab.

At the same time, the pandemic has accelerated digital transformation and technology adoption around the world, and greatly boosted demand for semiconductors.

Demand shows no sign of slowing down. Sales have also been robust as shown in global semiconductor industry sales growth in May of 18% year on year and 1.8% month on month to US$51.8 billion (RM229 billion), the Semiconductor Industry Association (SIA) announced last week.

SIA president and CEO John Neuffer highlighted that continuing high demand for semiconductors will necessitate more chip research, design and manufacturing in the years ahead.

And in April,  Intel CEO Pat Gelsinger told CNBC that he believes the overall semiconductor shortage will now drift into 2024, from earlier estimates of 2023, due to constrained availability of key manufacturing tools.

Meanwhile,  Gartner Supply Chain senior director analyst, KC Quah, opines that organisations should consider certain short- and long-term tactics to mitigate disruption, although the model for semiconductor inventory indicates that this year will be one of recovery in which, for most part, supply will start to catch up with demand.

“While 2021 was highly constrained, 2022 looks to be the beginning of a recovery.  And 2023 will see demand and supply come into balance. The models show that 2024 will bring a surplus of capacity,  where supply will exceed demand,” he remarks.

According to the Gartner Index of Inventory Semiconductor Supply Chain Tracking (GIISST),  a return to normal inventory levels won’t occur until the third quarter or fourth quarter of this year (see chart).

Closer to home, AT&S Malaysia managing director Vittorio Villari points out that the chip shortage is not homogenous as it is affecting different classes of semiconductors differently. Nevertheless, he expects the impact on the overall market will soon ease further.

“In some areas, however, there is a severe shortage, such as industrial. This might slow down currently planned investment and expansion projects in different industries. AT&S works closely with our equipment suppliers to avoid any delays on their own expansions,” he tells The Edge.

Vienna-listed AT&S is one of world’s leading manufacturers of high-end printed circuit board (PCB) and integrated circuit (IC) substrates, serving industries such as consumer electronics, computer, communication, semiconductor, automotive,  aviation, industrial and medical.

The Austrian firm, which has a presence in Nanjangud, India; Chongqing and Shanghai in China; and Ansan,  South Korea,  is building a new state-of-the-art facility in Kulim, Kedah, with a planned investment of RM8.5 billion under Phase 1 of the project.

“Our lead times were not impacted. The chip shortage slowed down the customers’ demand in some areas, but we saw customers rearrange their orders focusing more on high-end products. As AT&S is mostly dominant in the high-end segment, this compensated for the decrease in demand in other areas and led to overall growth,” Villari explains.

He observes that the commencement of new production capacities at the plant in Chongqing is proceeding faster than previously expected, while the update of customer orders shows a higher-quality product mix, which involves higher revenue and improved margins.

“AT&S profited from the ‘jump’ in digitalisation during Covid and the ramp-up of new production capacities in advanced technologies. We did not profit directly from the chip shortage, but indirectly: As customers shifted to the production of higher-end products,  AT&S — with a focus on high end — could increase sales in the respective applications and product categories,” Villari says.

Although the market conditions are still volatile, AT&S remains optimistic on the industry’s prospects and the company’s outlook.

“We are very positive for our current business year. In end-June, we increased our guidance for the current financial year 2022/23,” says Villari.

AT&S anticipates that revenue of roughly €2.2 billion (RM9.93 billion) will be generated in the financial year 2022/23 (previously: about €2 billion). The expected earnings before interest, taxes, depreciation, and amortisation margin adjusted for start-up costs will increase to 27%-30% (previously 23%-26%).

Challenging yet exciting times

JF Technology Bhd co-founder and managing director, Datuk Foong Wei Kuong says the past two years have been challenging yet exciting for the group.

“The global demand for chips has been very strong, which bodes well for us as every single IC needs to be tested with a customised test socket. While we are busy fulfilling the robust orders from our customers, we have to manage our operations closely amid the pandemic and the supply chain disruptions. No doubt that the raw material delivery lead time has increased but it is still manageable for us so far,” he tells The Edge.

JF Technology manufactures and supplies electronic products and components, including test probes and test socket products, to the semiconductor industry worldwide. Its customers include providers of semiconductor assembly, turnkey packaging and test services,  as well as IC test handler suppliers.

“Looking ahead, we anticipate the chip demand growth rate to taper off slightly as compared to the previous years, however, the overall orders are still expected to remain healthy on the back of exponential growth in the 5G (fifth generation) market and adoption of the fast-growing electric vehicle market,” says Foong.

He points out that JF Technology’s profit margins have been healthy given its strong emphasis on research and development (R&D), intellectual properties and patents,  as well as its highly customised products.

These factors, combined with the robust demand, have lifted the group’s earnings to record highs in the past two financial years.

Going forward, he foresees the ongoing challenges, such as supply chain disruptions and rising input cost, to persist but with gradual improvement.

“A key concern for the industry is the availability of talent, hence, we are working closely with universities to nurture the next generation of engineers that the industry needs. All in all, our growth plans continue to be intact and are progressing well despite the market conditions and the demanding business operating landscape,” Foong says.

Longer delivery lead time

QES Group Bhd managing director and president Chew Ne Weng concurs that business arising from the semiconductor segment has been strong over the past two years. As a result, the group has been expanding both capability and capacity to meet customer demand.

“Both chip shortages and supply chain disruption are affecting our equipment delivery lead time. For the manufacturing division, we have critical components delivery lead time delays ranging from an additional two months to six months,” he reveals.

QES started as a distributor of test, inspection and measuring equipment, before eventually becoming a manufacturer of this equipment.

Chew says the global IC shortages for certain chips, such as the microprocessor unit (MPU), are still critical and it probably will last for another six to nine months. Shortages for other types of IC, such as for automotive and communication devices, are gradually improving and the situation should be much better by the end of this year.

“Generally, we received strong orders and profit margins are slightly better as raw materials and operational costs are rising in tandem as well. The chip shortage disrupted delivery of many key components we need to manufacture equipment,” he says.

“Our revenue depends on how fast we can make the equipment. The good part is [that] our order book is on an increasing trend and if we can deliver more equipment, our earnings performance will grow as well,” Chew adds.

However, he is concerned about the inflationary pressure, coupled with US recession fears, which will affect overall market sentiment and, eventually, the industry and businesses.

“Having said that, we do have a strong book-to-bill [ratio] at the moment and it will take months for us to clear the outstanding orders. Even with the uncertainties outlined above, we continue to see good order momentum coming in from both semiconductor and E&E market segments throughout the first half of 2022,” says Chew.

“My worries continue to be extended delivery lead times and supply chain disruptions affecting our ability to deliver all the outstanding orders on time within the fiscal year of 2022,” he concludes.

 

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