- It is clear that under-investment is the root cause of demand-supply imbalance, particularly in the logic (non-memory) semiconductor industry
Since the beginning of this year, the concern over the shortage of semiconductor chips has spread across the global supply chains of the IT and automobile industries. In fact, chipmakers believe this tightness in supply will not be resolved until the completion of inventory replenishment, with H2 2021 as the best-case scenario.
Key reasons responsible for this supply shortage include under-investment in wafer capacity (especially in matured nodes of logic ICs) during 2015-2019, supply chain disruptions due to COVID-19 and geopolitical uncertainties, unexpected gadget demand for work from home (WFH), and improving the visibility of emerging technology products such as AI/edge and EV. However, things are expected to change for the better, with 2021 heralding a big capex cycle that will still fall short of meeting the entire demand.
Under-investment in wafer capacity
Taking a closer look at the semiconductor capital investment trends during the past few years, it becomes clear that under-investment is the root cause of demand-supply imbalance, particularly in logic (non-memory) semiconductor industry.
Capex is the leading indicator of growth in the semiconductor industry. We use the capital intensity ratio as our base to measure a fab’s expansion for future business. The ratio is calculated by dividing a company’s capital expenses by its revenue generated annually (capex to sales). The lower the ratio, the lesser the likelihood of new capacity or technology being added or implemented in the near future. Specifically, we focus on the Wafer Fab Equipment (WFE) market, representing the majority of a fab’s capex in both foundry (outsourcing) and IDM (in-house) production.
Exhibit 1 describes the 15-year trend and forecast for the capital intensity for global logic IC fabs. The blue line represents the industry average, including all foundries and IDMs. The red line depicts calculations for TSMC and Samsung Foundry.
- From 2015 to 2019, the capital investment cycle remained conservative across the industry. Even at TSMC, with abundant Apple orders on hand, low capex was witnessed during this period. Capital investment on 8-inch (200 mm) fabs in general was very thin, partially due to the lack of demand and concerns over oversupply risk in China. During these years of under-investment, many IDMs in Europe and Japan increased their manufacturing for advanced nodes.
- During 2019-2020, the industry ratio jumped to a higher level but mainly due to TSMC’s expansion in 7-nanometer and 5-nanometer to meet the growing demand from 5G smartphones and HPCs. Some of the other firms even considered to postpone plans for new capacities.
- From 2021 to 2023, leading foundries are likely to undergo a cycle of massive equipment investment. The industry-wide capital intensity ratio will exceed 20% to offer a big opportunity for global WFE vendors. TSMC, Samsung and Intel will remain the leaders in capital spending, all setting up their new lines locally as well as in the US.
Capex boost will not solve the shortage problem in matured nodes
The aggressive capital spending in the industry will not solve the supply shortage issue in the near term, especially for matured processes and products:
- Considering the long lead time of fab construction and equipment installment, IDMs are still inclined to increase their outsourcing percentage to foundry partners.
- Except TSMC and Samsung, most of tier-2 foundries have been registering poor earnings, low margins and high debt ratio during the past few years. From the profitability perspective, building a new fab for smaller foundries is difficult to consider for the time being.
When we summarize the capacity shares of the world’s top 10 foundries (Exhibit 2), the capex for their legacy nodes (defined by 40-nanometer and below, including the capacities in 8-inch fabs) is only allocated to select applications in 2021. For example, despite a strong 8-inch wafer demand, UMC recently announced to increase its 200 mm fab capacity only by 1-3% in 2021. The wafer supply uncertainties also emerge from the US ban on SMIC, which accounts for about 10% of the global foundry supply in matured nodes. Overall, we view the shortage as a structural issue before inventory relief builds across the supply chain by 2022.
Conclusion: We are still far away from the supply glut
Compared to the last capex cycle of the logic semiconductor industry (during 2010-2012, after financial crisis), the current cycle will be longer, stronger and more concentrated in terms of select leaders’ focus on leading-edge technology expansions. Should we be worried about any excess supply at some point? Not yet. If we consider the multi-year market opportunities for AI-enabled chips (like in mobile, server and automotive industries) in need of larger die sizes, and mmWave 5G applications, the capex boom in 2021 might just be the beginning of a wave.