" alt="" title=""/>Since 1989, Microchip Technology has been working in a nondescript backcountry of the electronics industry, manufacturing chips called microcontrollers that add computing power to cars, industrial equipment, and many other products.
Now a global chip shortage has sharpened the company’s profile. Demand for Microchip products is more than 50% higher than it can supply. That has put the Chandler, Arizona-based company in an unfamiliar position of power that it has been exercising since this year.
While Microchip typically allows customers to cancel a chip order within 90 days of delivery, Microchip offers priority shipping to customers who have signed contracts for 12 months with orders that could not be canceled or rescheduled. These commitments reduced the likelihood that jobs would disappear after the shortage ended, and gave Microchip more confidence to safely hire employees and purchase costly equipment to increase production.
“It gives us an opportunity not to hold back,” said Ganesh Moorthy, President and CEO of Microchip, who reported Thursday that last quarter earnings tripled and sales rose 26% to $ 1.65 billion is.
Such contracts are just one example of how the $ 500 billion chip industry is changing due to silicon scarcity, with many of the shifts likely to outlast the shortages caused by the pandemic. The lack of the tiny components – which manufacturers of automobiles, game consoles, medical equipment, and many other goods have enslaved – was a stark reminder of the fundamental nature of chips that act as the brains of computers and other products.
The most important change is a long-term shift in market power from chip buyers to sellers, especially those who own factories that make the semiconductors. The most visible beneficiaries have been giant chipmakers like Taiwan Semiconductor Manufacturing Co., which offer services called foundries that build chips for other companies.
But the shortage has also greatly exacerbated the influence of lesser-known chipmakers like Microchip, NXP Semiconductors, STMicroelectronics, Onsemi, and Infineon, who develop thousands of chip variants and sell them to thousands of customers. These companies, which manufacture many products in their own aging factories, can now increasingly choose which customers get how many of their scarce chips.
Many prefer buyers who act more like partners, taking actions like signing long-term purchase commitments or investing to help chip makers increase production. Most importantly, chip makers are asking customers to provide more information sooner about what chips they will need, which will help in making decisions to increase manufacturing.
“That transparency is what we need,” said Hassane El-Khoury, CEO of chip maker Onsemi, a company formerly known as ON Semiconductor.
Many of the chipmakers said they are reluctant to use their new performance to help customers avoid issues like factory closures and to raise prices modestly. That’s because it could erode customers who could cause bad blood, which would affect sales when the shortage ends.
Even so, the shift in power was unmistakable. “There’s no leverage today,” said Mark Adams, CEO of Smart Global Holdings, a major user of memory chips.
Marvell Technology, a Silicon Valley company that develops chips and outsources manufacturing, has seen the change in power. While foundries used to provide estimates of their chip production needs for 12 months, they began providing five-year forecasts in April.
“You need a really good story,” said Matt Murphy, CEO of Marvell. “Ultimately, the supply chain will be allocated to whoever you think will be the winners.”
For a mature industry, where growth has generally been slow, this represents a major shift in psychology. Many chip manufacturers sold largely interchangeable products for years and often struggled to keep their factories profitable, especially when sales of items such as personal computers and smartphones, which accounted for most of chip demand, plummeted.
But the components are now essential to more products, one of many signs that rapid growth may continue. In the third quarter, total chip sales rose nearly 28% to $ 144.8 billion, the Semiconductor Industry Association said.
Years of industry consolidation has also cut excess manufacturing capacity, leaving fewer suppliers selling exclusive types of chips. Buyers who were able to place and cancel orders at short notice – and who were able to play off one chip manufacturer against another in order to achieve lower prices – have less muscle mass.
One effect of these changes was to make chip factories more valuable, including some older foundry-owned factories. This is because new manufacturing processes have become so costly that some chip designers do not move to the most advanced factories to make their products. The result was a demand crisis for less expensive production lines that are 5-10 years old.
As a result, some foundries are beginning a major shift in strategy to invest more money in older production technologies. TSMC recently announced plans to build such a facility in Japan. Samsung Electronics, a major competitor to the foundry, has also announced that it is considering a new “legacy” factory.
But these investments will take several years to pay off. And they won’t deal with issues that affect chips like microcontrollers, which are a microcosm for the tightness in the supply chain.
Microcontrollers combine the ability to perform calculations with built-in memory to store programs and data, and often add functionality that only comes from specialized factories. And the number of applications is exploding, from braking and motor systems in cars to security cameras, credit cards, electric scooters and drones.
“We’ve probably sold more microcontrollers in the past year than we have in the last decade,” said Marc Barnhill, chief trading officer at Smith, a Houston-based chip distributor. It has now been more than a year to wait to receive some popular microcontrollers, and the prices of the products have increased 20-fold at vendors who buy and sell chips.
In the midst of the turmoil, companies developing or using chips have responded with new tactics. Some designers customize their products to be made in different factories with more production capacity, said Shiv Tasker, a global vice president who works in that practice for consulting firm Capgemini.
And customers who once bought chips based on price and performance are also thinking more about availability.
Consider BrightAI, a startup that creates devices and software to help businesses connect devices and other devices to the internet. Alex Hawkinson, its co-founder, said it redesigned a circuit board four times in six months to accommodate different chips. The company has also moved some designers to China to revamp products with components sourced there more quickly, he said.
Larger chip users like automakers have started speaking to manufacturers directly rather than following typical subcontracting practice. Last month, General Motors signed a deal with chip maker Wolfspeed to ensure that some of the semiconductors will come from a new factory that makes energy-efficient components for electric vehicles.
While the power shift in the chip industry has helped Microchip, it has also brought its own headaches. Moorthy said the company managed to produce more chips and source more from foundry partners at its three main factories in Arizona and Oregon. But demand is growing faster than it can produce.
“We’re falling further behind,” he said.
Expanding Microchip’s own factories is not easy. For one thing, the company has always relied heavily on buying used manufacturing equipment, but “the whole thing has dried up,” said Moorthy.
Purchasing new equipment can take 12-18 months and cost more, he said. While the long-term purchase agreements have made such investments more stable, Microchip and others also hope that Congress approves a $ 52 billion financing package that will include grants to subsidize further US chip production.
“Should we count on it to run our business? No, ”said Moorthy. “Would it help some of our investment decisions? Absolutely.”
