SAN FRANCISCO — Since 1989, Microchip Technology has operated in
an unglamorous backwater of the electronics industry, making chips called
microcontrollers that add computing power to cars, industrial equipment and
many other products.
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Now a global chip shortage has elevated the company’s profile.
Demand for Microchip’s products is running more than 50 percent higher than it
can supply. That has put the company, based in Chandler, Arizona, in an
unfamiliar position of power, which it began wielding this year.
While Microchip normally lets customers cancel a chip order
within 90 days of delivery, it began offering shipment priority to clients that
signed contracts for 12 months of orders that couldn’t be revoked or
rescheduled. These commitments reduced the chances that orders would evaporate
when the scarcity ended, giving Microchip more confidence to safely hire
workers and buy costly equipment to increase production.
“It gives us the ability to not hold back,” said Ganesh Moorthy,
president and CEO of Microchip, which Thursday reported that profit in the
latest quarter tripled and that sales rose 26 percent to $1.65 billion.
Such contracts are just one example of how the $500 billion chip
industry is changing because of the silicon shortage, with many of the shifts
likely to outlive the pandemic-fueled dearth. The lack of the tiny components —
which has pinched makers of cars, game consoles, medical devices and many other
goods — has been a stark reminder of the foundational nature of chips, which
act as the brains of computers and other products.
Chief among the changes is a long-term shift in market power
from chip buyers to sellers, particularly those that own factories that make
the semiconductors. The most visible beneficiaries have been giant chip
manufacturers like Taiwan Semiconductor Manufacturing Co., which offer services
called foundries that build chips for other companies.
But the shortage has also sharply bolstered the influence of
lesser-known chip makers such as Microchip, NXP Semiconductors,
STMicroelectronics, Onsemi and Infineon, which design and sell thousands of
chip varieties to thousands of customers. These companies, which build many
products in their own aging factories, now are increasingly able to choose
which customers get how many of their scarce chips.
Many are favoring buyers who act more like partners, by taking
steps like signing long-term purchase commitments or investing to help chip
makers increase production. Above all, the chip makers are asking clients to
share more information earlier about which chips they will need, which helps
guide decisions about how to lift manufacturing.
“That visibility is what we need,” said Hassane El-Khoury, CEO
of chip maker Onsemi, a company previously known as ON Semiconductor.
Many of the chip makers said they were using their new power
with restraint, helping customers avoid problems like factory shutdowns and
raising prices modestly. That’s because gouging customers, they said, could
cause bad blood that would hurt sales when shortages end.
Even so, the power shift has been unmistakable. “Today there is
no leverage” for buyers, said Mark Adams, CEO of Smart Global Holdings, a major
user of memory chips.
It’s a substantial change in psychology for a mature industry
where growth has generally been slow. Many chip makers for years sold largely
interchangeable products and often struggled to keep their factories running
profitably, particularly if sales slumped for items like personal computers and
smartphones that drove most chip demand.
But the components are essential for more products now, one of
many signs that rapid growth may linger. In the third quarter, total chip sales
surged nearly 28 percent to $144.8 billion, the Semiconductor Industry
Association said.
Years of industry consolidation has also wrung out excess
manufacturing capacity and left fewer suppliers selling exclusive kinds of
chips. So buyers that could once place and cancel orders with little notice —
and play one chip maker off another to get lower prices — have less muscle.
One effect of these changes was to make chip factories more
valuable, including some older ones owned by foundries. That’s because new
manufacturing processes have become so costly that some chip designers aren’t
shifting to the most advanced factories to make their products. The result has
been a demand crunch for less-expensive production lines that are 5-10 years
old.
So some foundries, in a major strategy shift, are beginning to
put more money into older production technology. TSMC recently said it would
build such a plant in Japan. Samsung Electronics, a key foundry rival, has also
said it was considering a new “legacy” factory.
But those investments will take several years to pay off. And
they won’t address issues affecting chips like microcontrollers, which are a
microcosm for the supply chain squeeze.
Microcontrollers combine the ability to make calculations with
built-in memory to store programs and data, often adding features that only
come from specialized factories. And the number of applications is
skyrocketing, from brake and engine systems in cars to security cameras, credit
cards, electric scooters and drones.
“We’ve probably sold more microcontrollers in the past year than
the past decade,” said Marc Barnhill, chief trading officer at Smith, a chip
distributor based in Houston. The wait to receive some popular microcontrollers
now stretches to more than a year, he said, and prices for the products have
leapt 20-fold among traders that buy and sell chips.
Amid the turmoil, companies that design or use chips have
responded with new tactics. Some designers are adapting their products to be
made in different factories with more manufacturing capacity, said Shiv Tasker,
a global vice president engaged in that practice for the consultancy Capgemini.
And customers that once bought chips based on price and
performance also are thinking more about availability.
While the chip industry’s power shift has aided Microchip, it
has also come with its own headaches. Moorthy said the company had managed to
produce more chips in its three main factories in Arizona and Oregon, as well
as get more from foundry partners. But demand is growing faster than what it
can produce.
“We are falling farther behind,” he said.
Expanding Microchip’s own plants isn’t easy. For one thing, the
company has always relied heavily on buying used manufacturing equipment, but
“that whole thing has dried up,” Moorthy said.
Acquiring new gear can take 12-18 months and costs more, he
said. While the long-term purchase agreements have provided more stability to
make such investments, Microchip and others also hope Congress approves a $52
billion funding package, which is expected to include grants to subsidize more
US chip production.
“Are we counting on it to run our business? No,” said Moorthy.
“Would it help some of our investment choices? Absolutely.”
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