Semiconductor bikes out of balance after customers have stocked

In such a cyclical industry as semiconductors, there is always either too much or too little supply. For those companies that design and use microchips, the last 30 years have been a constant exercise in securing the right amount of them to meet demand but not tie up too much money in inventory.

But the time-tested lash may be missing out of balance. At a time of year that is usually the low season for electronics, the industry is facing one of the worst shortcomings.

The most visible fallout has been in the automotive industry with manufacturers from Ford to Volkswagen closure or cut in production because they lack important semiconductor-based components. But the pressure is also affecting other sectors competing with automakers for these electronic parts used in such diverse products as 5G smartphones, TVs and factory automation equipment.

The natural reaction from chip manufacturers’ customers is to order more and build up stocks to protect themselves.

While carmakers still cut orders until November last year, companies with more experience working directly with chipmakers have done just that.

In the last three quarters, Taiwan Semiconductor Manufacturing Company, the world’s largest contract chip maker, has told investors that customers are building more inventory than the historical season average. In the second and third quarters of last year, this stock levels ran higher than the season average. In the fourth quarter, traditionally a seasonal peak, stock levels were depleted below the season average despite this effort.

Now, although the shortage persists, industry leaders said inventory levels are rising again.

The altered pattern was originally started by the shock disruption in the global supply chains of the coronavirus outbreak a year ago. This led to the forced closure of almost the entire manufacturing sector in China for several weeks. But even long after factories are back to normal, companies continue to worry about supply chain security.

The US government’s efforts to contain China as a technology power through trade barriers, heavy use of export controls and sanctions have led to the feeling that supplies can be blocked at any time and supply chains become more unpredictable.

Huawei, the Chinese technology group, was the first to build large stocks of semiconductors. It sought to secure its survival after being cut off from chips containing U.S. technology under sanctions that went into effect last September. A little later, Washington limited export to Semiconductor Manufacturing International Corporation. This meant that China’s largest chip manufacturer was no longer a viable supplier to many of its customers, in fact blocking part of the semiconductor production capacity out of the market.

“We expect customers to prepare for higher stock levels than [the] historical seasonal average over a long period of time as industries continue to need to ensure supply chain security, ”TSMC CEO CC Wei told investors last month about the company’s recent performance.

Securing “supply is more important than anything else in today’s situation,” he said. “We do not think it will really return to historic inventory levels.”

Many analysts agree. “If Covid does not disappear completely and the technology war between the United States and China continues, supply chain security issues could actually contribute to higher inventory levels in the long run,” said Sebastian Hou, head of technology research at CLSA, the brokerage firm, in Hong Kong. “The macro environment also supports it.” Hou said that with record low interest rates, it is less difficult to finance higher inventory levels.

Moreover, the pandemic and trade friction between the US and China are not the only factors playing a role. The lack of auto-chip illustrates a key risk in the almost limitless spread of semiconductors to new areas: we see a collision between needs and business models from industries that have not previously been interconnected.

“The car manufacturers operate on a just-in-time model, which does not deter the inventory. It is the opposite of the close and carefully controlled relationship between fabless chip manufacturers and foundries, ”said a director of a Taiwanese contract chipmaker. “The more that kind of thing happens, the more it will also disrupt things within our industry.”

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