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SAN FRANCISCO — Since 1989, Microchip Technology has been operating in a dazzling recession of the electronics industry, producing chips called microcontrollers that add computing power to cars, industrial equipment, and many other products.
Now one global chip shortage raised the profile of the company. Demand for Microchip’s products is growing more than 50 percent from what it can supply. This put the Chandler, Arizona-based company in an unusual position of power, which it began using this year.
While Microchip normally allows customers to cancel a chip order within 90 days of delivery, it has begun to offer shipment priority to contracted customers for 12-month orders that cannot be canceled or rescheduled. These commitments reduced the likelihood of orders evaporating once the shortage was over, giving Microchip more confidence to hire workers safely and purchase costly equipment to increase production.
“This gives us the ability to not hold back,” said Ganesh Moorthy, president and CEO of Microchip, who reported on Thursday that last quarter profits had tripled and sales were up 26 percent to $1.65 billion.
Such contracts are just one example of how the $500 billion chip industry has changed due to silicon shortages, and many of the shifts are likely to exceed the pandemic-induced shortage. Lack of minor components – which is stuck car manufacturersIt has been a clear reminder of the fundamental nature of chips, which act as the brains of computers and other products – game consoles, medical devices, and many 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 manufacture semiconductors. The most visible beneficiaries have been giant chip manufacturers like the ones below. Taiwan Semiconductor Manufacturing Company, offering services called foundries that produce chips for other companies.
But the shortage also sharply increased the influence of lesser-known chip manufacturers such as Microchip, NXP Semiconductors, STMicroelectronics, Onsemi and Infineon, which designed and sold thousands of chip variants to thousands of customers. These companies, which manufacture many products in their own aging factories, are now increasingly able to choose which customers get how much of their scarce chips.
Many prefer buyers who act more like partners, taking steps such as signing long-term purchase commitments or investing in helping chipmakers increase production. Above all, chipmakers are asking customers to share more information about which chips they’ll need, which helps guide decisions on how to increase production.
“This visibility is what we need,” said Hassane El-Khoury, CEO of chipmaker Onsemi, a company formerly known as ON Semiconductor.
Most chipmakers said they are using their new strengths in moderation and helping customers avoid problems like factory closures and modestly raising prices. That’s because carving customers, they said, could cause bad blood that would hurt sales once the shortage is over.
Despite this, the power shift has clearly been. “There’s no leverage for buyers today,” said Mark Adams, CEO of Smart Global Holdings, a major memory chip user.
Marvell Technology, a Silicon Valley company that designs chips and outsources manufacturing, has experienced the shift in power. It started giving foundries estimates of their 12-month chip production needs, and started giving them five-year estimates from April.
“You really need a good story,” said Matt Murphy, Marvell’s CEO. “Ultimately, the supply chain will allocate to people they think will be winners.”
A major change in psychology for a mature industry where growth is often slow. Many chip makers have sold massively replaceable products for years and have struggled to keep their factories running profitably, especially as sales plummeted for products such as personal computers and smartphones, which had drawn most of the chip demand.
But the ingredients are now needed for more crops, one of many signs that rapid growth may stall. Total chip sales in the third quarter increased by approximately 28 percent to $144.8 billion.said the Semiconductor Industry Association.
Years of industry consolidation have also consumed excess production capacity, leaving fewer suppliers selling specialty chips. Therefore, buyers who can once cancel orders with little notice and steal one chip maker from another to get lower prices have less power.
One effect of these changes was to make sawdust mills more valuable, including some old factories owned by foundries. This is because new manufacturing processes have become so costly that some chip designers are not moving to the most advanced factories to make their products. The result has been a contraction in demand for cheaper production lines of five to 10 years.
That’s why some foundries are starting to invest more money in legacy production technology in a major shift in strategy. TSMC recently said it will set up such a facility in Japan. Samsung Electronics, a major casting competitor, also said it was considering a new “old” factory.
However, these investments will take several years to pay off. And they won’t be addressing issues affecting chips like microcontrollers, which is a micro-universe for supply chain jamming.
Microcontrollers combine the ability to compute with on-board memory to store programs and data, adding features that usually only come from specialized factories. From brake and engine systems in cars to security cameras, credit cards, electric scooters and drones, the number of applications is growing rapidly.
“We probably sold more microcontrollers last year than we did in the last decade,” said Marc Barnhill, business manager at Smith, a Houston-based chip distributor. The wait to get some popular microcontrollers is now more than a year, and product prices have increased 20 times among chip traders, he said.
Amid the turmoil, companies that design or use chips have responded with new tactics. Shiv Tasker, a global vice president who joined the practice for Capgemini consulting, said some designers have adapted their products to have more production capacity in different factories.
And customers who once bought chips based on price and performance are also thinking more about availability.
Consider BrightAI, a start-up that develops devices and software to help businesses connect equipment and other devices to the internet. Co-founder Alex Hawkinson says he redesigns the circuit board four times every six months to accommodate different chips. The company also said that it has transferred some designers to China to revise products faster with components obtained there.
Larger chip users, such as automakers, have started talking directly to manufacturers instead of following the typical practice of working with subcontractors. Last month, general engines tattoo A deal with chip maker Wolfspeed to provide its share of semiconductors from a new factory producing energy-efficient components for electric vehicles.
While the chip industry’s power shift has helped Microchip, it has also come with its own set of headaches. Mr Moorthy said the company has succeeded in producing more chips at its three main plants in Arizona and Oregon, as well as getting more from its foundry partners. But demand is growing faster than it can generate.
“We’re getting worse,” he said.
Expanding Microchip’s own facilities is not easy. For one thing, the company has always relied heavily on buying used manufacturing equipment, but “this whole thing has dried up,” said Mr. Moorthy.
He said acquiring new gear could take 12 to 18 months and cost more. While long-term buyout deals provide more stability to make such investments, Microchip and others also hope Congress will approve a $52 billion financing package that is expected to include grants to subsidize more U.S. chip production.
“Do we rely on him to run our business? No,” said Mr. Moorthy. “Will it help some of our investment choices? Absolutely.”
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