JP Morgan Report: Dude, Where's My Stuff?

At the end of September, JP Morgan produced a report Dude, Where's My Stuff? (also available as a pdf). It was written by Michael Cembalest, Chairman of Market and Investment Strategy. The report looks at supply-chain disruption. It covers a lot of ground from shipping containers to trucking. But a big section in the middle is on our industry, under the subtitle...

The Other Big Bottleneck: The Semiconductor Shortage

The opening paragraph:

Semiconductors are the world’s 4th most traded good after crude oil, refined oil and cars. Strong demand existed before COVID and reflected the chip-intensity of 5G, AI, electric vehicles (3-5x the chip content of ICE cars) and the Internet of Things. Current chip shortages are mostly related to older and simpler 200-mm silicon wafers used in cars, computers, monitors, laptops, TVs, refrigerators and washing machines. Demand for many of these items soared during the pandemic as people built out home offices and related projects; this surge in demand is illustrated below via the rise in Taiwanese electronic component exports.

One issue with this situation is that it is not very attractive to build a new 200mm (8") fab. For one thing, if you start now it will take you a couple of years. Most new fabs, at least outside of China, are 300mm (12"). Or, as the report puts it:

There’s limited economic incentive to build new 200-mm chip plants given wafer-thin margins.

I have no idea if "wafer-thin" is a deliberate pun or unintended, but it amused me anyway. Instead of building new fabs, companies are expanding existing 200mm fabs by adding more equipment. It is not that long ago that you could hardly give 200mm equipment away, and it would be advertised on billboards along 237 and 101. But now it is very much in demand for this expansion, and because China has built a lot of 200mm fabs to run older technologies.

JP Morgan reckons that this capacity expansion will cause the semiconductor shortage to end in a couple of quarters. We will see:

Even so, there’s a few billion dollars being invested to expand capacity by ~20% in existing plants, in which case the semiconductor squeeze may start to ease by Q2 2022.

There only seems to be data on fab utilization rates up until the end of last year, but they are very high at nearly 95%. I have heard that some fabs are running at over 100% capacity. I know that sounds impossible, but you have to schedule time for maintenance of equipment and so on. You can defer that for a time, although obviously not forever, and as a result, utilization can creep up a little above 100%.

Automotive

One sector that is especially hard hit by the semiconductor shortage, as you have probably already heard, is automotive. When the pandemic hit, car sales cratered, the automotive companies cut back hard and cancelled much of their semiconductor backlog. But the market recovered faster than expected. In the meantime, the capacity originally planned for automotive had already been reallocated, as you can deduce from the capacity graph above. Automotive has an additional problem, since they have an extended temperature range, higher reliability requirements, and stricter manufacturing tests. Possibly chips also require burn-in, holding them at high temperature for a time to shake out any early failures even earlier, so they occur before the chip is put in a vehicle. This makes the lead-time for automotive chips longer than for regular consumer chips.

An anecdote a friend told me was dropping by a Hyundai dealership and discovering that they had just one vehicle for sale, a Ford 150 pickup truck. And you've probably read how car rental companies cannot get vehicles so rental rates for the few vehicles they do have can be as high as $500/day.

The financial impact is huge for the automotive industry:

One by-product of the shortage: a rise in US auto manufacturer inventories and a collapse in dealer inventories as manufacturers wait for the chips they need. Auto consulting firm Alix now estimates that the semiconductor shortage will cost US auto manufacturers $210 bn this year, up from their $60 bn estimate back in January. Ford is actually offering customers faster delivery if they agree to “lower feature content”, which translates into fewer semiconductors.

And just last week German Opel announced it was shutting one of its plants until 2022.

In the trucking industry, things have a knock-on effect, since if you cannot buy trucks then the supply chain for other things (not specifically automotive) gets disrupted too. There is also a shortage of drivers. Britain scored a self-inflicted wound by shutting down the DVLC, the Driver Vehicle Licensing Center, meaning that you couldn't get a trucking license (or HGV, Heavy Goods Vehicle, in UK-speak) leading to a severe shortage of drivers which you can see in the news (if you follow the UK news, like I do but you probably don't). There has long been a predicted surplus of truck drivers as autonomous trucks hit the road. But first, autonomous trucks are not yet here and unlikely to be for several years (in significant numbers anyway). Plus, drivers do a lot more than just drive the truck, such as handling paperwork, making multiple deliveries, and so on. As Michael says in the report:

For all the clients that have asked me about the political and economic problems associated with the rise of autonomous vehicles and more unemployed truckers, I keep telling them they’ve got it backwards: the US has had a trucker shortage for the last few years, and it’s projected to get worse. In other words, COVID has worsened some existing vulnerabilities in the US supply chain, just as global trade is surging.

OSATs

It is not just the manufacture of wafers, but also test and assembly. For that, one place to keep an eye on is Malaysia:

Emerging markets are not the epicenter of most supply chain problems, at least as measured by supplier delivery times. But countries like Malaysia play an outsized role in the semiconductor food chain due to its role as a major center for chip testing and packaging, the last step in the semiconductor food chain which is also more labor-intensive than automated wafer fabrication. The delta variant has caused Infineon, NXP and STMicroelectronics shutdowns in Asia, which resulted in component shortages at Nissan, Toyota, Ford and GM operations elsewhere. Malaysia is also a large producer of multilayer ceramic capacitors, used in smartphones and cars.

Containers and Containerships

One thing I didn't know, since I'd never really thought about it, was that most containers are manufactured in China (95%)...as are most containerships (45% of all new shipbuilding orders). I'm not sure how much this affects the semiconductor industry. Wafers, and even iPhones, are light enough that it is economical to ship them by air to get them there faster.

In fact, the report opened with a paragraph describing how the shortage of container capacity is impacting everything, at least everything heavy:

The containership industry is a good illustration of the supply chain mess: more than 70 containerships are stacked up outside Los Angeles/Long Beach ports waiting to unload. Idle containerships are back to just 3% of the total fleet, shipping costs are surging, manufacturing delivery times are extended and rail shipments are declining sharply from their summer peak, illustrating the far-reaching impact of the delays.

Intel

It was not covered in the report, but significant for the semiconductor supply chain, at least in the long term, is that Intel broke ground on $20B to build two new fabs in Arizona. Here's a Reuters report. Or watch a video of the event (30 mins):

Also significant is Pat Gelsinger's statement about another site in the US. This paragraph is from the Reuter's report:

Gelsinger said Intel plans to announce another U.S. campus site before the end of the year that will eventually hold eight chip factories.

Earlier in September, Pat talked about fabs in Europe, as reported in Fortune:

Intel CEO says ‘big, honkin’ fab’ planned for Europe will be world’s most advanced

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