The Global Chip Shortage: The Solution May Have Already Been Manufactured

30/04/2021
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However, this latest chip shortage is not an isolated occurrence but a symptom of a systemic problem that is not going away without rethinking the entire semiconductor manufacturing supply chain. The semiconductor manufacturing supply chain is rigid with a high barrier to entry and grave repercussions to supply glut are exacerbated by fast-cycling end markets. As a result, we are currently seeing the reverberations of decisions made over a decade ago by chipmakers and their equipment suppliers.

Let me explain. Current chip shortages are not limited to critical components and specialized core processors. Shortages include less critical but still crucial components, such as power regulation, which is used across a wide range of end devices. There has been extensive coverage of these shortages impacting the automotive industry, but all industries competing with consumer electronics giants for the same components used in both an electric car and your iPhone will feel the impact.

Why? Because these less critical but crucial components are largely manufactured using legacy equipment no longer in production and at fabrication centers whose capacities are nearly maxed out. As smart devices proliferate, demand for these components will only increase across all end markets.

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Analog chips, display drivers, power management ICs and RF devices are produced in 200mm (8-inch) fabs — not the 300mm (12-inch) fabs used for cutting-edge chips. As Semiconductor Engineering adeptly summarizes, investment in growing 200mm capacity stagnated in the first decade of the 2000s as chipmakers migrated to 300mm process nodes. And who could blame them? Supply glut in the early 2000s pushed down chip prices leading to a series of mergers and acquisitions, essentially pushing out small players who simply did not have the scale to compete in the lower-margin business of running 200mm fabs.

Moreover, fast-cycling end markets means a seven-figure machine used to manufacture a generation of chips could become obsolete within the span of five years. And though this equipment has a much longer lifespan, capital equipment has historically been illiquid with machines reselling for a fraction of their original value. However, with the proliferation of everyday "smart" devices, demand for 200mm started increasing again around 2015 as IoT devices created a need for lower-cost chips with laxer performance requirements.

Fast forward to today and industry sources suggest 200mm fabs are at capacity across foundries. With production lines maxed out, chip makers must either expand capacity in existing fabs or build new ones. Both options require more equipment — of which, there is also a shortage. Most original equipment manufacturers (OEMs) no longer produce 200mm equipment (with some notable exceptions). Even if new equipment across the process supported 200mm, lead times can be up to 18 months for new equipment from OEMs, meaning, increased expenditure on new equipment today won't yield increased capacity until 2022 at the earliest. OEMs are also looking for legacy machines, some 20 to 25 years old, in order to remanufacture them to support smaller wafers. In short, all of the sudden, vintage equipment is a hot commodity.

In theory, equipment shortages and long lead times should impact chip makers around the world equally — but are they?

Nikkei Asia recently reported on an unintended consequence of Trump-era trade wars: Chinese chip makers spent 2020 stocking up on older-generation machines not yet restricted by regulations. By way of disclosure, I am CEO of a global marketplace for used semiconductor manufacturing equipment. As such, my company's marketplace data confirms this trend:

• Across the board, chipmakers increased spend on used equipment by 54% from 2019 to 2020.

• U.S. chipmakers increased spend by 61% from 2019 to 2020.

• Chinese end users increased spend by a whopping 339% from 2019 to 2020, outpacing U.S. chipmakers in equipment spend by a ratio of over two to one.

• The value of used equipment has more than doubled over the past year alone.

Why does this matter? Discussions around building domestic production capacity, trade restrictions and chip shortages are overwhelmingly focused on cutting-edge technology. But cutting-edge technology is not simply a matter of cutting-edge chips.

On the policy front, industry groups like SIA have suggested incentives to spur domestic chip production to ensure U.S. self-reliance when it comes to the future of semiconductors.

Intel, the largest US chip maker, is doubling down on manufacturing, investing $20 billion on two new fabrication centers in Chandler, Arizona. Indeed, local tax incentives have made Arizona the U.S. hub for semiconductor manufacturing with the Taiwan Semiconductor Manufacturing Corp. reported to be spending $35 billion in market and Samsung also considering Arizona for new fabs.

However, the short-term solution to chip shortages may involve existing 200mm fabs expanding capacity. The quickest way to do so is by sourcing pre-owned or refurbished equipment.

Yet, the secondary market for semiconductor manufacturing equipment is fragmented, unmeasured and easily overlooked by chipmakers, industry groups and regulators alike. While "used manufacturing equipment" might not sound like a sexy solution to a global crisis, a healthy secondary market for capital equipment has the potential to:

• Improve rigid supply chains that contributed to global shortages.

• Increase equipment liquidity, helping U.S. chip makers expand capacity while mitigating supply glut risk.

• Enable smaller manufacturers to compete in legacy technologies, thanks to cheaper capital equipment.

• Drive environmental sustainability in high-tech manufacturing through recirculation of machines seldom at end-of-life when retired by their first owners.

The secondary market for capital equipment is crucial to expanding capacity of mature nodes. As an industry, we can help add transparency and legitimacy to this supply chain strategy by formally measuring and monitoring the global secondary market for semiconductor manufacturing equipment.