Chip shortage, TSMC and automakers’ JIT culture
By: Jerry Yang
Tags: Auto, USA, Semiconductors, Taiwan, Shortage

My colleague Mike and I held our first Clubhouse room on Wednesday, where we talked about the global chip shortage.

I remember during the 90’s and even early 2000’s, most of the tech people — hardware or software — did pay certain attention to the evolution of the semiconductor industry, because underlying all techs was the chips. Somewhere beyond 2004 when computing power started exceeding the performance requirement of most retail softwares — which ushered in the golden era of lean startups — new generations of software people started abstracted the underlying semiconductor chips, seeing it as a resource that you can gain access to as long as you’re willing to pay the price.

The recent crisis of chip shortage that prompted German, Japanese and eventually US governments to plead with Taiwanese government to help negotiate with TSMC in allocating some capacity to their automobile makers shows that you can ignore the devil for a while, but you can’t run away from it forever.

This article could go very lengthy, much like our 1-hour Clubhouse chat that left still quite some ground uncovered, but I will try to keep it short and only present the facts.

JIT does not work in semiconductors

Let me jump to the key problem: the huge difference in the supply chain culture of automakers and semiconductors.

Automakers run on JIT (Just-in-time) systems and rely on (screwing) their suppliers to react to their demands in a swift and reactive way (forcing the later to shoulder the inventory cost and working capital).

Automakers’ concept of supply chain is measured in weeks if not days.

Semiconductors run on extremely high capex, long cycle of bring-ups and constant obsoletion of equipments that fall behind the curve dictacted by Moore’s Law. To ensure the massive capex of a new process technology be recovered in 4 years before it falls behind the curve and therefore becomes unprofitable, foundries need long-term forecasts from clients in order to build capacity.

Semiconductors’ concept of supply chain is measured in years. Clients like Nvidia (co-founded by its Taiwan-born CEO Jensen Huang), Qualcomm, Broadcom, Mediatek as well as today’s Apple and Tesla give forecasts of their chip demands to TSMC starting at 2 years minimum.

Forecasts alone are not enough. Mutual trust between clients and TSMC also rely on clients making good on their promises continuing to fulfill most if not all of the forecasted orders year over year, and TSMC making good on their promises to deliver those chips.

These clients do not screw TSMC in bad times. TSMC does not screw these clients in good times.

Now can you imagine GM, Ford, BMW, Volkswagen, Toyota and Nissan to behave the same with TSMC, when they’ve been relying on (screwing over) their own Tier-1, Tier-2, Tier-3… Tier-N suppliers over the decades? Can you imagine them placing an order of $1B to TSMC for 2022 and still keep up with that promise even if by then they realize they had been overly optimistic?

Can you imagine the automakers, ever so used to just pick up the phone and call a supplier demanding them to bring in XXX in YYY quantity in 1 week, to be able to understand the cycle time of a delicate 5nm semiconductor fab and work closely throughout the months with TSMC, keeping in sync?

Now you see why German, Japanese and US governments were forced to step in for their automakers.

Automakers used to commend over their suppliers due to their prowess, but TSMC does not need auto business. Car electronics account for just a very small part of TSMC’s business. Their advanced nodes (10nm and below) have been full due to the explosion of AI applications(Nvidia) and continued growth in mobile devices (Apple, Qualcomm, Broadcom, Mediatek, etc).

Not to mention AMD, led by its Taiwan-born CEO Lisa Su, all of a sudden came back to life and grabbed 40% of the CPU market share!

A surprising comeback of AMD further strained the already tight capacity

From the trend above, one can see that in 2016 AMD was hovering at 20% market share. As Intel’s advanced nodes surprisingly fell behind in schedule, AMD’s CPUs, which leverage TSMC’s advanced process technologies, started outperforming Intel CPUs on the market and grabbing market shares.

From 20% to 40%, whatever AMD gained was the loss of Intel. The CPU chips underlying those lost Intel revenues were supposed to be manufactured in Intel’s fabs. Instead they are manufactured at TSMC now.

AMD has since become a top 5 client of TSMC.

This makes advanced nodes even more crowded. Given the situation, TSMC of course will prioritize over long-time chip clients such as Nvidia, Qualcomm, Broadcom and Mediatek, while catering to proven new champions such as Apple and Tesla. All these clients are Silicon Valley companies that understand, respect and honor their partnerships with TSMC.

But why don’t automakers go to other foundries?

Because there’s no other foundry that has advanced nodes in mass production. TSMC is the only one currently mass producing at 5nm.

GlobalFoundry is still stuck at 14nm. Samsung has advanced nodes and does have a foundry service, but since it has its own chip products as well so there’s always an inherent conflict with clients. Intel also has advanced nodes but despite contemplating doing foundry services (as a night job), never got serious.

TSMC is only foundry for applications that require advanced nodes, especially the AI chips and powerful CPUs that are now becoming larger and larger part of a car’s BOM cost.

Another bottleneck upstream of TSMC

But even if traditional automakers somehow miraculously calibrate their culture and work with TSMC as the chip companies do, there’s another bottleneck that’s even further upstream than TSMC.

The EUV maker, ASML in Netherlands.

EUV stands for « extreme ultraviolet lithography ». ASML is the sole manufactuer of EUV machines that produce light in the 13.3–13.7 nm wavelength range. These machines are the only ones that can do modern advanced process technologies such as 5nm.

Each one of this machine costs a minimum of $120M and you have to place orders years ahead.

In 2020 ASML was only able to manufacture and ship 31 EUV lithography machines. Half of those went to TSMC. The rest went to Intel and Samsung.

None went to China.

In 2012, Intel, Samsung and TSMC invested in ASML and became each one of them a meaningful shareholder. All three work with ASML to co-develope EUV lithography processes.

This means that even if automakers are willing to pay for the fabs and the machines themselves to secure the capacity, ASML might not have the capacity to cope with additional orders. Again, here it takes months to build the machines. So forecast is on the order of years.

Contrast to that, automakers’ JIT culture runs on weeks and days.

And my former employer Qualcomm tried that before already. Years ago as Qualcomm swept through the 3G and 4G markets and became the dominant force, they were worried about TSMC not being able to provide enough capacity for them. With tons of cash in the hand, Qualcomm inquired TSMC about the possibility of Qualcomm paying for Capex to build a Qualcomm-exclusive fab and contracting TSMC to run it.

TSMC politely declined. (Of course.)

Qualcomm eventually gave up on the idea and continued to work with TSMC closely as their largest client.

If TSMC could say no to Qualcomm, what will TSMC say to the automakers?

The White House of Taiwan

Any geopolitics perspective in this?

Of course. Otherwise German, Japanese and US governments won’t get involved.

Taiwan has always been in a delicate position geopolitically between China and all the western powers. Trump administration tore off the veneer of peace and politeness between US and China, partly by leveraging American’s dominance in semiconductor supply chain.

Despite the (surprising) recent setback at Intel, US is still №1 in semiconductor manufacturing; Taiwan is №2.

The eye-popping evolution of how China, US, Japan and Germany handled Covid crsis as contrasted with Taiwan also helped open up a lot of space for maneuvering among multi stakeholders. This is why German, Japanese and US governments raised their voices. This is a multi-stakeholder geopolitics game.

But one has to remember that TSMC is not a state corporate. It’s a public company with a market cap of $590B as of today and its ADR trading on NYSE. At the moment ADR accounts for 20% of TSMC’s outstanding shares. Those shareholders in US do not hold TSMC’s ADRs because they’re a big fan of Taiwan. They hold them because they want to make money in dividends and capital gains.

Taiwan is also a « full democracy » — at least in The Economist’s latest Democracy Index 2020 Report. This means unlike Alibaba vs CCP, Taiwanese government does not have a commend over TSMC on how it should operate as a for-profit private corporate.

That said, TSMC started out in 1987 as a project encouraged and supported by the government. TSMC also didn’t achieve its currents status by itself. The whole semiconductor and tech ecosystem in Taiwan was its biggest ally and they are in turn supported by the active involvement of the government over the past 30+ years. TSMC obviously would work with the Taiwanese government in response to all these demands from Germany, Japan and US.

Also, prior to this crisis in the beginning of 2021, TSMC already started building a fab in Arizona. This opens up the access to DoD businesses so it benefits both TSMC and US. We’ll see how Germany and Japan might take the same approach and work with TSMC to build fabs and acquire talents to run locally.

Exactly how this will play out remains to be seen obviously. One thing for sure is the geopolitical situation has changed forever since the tulmultous 2020. It will never go back to the pre-2020 world. Anyone with deep experiences in related subjects should definitely refresh their understandings and stay open-minded.

Okay, this isn’t exactly a short piece as I promised.

But then again the chip shortage crisis also isn’t a simple problem that could be addressed by a tweet.