As this report goes to print, President Biden has just signed an executive order meant to address a global chip shortage impacting industries ranging from medical supplies to electric vehicles.
A resurgence in demand for automobiles in Q4 2020 took the industry by surprise. It could have been a pleasant surprise, if the industry had any spare capacity. The problem was that strong demand for semiconductor chips used in PCs, Cloud datacenters, AI clusters, games and crypto-currency mining was already constraining the industry supply chain late last year.
The bottlenecks are CMOS fabs, including TSMC, and factories producing organic substrates used in IC packaging, run by companies like ASE and Kyocera. It will take many months to increase capacity in these facilities even if the US government puts all its might into solving this problem. We do not expect the bottlenecks to ease until the end of 2021, in the best case scenario.
A confluence of several events brought the industry to the brink of exhausting its manufacturing capacity by the end of 2020:
Demand for IC chips used in Cloud datacenters and AI clusters was very strong even before the pandemic. COVID-19 increased demand for Cloud services, further accelerating investments into the supporting infrastructure.
COVID-19 shutdowns also boosted demand for PCs and gaming consoles, which rely heavily on complex CPU and GPU chips.
CMOS fabs remained open during the pandemic, but some of the IC packaging facilities had to shut down in April-May 2020. This contributed to concerns about disruptions in the supply chain, forcing many customers to increase the size of their orders in an effort to create inventory reserves.
US sanctions against Huawei, which were announced in May and scheduled to start in September 2020, prompted Huawei and other Chinese companies to create inventory reserves as well.
In July 2020, Intel reported delays with its introduction of chips based on 10nm and 7nm CMOS technologies and outlined plans to outsource more of its chip production to TSMC.
By October 2020, the industry supply chain was running red hot. This is when the auto industry was caught off guard by a surge in consumer demand.
The only solution is to increase production capacity across the industry supply chain: from the low-tech organic substrates to the high-tech 5nm CMOS fabs. This will require 10s if not 100s of billions of dollars and many months, possibly years, of effort.
TSMC announced plans to spend $28 billion on increasing capacity in 2021. The Chinese government invested $22 billion into domestic chip production last year and it will probably double this budget for 2021. And the US government is finally realizing how critical the semiconductor industry is to national security and a thriving economy, and that most of the IC chips used in the US are made abroad.
Despite these challenges, 2020 was a remarkably good year for many of the IC suppliers, which are US companies. New records in annual revenue and year-over-year revenue growth include:
AMD– up 45%,
Nvidia– up 35%
Intel– up 8%.
Low interest rates and skyrocketing stock market valuations funded a wave of mergers and acquisitions in 2020:
$10 billion paid by Marvell for Inphi
$21 billion paid by Analog Devices to merge with Maxim Integrated
$35 billion paid by AMD to acquire Xilinx
$40 billion offer by Nvidia for ARM
Suppliers of optical interface IC chipsets also reported very strong revenue growth for 2020, despite the challenges:
Inphi– up 87%,
Maxlinear– up 51% (mostly due to acquisition of Ethernet Wi-Fi business from Intel)
MACOM– up 21%
Maxim Integrated– up 8%
Sales of PAM4 DSPs used in Ethernet transceivers, AOCs, AECs and on-board re-timers contributed the most to growth in this market, as illustrated in the figure below. The re-timers are included into the Ethernet category along with optical transceivers.
The market for optical interface IC chipsets reached an inflection point in 2020 and it is projected to grow at 22% CAGR in 2021-2025. Increasing sales of PAM4 and coherent DSPs will sustain this growth rate. Bottlenecks in the industry supply chain may limit growth projected for 2021, but it will not derail the longer term forecast.