Some models for the semiconductor industry include the Competitive Strategy model of Michael Porter, which finds companies can succeed by innovation, by selling at the lowest cost, or both. Another model is the Christiansen Innovator’s Dilemma model which notes that industries may be characterized by steady or disruptive innovation, and by low cost creating or expanding the market. Another modeler is Malcolm Penn who posits a basic driver for semiconductor businesses is the increase in transistors in products which grows at 8% per year on average.
According to BCG, in 2021 demand for auto chips was 118 while supply was 106 in relative terms. In 2022 supply is better at 113 but demand is 121-123. In 2023, BCG predicts, demand will be 124-127 and supply 123. So the shortage persists today, and will continue to persist, but narrow in 2023.
The crippling auto chip shortages have yet to be explained fully by the models I’m aware of. So that makes it very interesting from an intellectual and practical standpoint.
The BCG report contains a concept that potentially explains the shortages in mature nodes MEMS and analog; the “cost penalty.”
”The tight supply for analog and microelectromechanical systems chips will likely persist, in part due to the comparative cost penalty of new versus fully depreciated fabrication plants acting as a headwind to new investment.”
I like the BCG cost penalty concept as it is simple explanation for why we still have shortages. No one, not the auto makers, nor their suppliers, is willing to bear the cost penalty, since it would be a poor strategic move. The higher cost supplier would eventually go out of business. So, essentially, low cost is an unassailable moat that prevents new, higher cost capacity for analog and MEMS. This is predicted by the Porter model.
This shifts the debate, in my opinion, from who is to blame (no one is to blame) to what is missing from the market. It seems what is missing is competition; new entrants to the market bringing new capacity with new capabilities that justify the cost increase.
Is this the correct explanation? There have been no new competitors in the MEMS and analog market since the shortage started. That indicates it’s potentially correct. Then why are their no new entrants? Product shortage should incent competition; why not with analog and MEMS?
I think there are special problems with mature markets that require capital investment. It isn’t sexy. The potential upside is limited, while the costs, and the risks, are substantial. So no one wants to go there.
The mature analog and MEMS players also provide a warning to new entrants. They illustrate a market you want to avoid: Low prices, no pricing power, low ROI.
The fact that the mature analog and MEMS players continue operating with such bad conditions may perhaps be the crux of the issue. Until some of them go out of business, the low ROI will scare off new players. So the market has to get worse, to get better.
One of the problems I’ve observed over the years in the semiconductor industry is this industry cyclicality produces deep troughs in profitability. An illustration: During 2008, at Qimonda, the DRAM price fell and Qimonda’s cash cost at the fab I was employed at was $2 more per chip than the market price. We joked about each chip coming with 2 $1 bills attached. That negative ROI wasn’t sustainable and we eventually went bankrupt.
If prices had risen slightly, we might have remained in business in the hope that our ROI would turn positive eventually. I think this is where the mature MEMS and analog fabs are at currently. They are too unprofitable to survive but remain alive for now, perhaps surviving on low cost debt financing, which prevents new entrants and a healthy market.
Higher interest rates may put the zombie MEMS and analog players out of business. Or perhaps new entrants are needed first, to double tap the weak zombies. It will be interesting to see if the cost penalty model is correct, whether zombie companies can survive higher interest rates, and whether the aging Intel, Samsung or TSMC fabs can match the costs of the zombie MEMS and analog players.
According to BCG, in 2021 demand for auto chips was 118 while supply was 106 in relative terms. In 2022 supply is better at 113 but demand is 121-123. In 2023, BCG predicts, demand will be 124-127 and supply 123. So the shortage persists today, and will continue to persist, but narrow in 2023.
The crippling auto chip shortages have yet to be explained fully by the models I’m aware of. So that makes it very interesting from an intellectual and practical standpoint.
The BCG report contains a concept that potentially explains the shortages in mature nodes MEMS and analog; the “cost penalty.”
”The tight supply for analog and microelectromechanical systems chips will likely persist, in part due to the comparative cost penalty of new versus fully depreciated fabrication plants acting as a headwind to new investment.”
I like the BCG cost penalty concept as it is simple explanation for why we still have shortages. No one, not the auto makers, nor their suppliers, is willing to bear the cost penalty, since it would be a poor strategic move. The higher cost supplier would eventually go out of business. So, essentially, low cost is an unassailable moat that prevents new, higher cost capacity for analog and MEMS. This is predicted by the Porter model.
This shifts the debate, in my opinion, from who is to blame (no one is to blame) to what is missing from the market. It seems what is missing is competition; new entrants to the market bringing new capacity with new capabilities that justify the cost increase.
Is this the correct explanation? There have been no new competitors in the MEMS and analog market since the shortage started. That indicates it’s potentially correct. Then why are their no new entrants? Product shortage should incent competition; why not with analog and MEMS?
I think there are special problems with mature markets that require capital investment. It isn’t sexy. The potential upside is limited, while the costs, and the risks, are substantial. So no one wants to go there.
The mature analog and MEMS players also provide a warning to new entrants. They illustrate a market you want to avoid: Low prices, no pricing power, low ROI.
The fact that the mature analog and MEMS players continue operating with such bad conditions may perhaps be the crux of the issue. Until some of them go out of business, the low ROI will scare off new players. So the market has to get worse, to get better.
One of the problems I’ve observed over the years in the semiconductor industry is this industry cyclicality produces deep troughs in profitability. An illustration: During 2008, at Qimonda, the DRAM price fell and Qimonda’s cash cost at the fab I was employed at was $2 more per chip than the market price. We joked about each chip coming with 2 $1 bills attached. That negative ROI wasn’t sustainable and we eventually went bankrupt.
If prices had risen slightly, we might have remained in business in the hope that our ROI would turn positive eventually. I think this is where the mature MEMS and analog fabs are at currently. They are too unprofitable to survive but remain alive for now, perhaps surviving on low cost debt financing, which prevents new entrants and a healthy market.
Higher interest rates may put the zombie MEMS and analog players out of business. Or perhaps new entrants are needed first, to double tap the weak zombies. It will be interesting to see if the cost penalty model is correct, whether zombie companies can survive higher interest rates, and whether the aging Intel, Samsung or TSMC fabs can match the costs of the zombie MEMS and analog players.