US is slowly gearing up to lead the semiconductor industry, but how will Europe survive when it consumes 20 percent of the international chip supply, but produces only nine percent
For a very long time, semiconductors have played an important role in modern technology, be it powering smartphones, computers, artificial intelligence, products or the systems, that we utilize in our daily lives. But, with the onset of the COVID-19 pandemic in 2020, the production of chips slumped to a larger extent and therefore, it continuously failed to meet the requirements of the various industries. This year, the industry faced a larger decline in sales and production as the international economy contracted and the demand from the consumer-driven markets was very low.
One of the imperative hurdles the industry faced of late is the supply chain imbalances owing to several reasons along with the pandemic and in fact, the trade disputes coupled with the current geopolitical scuffle caused a huge shortage of chipset production internationally. Although there are various industrial sectors such as data centers, consumer electronics, and automotive, the demand for chips, but limited access to raw materials, construction of foundry challenges, lower manufacturing have been the major reasons behind production delays and disruptions.
Now, the unleash of vaccines has been extremely bumpy globally, which implies a lot of economies will take to get stable more slowly than others. Now, as per an interaction analysis report, the EMEA region (Europe, the Middle East and Africa) in particular has fared relatively badly. In February 2021, for example, while the UK registered 89.8 vaccination doses per 100 people, Germany registered only 54.2. France and Italy currently measure 48.6 and 51.9 per 100 respectively. This is one of the most imperative factors, which has led to the weaker manufacturing of microchips.
Adrian Lloyd, CEO at Interact Analysis, who is also a strategy advisor said, "This is probably one of the most harsh times for the international manufacturing sector and we are still not out of the problems yet. Even in the coming years, the chip shortage will continue for a while. Moreover, the huge volume of quantitative easing and fiscal assistance, which was provided by the governments during the COVID-19 amounts to 54.5 percent for Japan, 39.5 percent and 26.5 percent for Germany and the US shows that inflation cannot be prevented in some important countries. The COVID-19 situation is definitely going to stretch it further as we are not out of danger yet.”
The Growth Trajectory of Semiconductor Foundry And Market Trends
A year back, the global semiconductor market for foundry was valued at USD 127.79 billion, which is expected to grow at a CAGR of 76.7 percent, worth USD 184.94 billion in the coming five years, claims a survey report of Mordor Intelligence. While, another market research firm Consegic Business Intelligence mentioned that between 2023 and 203, the global foundry market of semiconductor industry will grow at a CAGR of 7.10 percent. The growth of top-notch technologies such as IoT, AI, and cloud computing are augmenting the demand for the semiconductor industry. For example, AI is crafting emerging opportunities for this sector as various AI applications depend on hardware as a harbinger of innovation mostly for the memory and logic functions. The demand for semiconductors in relation to increasing utilization of AI is speculated to contribute massively towards the industry’s growth.
The semiconductor foundry is like a factory that does the wafers production and there are two types of models in this sector namely, integrated device manufacturer (IDM) and pure-play foundry. The latter operates the semiconductor fab units manufacturing ICs for other firms devoid of any in-house designing capabilities. IDM does the selling, designing, and manufacturing of IC products. Now, the point is why various economies are planning to set-up more semiconductor foundries and why it is gaining a huge importance suddenly.
Faisal Kawoosa Senior Research Analysts and founder at techARC said, “Since the coronavirus pandemic, various countries in Europe, India, and the US want to set-up fab units in their own country so that they can increase their production of chips and depend less on China and other Southeast Asian countries. These countries have started boycotting China and all their tech products. For this reason, the Chip 4 alliance was formed by the US president Joe Biden, while India and Europe have also unleashed their own CHIPS act and started inviting semiconductor manufacturers to set-up foundries in their soil.”
“Most importantly, there are now close associations among the governments of various countries especially between the US and South Korea, which are expected to uplift the growth of the semiconductor foundry units. Moreover, governments are also trying to magnetize numerous chip firms to reveal the actual chip production information rather than disclosing the trade secrets to find out the actual impediments and ward off supply chain imbalances. TSMC and Samsung both were requested by the US administration to detail those information as soon as possible,” added Kawoosa.
In spite of deploying this strategy several chip companies are very slow to detail the information required. Amid the severe effects of the pandemic, in the second half of 2020, the chip industry saw a huge spike in demand. Interestingly, along with the escalating demand, there is also a high deficit, which led to a huge gap in the supply chain ecosystem. Initially, a major of the foundry volume has been reduced and forced to cut production as the demand for semiconductors slumped from major sectors such as automotive.
Other than this, the increasing initiatives from the government for the adoption of electric cars is speculated to proffer a gigantic growth opportunities for chip foundry market. In EVs, the chip plays an important role for the development of powerful batteries, driver assistance systems, and efficient power management systems.
In terms of global chip sales, the Semiconductor Industry Association (SIA) mentioned that 47 percent of them are produced in the US. This is a huge disparity, which is creating a colossal threat to the national security and finance of the country and this is why both politicians and business bigwigs have started forming strategies to set-up fabs in the country. There are five companies, which are leading the semiconductor foundry market such as UMC, TSMC, SMIC, Samsung Electronics, and GlobalFoundries.
What Are The Current Setbacks of The Global Semiconductor Foundry Market
Fabrication of semiconductor is an intricate process of manufacturing and designing electronic components such as transistors and microchips. Speaking of the electronics industry, it is a very important component, which is now a backbone for various devices like TVs, computers, and smartphones. Amid this importance, the fabrication procedure is caught up with endless barriers that can either degrade the quality or the production.
Robert Casanova, Director of Industry Statistics and Economic Policy at Semiconductor Industry Association (SIA) said, “Constructing a semiconductor fab is a huge task and it takes a lot of years and hence, it’s always constructed in phases. Then, choosing an appropriate location involves a lot of research starting from local workforce potentials to tax evasions and availability of freshwater. For instance, a massive rainwater collection system and wastewater treatment facility was built by TSMC as Taiwan is grappling with water problems. Another aspect is that clean rooms are extremely essential for fabs, where air quality is very vital. The design of these rooms depends on the level of spic and span required.”
Most importantly, fabrication requires specialized machineries and equipment, which are extremely costly. At regular intervals, these machines must be upgraded and supervised so that it works well whenever required. Therefore, the situation makes it very difficult for SMBs to enter this market as they require huge amounts of investments and resources for the equipment. Then, protecting the intellectual property is another vital aspect for revenue generation of chip companies. The procedure is challenging as it entails several stakeholders such as suppliers, designers, and manufacturers.
How The US and Europe Aiming To Grow The Semiconductor Foundry Market
Throughout the world semiconductor companies are investing billions of dollars to set-up new fab units. The EU and the US in an effort to keep China out of the chip rat-race has unleashed 15 billion euros and the CHIPS Act worth $52 billion in subsidies to grow chip manufacturing in the region.
In a previous interaction with CircuitDigest Casanova opined that the share of modern semiconductor manufacturing capacity located in the U.S. has decreased from 37 percent in 1990 to 12 percent today. This decline is largely due to substantial manufacturing incentives offered by the governments of our global competitors, placing the U.S. at a competitive disadvantage in attracting new construction of semiconductor manufacturing facilities, or “fabs.” Additionally, federal investment in semiconductor research has been flat as a share of GDP, while other governments have invested substantially in research initiatives to strengthen their own semiconductor capabilities, and existing U.S. tax incentives for R&D lag behind those of other countries. Furthermore, global semiconductor supply chain vulnerabilities have emerged in recent years that must be addressed through government investments in chip manufacturing and research.
Speaking of the recent developments, Renesas Electronics back in May 2022 declared an investment of USD 706.5 million in its Kofu Factory in Japan. By the first half of 2024, the unit is scheduled to commence its operation for the production of 310-mm wafers. The US based firm Intel on the other hand in January 2022, decided to invest around USD 20 billion for setting-up two top-notch chip units in Ohio. According to the company’s IDM 2.0 plan, the investment will boost production to meet the rising demand. The world’s largest semiconductor foundry TSMC announced in November 2022 that manufacturing of 3-nanometer chips will begin at its Arizona factory and in the same year in December, the company proclaimed to increase its investment in Arizona by three times, which is around USD 40 billion.
Then, Micron Technology, one of the globe’s leading manufacturers of data storage and computer memory announced a year back that it is going to set-up the world’s largest chip factory in Clay, New York. The construction is scheduled to commence in the first half of 2024 and the operation is likely to begin in the latter half. GlobalFoundry, based in Malta, New York countered stupendously to the international chip shortage because in addition to the dollar 1 billion expansion, the company has assured to set-up another mega fab in the same facility. The company has already purchased an additional 800 acres of land close to the same unit. Therefore, the US is already on the verge of creating a history in the semiconductor ecosystem.
But, when it comes to the EU, the question arises is how can the region lead the race when it consumes 20 percent of the international chip supply, but produces only nine percent, claims Deloitte. Interestingly, it’s not increasing the pace because in 2020 and 2021, the investment on semiconductor manufacturing equipment was just 3.7 percent and 3.2 percent of the entire international spending.
Research experts have added that the decision-makers in Europe must have various alternatives so that they can optimize the region’s semiconductor ecosystem. The decisions will have a positive impact on both buyers and suppliers of chips and the major buyer will be the automotive industry. Speaking of the third quarter of 2022, there are not pure-play chip firms internationally, which are adjacent to the trillions of dollars of valuation, but there are a couple of firms, which are close to hundreds of billion dollars.
Currently, Europe is equipped with semiconductor firms like ASML headquartered in the Netherlands, one of the globe’s leading manufacturers of semiconductor equipment. ST Microelectronics and NXP are both Dutch firms and Infineon is based out of Germany. In the UK, there is ARM, a provider of processor intellectual property. There are 44 countries in Europe and hence, researchers highlighted how the region will spearhead the semiconductor race with a handful of chip firms.
