How the global chip shortage is creating new power players

Chief among the changes is a long-term shift in market power from chip buyers to sellers, particularly those that own factories that make the semiconductors. The most visible beneficiaries have been giant chip manufacturers like Taiwan Semiconductor Manufacturing Co., which offer services called foundries that build chips for other companies.

But the shortage has also sharply bolstered the influence of lesser-known chip makers such as Microchip, NXP Semiconductors, STMicroelectronics, Onsemi and Infineon, which design and sell thousands of chip varieties to thousands of customers. These companies, which build many products in their own aging factories, now are increasingly able to choose which customers get how many of their scarce chips.

Many are favoring buyers who act more like partners, by taking steps like signing long-term purchase commitments or investing to help chip makers increase production. Above all, the chip makers are asking clients to share more information earlier about which chips they will need, which helps guide decisions about how to lift manufacturing.

“That visibility is what we need,” said Hassane El-Khoury, CEO of chip maker Onsemi, a company previously known as ON Semiconductor.

Many of the chip makers said they were using their new power with restraint, helping customers avoid problems like factory shutdowns and raising prices modestly. That’s because gouging customers, they said, could cause bad blood that would hurt sales when shortages end.

Even so, the power shift has been unmistakable. “Today there is no leverage” for buyers, said Mark Adams, CEO of Smart Global Holdings, a major user of memory chips.

It’s a substantial change in psychology for a mature industry where growth has generally been slow. Many chip makers for years sold largely interchangeable products and often struggled to keep their factories running profitably, particularly if sales slumped for items like personal computers and smartphones that drove most chip demand.

But the components are essential for more products now, one of many signs that rapid growth may linger. In the third quarter, total chip sales surged nearly 28% to $144.8 billion, the Semiconductor Industry Association said.

Years of industry consolidation has also wrung out excess manufacturing capacity and left fewer suppliers selling exclusive kinds of chips. So buyers that could once place and cancel orders with little notice — and play one chip maker off another to get lower prices — have less muscle.

One effect of these changes was to make chip factories more valuable, including some older ones owned by foundries. That’s because new manufacturing processes have become so costly that some chip designers aren’t shifting to the most advanced factories to make their products. The result has been a demand crunch for less-expensive production lines that are 5-10 years old.

So some foundries, in a major strategy shift, are beginning to put more money into older production technology. TSMC recently said it would build such a plant in Japan. Samsung Electronics, a key foundry rival, has also said it was considering a new “legacy” factory.

But those investments will take several years to pay off. And they won’t address issues affecting chips like microcontrollers, which are a microcosm for the supply chain squeeze.

Microcontrollers combine the ability to make calculations with built-in memory to store programs and data, often adding features that only come from specialized factories. And the number of applications is skyrocketing, from brake and engine systems in cars to security cameras, credit cards, electric scooters and drones.

“We’ve probably sold more microcontrollers in the past year than the past decade,” said Marc Barnhill, chief trading officer at Smith, a chip distributor based in Houston. The wait to receive some popular microcontrollers now stretches to more than a year, he said, and prices for the products have leapt 20-fold among traders that buy and sell chips.

Amid the turmoil, companies that design or use chips have responded with new tactics. Some designers are adapting their products to be made in different factories with more manufacturing capacity, said Shiv Tasker, a global vice president engaged in that practice for the consultancy Capgemini.

And customers that once bought chips based on price and performance also are thinking more about availability.

While the chip industry’s power shift has aided Microchip, it has also come with its own headaches. Moorthy said the company had managed to produce more chips in its three main factories in Arizona and Oregon, as well as get more from foundry partners. But demand is growing faster than what it can produce.

“We are falling farther behind,” he said.

Expanding Microchip’s own plants isn’t easy. For one thing, the company has always relied heavily on buying used manufacturing equipment, but “that whole thing has dried up,” Moorthy said.

Acquiring new gear can take 12-18 months and costs more, he said. While the long-term purchase agreements have provided more stability to make such investments, Microchip and others also hope Congress approves a $52 billion funding package, which is expected to include grants to subsidize more U.S. chip production.

“Are we counting on it to run our business? No,” said Moorthy. “Would it help some of our investment choices? Absolutely.”