Costs Prohibitive to Add Semiconductor Capacity, Says SIA Report
Industry will need to invest about $3 trillion over the next decade in R&D and capital spending globally across the value chain “to meet the increasing demand for semiconductors” that's causing severe shortages across multiple industries, concluded a new Semiconductor Industry Association report prepared with Boston Consulting Group and released Thursday. “Industry participants and governments must collaborate to continue facilitating worldwide access to markets, technologies, capital, and talent, and make the supply chain more resilient.” Government action, in the form of financial incentives and subsidies, “is needed to address vulnerabilities in the global semiconductor supply chain and ensure its long-term strength and resilience,” it said.
Geographic specialization in semiconductor production and supply “has served the industry well,” but it also “creates vulnerabilities that each region needs to assess in a manner specific to its own economic and security considerations,” said the report. “There are more than 50 points across the supply chain where one region holds more than 65% of the global market share, although the level of risk associated with each of these varies.”
The “global structure” of the supply chain “delivers enormous value” to the industry, said the report. It speculated that a “hypothetical alternative” with parallel, fully self-sufficient local supply chains in each region to meet current levels of semiconductor consumption “would have required at least $1 trillion in incremental upfront investment.” That would have resulted in 35%-65% pass-along increases in semiconductor prices “and ultimately higher costs of electronic devices for end users,” it said.
Manufacturing emerges as a major focal point “when it comes to the resilience of the global semiconductor supply chain,” said the report. About three-quarters of global semiconductor manufacturing capacity, plus suppliers of key materials, such as silicon wafers and specialty chemicals, “are concentrated in China and East Asia, a region significantly exposed to high seismic activity and geopolitical tensions,” it said. Micron Technology's infrastructure investments in recent years enabled it to mitigate the fallout of earthquake-induced disruptions to its Taiwan operations in December, said its CEO on Wednesday's fiscal Q2 investor call (see 2104010037).
The world’s “most advanced” semiconductor manufacturing capacity, in nodes below 10 nanometers, is concentrated entirely in Taiwan (92% share) and South Korea (8%), said the report. “These are single points of failure that could be disrupted by natural disasters, infrastructure shutdowns, or international conflicts, and may cause severe interruptions in the supply of chips.”
The need for “massive global scale” means there’s no easy cure for semiconductor shortages, said the report. Industry economics, “together with the deep expertise in the complex technology required to produce semiconductors, create natural barriers to entry across the core activities in the supply chain, leading to a relatively concentrated supplier base in each activity,” it said.
The “sheer size” of the upfront investment required to build new semiconductor factory capacity “acts as a major barrier,” said the report. It estimates the “aggregated annual capital expenditure” of the top five foundries between 2015 and 2019 totaled about $75 billion, “or an average of $3 billion per firm per year, equivalent to more than 35% of their annual revenues.”
Though semiconductor design doesn't require a lot of capital expenditure, “its high R&D intensity also creates significant scale advantages” and is an additional “barrier to entry,” said the report. The top five fabless firms invested $68 billion in R&D between 2015 and 2019, or an average of $2.8 billion per firm per year, equivalent to 22% of their revenue, it said. “Achieving a satisfactory return on these massive investments is possible only for firms with very large scale.”