The global chip shortage seems to be decreasing. Both Samsung and TSMC, both major players in the chip market, report that demand for chips is falling. Good news for the automotive industry, among others, which has been hit hard by the chip shortage in recent years.
Chips are today an indispensable part of a wide range of products. These include industrial robots and manufacturing systems, but also household appliances like refrigerators and dishwashers, cars, computers and mobile phones. In the COVID-19 pandemic, devices were in high demand, partly due to a sudden shift to working from home. At the same time, chip production was simultaneously disrupted by lockdowns, among other things. The combination led to a massive global chip shortage.
Automotive industry hit hard
The automotive industry is one of the sectors that has been hit hard by the shortage. Figures from Allianz Trade at the end of last year showed that, due to the chip shortage, no fewer than 18 billion fewer vehicles were produced worldwide than planned. European car manufacturers have been hit relatively hard; Allianz Trade estimates the losses for European manufacturers in 2021 and 2022 at around 100 billion euros.
It seems that the biggest shortages are behind us. Both Samsung and TSMC report cutting production of their chips. The reason for this is declining market demand for chips. Samsung, for instance, announced it was producing fewer memory chips in view of falling prices and rising customer inventories. The company saw its operating profit fall by 96% to 600 billion won, or around 416 million euros. This is the lowest result since 2009, when the company saw demand for chips fall due to the financial crisis.
TSMC also sees demand falling
Samsung is not alone in this. TSMC, another major player in the chip market, is also seeing demand for chips decline. The company lowered its first-quarter forecasts by 5 per cent at the start of this year, reports Reuters. The company also announced that it would be cutting its investments in light of lower market demand.
DigiTimes, also based in Taiwan, also reports that the Dutch chip equipment manufacturer ASML has received significantly fewer orders for EUV equipment from TSMC. The Taiwanese chip manufacturer is ASML’s largest customer.
Besides Samsung and TSMC, other chip makers are also taking action. Competitor SK hynix, for instance, already announced in September that it was cutting its investments in chip production. The company is halving its investments. Micron, too, is taking measures, cutting its investments by 30%.
Availability increases and prices fall
While falling demand is bad news for chip makers, it is not for buyers such as the automotive industry. With lower demand, chip availability is increasing and prices are also falling. The turnaround can already be seen in car deliveries in March.
“The rise in March was mainly due to cars that had been ordered earlier. These were therefore back-orders. We can only conclude that this is linked to a reduction in the chip shortage,” a spokesperson for the trade association BOVAG told NU.nl.
Shorter delivery times
A survey by AutoWeek also confirms this picture. The survey shows that delivery times for new cars from various makes are now getting shorter.
At the same time, consultancy firm Bain & Company warns that it is too early to breathe a sigh of relief. For instance, delivery times for chips are still longer than they were before the COVID-19 pandemic. Furthermore, there is a risk that a chip shortage could arise again. This is partly due to the growing use of chips in cars, where they play a crucial role in electric powertrains, amongst other things. However, the current energy transition also requires chips.
European Chips Act
In the long term, the European Union (EU) aims to prevent a repeat of the chip shortage by bringing more chip production to European soil. To this end, it introduced the European Chips Act back in February 2022. Through subsidies and tax incentives, the European Commission aims to persuade chip manufacturers to produce chips on European soil. This should reduce the EU’s dependence on other countries for chip production. In the long term, according to the European Commission, the EU should even become a leader in the field of chip production.
As part of the European Chips Act. As part of this act, a budget of over €43 billion should become available. This budget consists of both private and public funds. Thus, a quarter of the budget has to come from public funds, while the private sector has to contribute the remaining three quarters.
Several parties are investing
The European Chips Act appears, at any rate, to be leading to an increase in investment in chip production on European soil. Various parties have already announced investments. These include Bosch, which is investing 170 million euros in two new R&D centres in Germany. The German company is also investing 250 million euros in the expansion of a wafer fab in Dresden, Germany.
Intel is also looking to invest; the company announced in March 2022 a €17 billion investment in two chip factories in Magdeburg, Germany. This is, according to the US company, a "mega-site" for chip production. Construction of the production facilities was scheduled for the first half of 2023. Production could then start in 2027.
Intel wants more subsidies
Late last year, however, it was announced that Intel was delaying the construction of these German chip factories. The company already received 6.8 billion euros in subsidies to build the facilities, but wants more subsidies. The Financial Times reports that Germany is willing to grant additional subsidies, but only if Intel itself also increases its investments. The US company previously promised to invest $29 billion in production sites in Europe. By the way, this does not only include chip factories in Germany, but also sites in Ireland.
At the same time, other parties are also planning chip factories in Europe. One example is TSMC, which is considering a chip factory in Germany. A delegation from the Taiwanese company travelled to Germany in the autumn of 2022 to select a site for a chip factory. Reuters reports that construction at this site is set to begin shortly. However, TSMC is still negotiating with the German government regarding subsidies. The amount of subsidies TSMC hopes to receive is not known. A source has, however, told Reuters that the negotiations are at an ‘advanced stage’.
Author: Wouter Hoeffnagel
Photo: axonite via Pixabay
