Semiconductors and the digital dance

The world is not making enough semiconductors to fulfill demand. The disequilibrium of supply and demand is especially troublesome in certain categories. While usually skeptical of “shortage” talk, I recently acknowledged that current automotive production is constrained by a shortage in supply of legacy semiconductors.

But step just a bit upstream from the inventory bins of automotive manufacturers and the demand aspect of this shortage emerges. (Good overview.)

In spring 2020 many automobile manufacturers anticipating sales would crater canceled existing orders for semiconductors. Freed from this commitment to lower margin products, semiconductor manufacturers converted production to higher-margin categories… at the front end of a surge in demand for higher-end categories that started in the second-half of 2020. Automobile manufacturers gave away their place in line.

Since 2020 demand for all-things-digital — and therefore the semiconductor muscles of the digital dance — has done nothing but grow. To reclaim the parts they need, automobile manufacturers are paying more and developing creative work-arounds.

The fundamental challenge, it seems to me, is to reclaim time and space for automobile chips in an ecosystem where demand-pull is surging and supply-push is expensive and time-consuming to grow. Semiconductor manufacturers are expanding capacity. But in the meantime choices are being made about how to maximize current returns and longer-term strategic advantage.

Tuesday GlobalFoundries (one of the planet’s top-five manufacturers of semiconductors) released its 2021 fourth quarter financial results. For the full calendar year shipments were up 17 percent. Revenue was up 36 percent. Implying the ferocity of demand? Two other bits from the report are explicit regarding demand dynamics:

GF entered into 30 significant long-term customer agreements that provide assurance to our customers and provide revenue visibility to GF.

GF and Ford announced a non-binding strategic collaboration to advance semiconductor manufacturing and technology development within the US, aiming to boost chip supplies for Ford and the US auto industry. (more)

When there is a pinch, where do you suppose supply will flow — toward “long-term customer agreements” or “non-binding strategic collaboration”?

Supply organizes around demand.