One of the biggest issues facing the tech industry right now is significant delays and a backlog of semiconductor foundries. Almost every tech category has seen a boost to demand, and that led to a dynamic of significant demand and not enough supply of semiconductors.
While an unanticipated surge of demand is a chief cause of the chip shortage, China’s initial shutdown this time last year due to the pandemic was going to cause delays for the entire year regardless of an uptick of demand. The surge in demand exaggerated this problem even more, which now brings an important observation to bear.
When I wrote last week about Apple perhaps partnering with Intel, I was only scratching the surface of what should be on every tech companies mind if their products rely on semiconductors in some way. This shortage is brought about because of the lack of foundry options for semiconductor companies. TSMC has had the clear lead for several years, and if you want a product on leading-edge process, your only option was TSMC. Samsung kept pace, but they hit some snags with their 10 and 8nm product which led some of their customers to go to TSMC.
While TSMC is not a semiconductor foundry monopoly yet, we are seeing a glimpse of what the world may look like if TSMC either is the last foundry standing or, at the very least, having a multi-year advantage on leading-edge process technology.
In either scenario, competition is painfully impacted. If only a few of the biggest tech companies, with scale and money, have access to leading-edge process technology and transistor designs, then those companies will maintain an edge on everyone else because they will be the few who can actually secure inventory. Everyone else will have to wait to get their chips to market. This is not a good scenario.
While TSMC is investing in foundries in the US, right now in Arizona, it will take several years to build out and be ready to start producing wafers. But the dynamic of TSMC having a monopoly on the leading-edge process, at a minimum, is concerning since they control who can get supply AND they could control pricing. This is why it is of the utmost importance that foundry competition is established and remain.
Yesterday Joe Biden signed an executive order to investigate the issues surrounding the chip shortage and look to strengthen the supply chain. Many hope for a renewed focus and more investment around the Chips Act and actively look to make US-based foundries more competitive.
Semiconductor foundries are not startup opportunities. Therefore, the US government’s options are Intel and Global Foundries to support US-based semiconductor manufacturing. While I do hope there is more around the Chips Act that can be established, I do not have the most faith in the government to help solve this. Which is a key reason I mentioned Apple, as I feel it makes more sense for private enterprise to help Intel via joint ventures or supply commitments.
The Art of Dual Sourcing Foundries
Given the reality, both short and long-term is the industry will only have a few viable foundries supporting the growing demand and need for semiconductors, companies who can strategically execute a dual-source strategy will be well-positioned.
This was always something Broadcom did well. I recall many conversations with their executives who were proud of the fact their chip design libraries were portable, and they could make them at whatever foundry they saw fit. Qualcomm is similarly executing a dual-source foundry strategy as they have versions of the same chipsets made at both TSMC and Samsung.
Companies that dual-source will be extremely well-positioned to weather a number of different storms that could come their way. From the geopolitical that I have outlined before, national economic issues, global catastrophes, etc. While this isn’t discussed as much publicly for obvious reasons, it is top of mind for many executives in the supply chain and those whose companies make products via semiconductor foundries.
While I keep circling the wagon on this, the fundamental point that needs to be addressed in the long-term is how to keep foundry competition alive. I believe Intel is critical to that future, which is why the industry needs to be concerned with Intel’s future whether they buy chips from Intel or not.