When will my car arrive?

VT Tyndall Global Select Fund

When will my car arrive?

Over recent years companies have progressively moved towards leaner, just in time supply models which rely upon frictionless trade. Presidential trade wars can upset the finely poised balance between
supply and demand, especially when they ban suppliers of key components from trading with companies under their sphere of influence, however the recent pandemic has had ramifications that stretched these models to breaking point.

Semiconductors content is increasing in most of the products we use on a daily basis, creating a structural growth story for both the chip designers and the foundries that make the chips. The reliance on foundries has been increased by the shift towards a ‘fabless’ business model, with only a few mega cap companies, such as Intel, sticking to an in-house supply chain owing to the costs involved in keeping up with the dynamics of Moore’s law. Moore’s law is the belief that the number of transistors on a microchip doubles every two to three years at the same cost, and therefore the industry has the option of either making microchips faster and more powerful at half the cost or reducing the size and doubling the number of transistors on a chip at the same cost. For the foundries, the more profitable route to follow is the latter one, especially as the end customers are increasingly wanting the chips to use up as little space as possible in their products.

TSMC’s progression towards a 3nm fabrication node
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The costs, timelines, and technological difficulties in maintaining a leading position in this field provide those with the scale significant defensive moats; even Intel has resorted to outsourcing some of its production to TSMC as it struggles with quality issues in its own 10 nanometer transistors. Once a company falls behind it is rare that it can catch the leaders up, thereby increasing the order books for those with the capabilities and consequently the cash flows to invest in even more advanced production facilities. TSMC is due to start production at its 3nm foundry in late 2022, at a cost of $19.5bn and a 3½ year build program. This node is expected to be 30 per cent more energy efficient and 15 per cent faster than the current state-of-the art 5nm one.

Only Samsung & TSMC can produce under 10mn
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The unintended consequence is that Samsung and TSMC are running at maximum capacity in all their nodes, despite building new production plants and hence backlogs of orders have increased. The foundries are having to prioritise their orders and thus delay orders due to temporary demand dips by OEMs, which can have disastrous consequences, as the car companies are now finding out. Ford, GM, Honda, Fiat Chrysler and VW have all cited that a shortage of chips is leading to production difficulties. In 2020 they cut their orders, while companies such as Apple increased their orders on the back of the uptick in demand for 5G phones, and other technology companies asked for a greater supply for personal computers as working from home surged. Having spent billions of Euros (or Dollars) on state-of-the-art seamless production plants, bottleneck costs can lead to significant costs and result in margin compression.

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The car companies are not alone in their struggle, companies that sell their chips to the electronics industry such as AMD and Qualcomm are also citing shortages in chip supply and Sony blamed the situation for the difficulties in producing enough PlayStation 5 consoles to meet demand. The Semiconductor Industry Association estimated that global chip sales in 2021 would rise a further 8.4% from the record $433 billion of sales registered in 2020.


Despite foundries racing towards the bottom, they still have significant production facilities at larger nodes, however this does little to allay the problems for the automotive companies, or those that do not necessarily need the smallest semiconductors, as almost all the foundries are running at maximum capacity across their spectrum. The Sino-US stand-off has compounded the issue further with SMIC no longer allowed to supply US companies and TSMC had to halt producing chips to Huawei, the worlds largest maker of 5G phones and about 12-15% of TSMC’s revenues in 2019; fortunately, the
increased demand from Apple, AMD, Intel, Nvidia and other fabless companies more than offset this drop.

TSMC Wafer Production by Revenue
26th February 2021
Read time : 5  mins

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Data source (unless otherwise stated): Bloomberg
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