A large industrial conglomerate is being forced to take increasingly desperate measures to satisfy their needs for chips, according to ASML, a manufacturer of chip-making equipment.
Talking on an earnings call this week with financial analysts, Peter Wennick, CEO at ASML, said that “width of demand” for chips was “significantly underestimated” by industry and: “I don’t think that is going away.”
“I met the executive of a very large industrial company, a conglomerate, last week, and actually they told me that they’re buying washing machines to rip out the semiconductors to put them in industrial modules. I mean, that’s happening these days,” he said.
“Now you could say that’s an anecdote but to be honest it happens everywhere. It is 15, 20, 25-year-old semiconductor technology that is now being used everywhere… driven by IoT type applications.”
ASML, the world’s largest supplier of photolithography systems, reported calendar Q1 2022 revenue of €3.13 billion ($3.41 billion), up 36 percent year-on-year, and net profit of €1.331 billion ($1.45 billion), up 91.5 percent.
Semiconductor lead times stretched to an average of 26.6 weeks in March, according to financial analyst Susquehanna, which collates data from distributors. According to Avnet, some 93 per cent of 530 engineers it interviewed across the globe are seeing delays in chip shipments and most expect the price to leap in the next 18 months.
Not one industry is immune to the shortfall in supply, although a particularly high profile casualty in the automotive sector, where the supply chain was less flexible and found it harder to recover supply following order cancellations in the early stages of the pandemic.
Richard Gordon, practice vice president for semiconductors and electronics at Gartner, told The Reg the example cited by ASML seems a “bit extreme” and not representative of the situation.
“More typical over the past couple of years is ‘de-spec’ing’, particularly in automotive where the auto-makers would de-activate non-essential functions (e.g. rear-seat aircon and things like that) in order to ship vehicles.”
Gordon said ASML demand is from immediate customers – semiconductor vendors – and it has “less visibility into end-markets.” ASML, he added, was trying to reassure investors on the earnings call as it is totally reliant on the capital expenditure from those chipmakers to grow production.
The long-term outlook for the semiconductor industry looks positive due to new applications including electric vehicles, industrial IoT, 5G, and depending on who you believe, the metaverse too but there will be bumps in the road in the medium term.
“We’ve just seen a classic peak in the semiconductor market – chip shortages, prices rises, inventory build-up, all of which led to a very high growth year and record revenues in 2021. But, this is a cyclical market. The shortage situation is easing; I think we are past the peak in the cycle.
“On the supply side, capacity is going to come on-stream progressively from 2022 onwards and supply chain disruption in places like China will cause sporadic glitches in electronics production.
“On the demand side the signs are not good from a macroeconomic perspective – consumer disposable income is going to get squeezed due to the rise in cost of living and increased taxation etc. Post-COVID, people are prioritizing any discretionary spending they can afford on things like travel rather than PCs and smartphones.”
The chip industry expert said it he was already hearing about semiconductor inventories “being released back on to the market and orders for semiconductors being cancelled.”
“The bottom line is that the industry is heading in to a down cycle, probably starting in 2H22 but certainly affecting 2023 and 2024 – this means that the industry will move from under-supply to over-supply (capacity investment on the supply side set against weakening end-market demand), which will put downward pressure on semiconductor pricing and result in a slow-down in revenue growth. The next up-cycle will begin in 2025 / 2026.”
Given the investments in new chip fabrication plants in the US, including from TSMC and others, as well as Europe muscling in on the action, the situation could get messy. ®