Local Technology Firms Brace For A Prolonged Chip Crunch Through 2023

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MORE THAN A YEAR OF PRODUCTION DISRUPTIONS AND AN INCREASE IN DEMAND FOR ELECTRONICS has resulted in an unprecedented year for semiconductor businesses, which have been ramping up production since the second half of 2020.

While attempts are being taken to alleviate the global chip shortage, a resolution is not imminent. Local IT firms anticipate the shortfall will endure for the next two years.

The chip problem is the result of a number of interrelated factors. Numerous lockdowns imposed in response to the Covid-19 pandemic have affected semiconductor manufacturers’ operations, resulting in reduced supply. Additionally, the scarcity is being exacerbated by the world’s accelerating digital transformation and technology adoption.

The ongoing trade war between the United States and China; the fire at a Renesas Electronics Corp. chip plant in Japan; Taiwan — one of the most critical links in the global technology supply chain — being hit by the worst drought in half a century; and a harsh winter storm wreaking havoc on computer-chip manufacturing facilities in Texas have all exacerbated the imbalance. Renesas controls 30% of the global market for automotive microcontroller units; two-thirds of the chips manufactured at the plant are for the automotive industry.

The pandemic and consequent supply chip shortages have produced a perfect storm that affects not only the semiconductor industry, but also other sectors such as automotive, consumer electronics, and home appliances.

According to Goldman Sachs, the semiconductor shortage has impacted as many as 169 industries in the United States, potentially resulting in price increases of up to 1% to 3%.

Malaysia is a critical component of the global semiconductor supply chain and the top semiconductor trading partner of the United States. Malaysia now accounts for around 7% of total worldwide semiconductor trade, as well as 13% of global chip assembly testing and packaging.

The US, which controls about half of the global semiconductor industry’s revenues, has been importing more semiconductors straight from Malaysia than any other country. The United States’ commerce with Malaysia accounts for 24% of all American semiconductor exports.

So how has the chip shortage affected Malaysia’s semiconductor and semiconductor-related industries? Are they more optimistic about business prospects or more pessimistic about market challenges?

According to Tan Sri Syed Zainal Abidin Syed Mohamed Tahir, group managing director of Dagang NeXchange Bhd (DNeX), the global semiconductor problem could endure until 2023.

“Because Malaysia is critical to the worldwide semiconductor sector, with numerous back-end chip packing and testing facilities taking place here, the increase in Covid-19 cases has aggravated the global chip shortage,” he told.

Syed Zainal, who is also the executive chairman of SilTerra Malaysia Sdn Bhd, notes that the recent temporary shutdown of local semiconductor plants to contain the virus have exacerbated supply chain disruptions and extended lead times for chip supplies.

“Given the current state of the business and the volume of inquiries we have received, the chip scarcity is likely to go longer than anticipated,” he says.

Steven Siaw Kok Tong, co-founder, executive director, and executive vice-president of ViTrox Corp Bhd, believes that tight supply and shortage conditions would endure through 2022, before improving with improved demand and supply forecasting and management.

“Due to the intricacy of the semiconductor chip manufacturing process, it will take time for the industry and supply to catch up with demand. Additionally, the rapid acceleration of significant semiconductor application trends in digitalisation, artificial intelligence, fifth generation (5G) technology, and automotive electronics exacerbates this scenario,” he told.

However, Siaw, who was named 49th richest man in Malaysia by Forbes this year with a fortune of US$325 million, believes that the worst is past now that all black swan occurrences have occurred and mitigating techniques to overcome these obstacles have been implemented.

“Going forward, the issue could deteriorate further if the Covid-19 pandemic situation deteriorates owing to the introduction of new or unknown varieties that are more infectious and destructive. This could result in unforeseen capacity reductions as a result of disruptions to operations, shutdowns, or a reduced workforce,” he cautions.

Dillon Atma Singh, CEO of JF Technology Bhd, observes that the Delta variant has exacerbated the situation, resulting in additional disruptions to the semiconductor supply chain through various temporary factory closures and logistics disruptions not only in Malaysia, but also in other semiconductor manufacturing countries such as Taiwan.

“As a result, lead times for semiconductor component deliveries have increased, and the situation is likely to persist until worldwide Covid-19 immunisation rates improve and production capacity is expanded in the majority of the semiconductor manufacturing supply chain,” he says.

On a more positive note, Dillon observes that there are other growth catalysts for semiconductor component demand, including the massive number of new applications that will adopt 5G.

“Electric vehicles (EVs) are another important growth driver, and we already hear a lot about automakers planning to phase out combustion engines entirely over the next decade or so. These growth drivers will generate enormous demand for billions of semiconductor components, which is a positive sign for our sector. Simultaneously, supply chain pressures will continue to be a challenge,” he says.

For local technology companies, this is more of an advantage than a curse

Closer to home, how is the chip scarcity affecting Malaysian firms and local entrepreneurs? What actions should they take to lessen the consequences?

While the scarcity has impacted a variety of businesses, including video cards, video game consoles, consumer electronics, and home appliances, it appears that the automotive industry has been hardest hurt.

Syed Zainal of DNeX acknowledges that the global car sector has been severely impacted by the shortage due to the rising use of semiconductors in automobiles as a result of technology such as driver assistance systems and autonomous driving.

“Things were exacerbated further when automakers underestimated vehicle demand. When the epidemic began, automakers reduced their chip orders in anticipation of reduced demand. However, when demand increased, chipmakers were unable to meet the spike, which was fueled in part by an increase in demand for consumer electronic products,” he explains.

Global motor vehicle and component output decreased by 22.5 percent in the second quarter of 2021, according to Reuters, due to a global semiconductor shortage. Fortunately, Malaysia’s auto sector has been improving since the end of 2020 and is therefore less affected.

“This is because motor cars produced in developing economies, particularly mass-market and national brands, require fewer chips than those produced in industrialised economies. Additionally, the SST (sales and services tax) exemption on passenger car purchases has resulted in a rise in vehicle demand in Malaysia,” says Syed Zainal, a former managing director of Malaysian automaker Proton Holdings Bhd.

Malaysia, he continues, is one of the largest net exporters of semiconductor products. As a result, the increasing demand for semiconductors has benefited a number of Malaysian enterprises.

For example, semiconductor foundries such as SilTerra have seen an increase in orders, while local outsourced semiconductor assembly and test players as well as makers of automated test equipment have benefited, according to Syed Zainal.

“The current circumstance presents SilTerra with numerous commercial options. Our customers in China, Taiwan, Europe, and the United States are increasing their demand for semiconductor chips. We are now racing against the clock to meet our demand backlog, which has been extended to the second quarter of 2022.”

According to Siaw, the global chip scarcity has resulted in an unprecedented rise in demand for semiconductor equipment across all processes, which has benefited ViTrox in some ways.

“We are lucky to be giving solutions in the right business, all the more so in light of the pandemic’s uncertainty and patchy economic recovery. However, we occasionally have constraints in our supply chain and materials as a result of the same factor,” he says.

Siaw emphasises the importance of ViTrox continually implementing mitigating techniques such as rescheduling equipment deliveries with clients and finding alternate supply sources in order to acquire and secure incoming business opportunities.

According to Dillon, JF Technology benefits from the overall expansion in global semiconductor demand, as each semiconductor component requires testing, and the company’s cutting-edge and highly-customized test contacting solutions are important components of the semiconductor test process.

“Semiconductor manufacturers will be actively expanding capacity to meet demand, which is a benefit for JF Technology since it allows for the deployment of more of our devices and increases recurrent sales of test consumables linked with our test contacting solutions,” he says.

To meet anticipated demand growth, Dillon reports that JF Technology has begun construction on a new four-story building expansion that is slated to be finished in the fourth quarter of next year.

“This will enable us to expand our manufacturing capacity and floor space to accommodate additional research and development resources for the purpose of developing new products and meeting future customer demand.”

The Semiconductor Industry Association has emphasised the critical role of semiconductors in technologies that control and enable critical infrastructure and life-critical equipment, including healthcare and medical devices, water systems and the energy grid, transportation and communication networks, and the financial system.

Semiconductors also enable remote work and access to services across all domains, including medicine, finance, education, government, and food distribution, via information technology systems. As a result, semiconductor and related supply chains are required to support the expanded variety of services that will be digitised in order to maintain global economic productivity and speed economic recovery.

Published by Zack Baharum

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