China to invest in chip capacity to address shortages

China's industry ministry has committed to work with domestic and overseas companies to increase investment in semiconductor production to ease ongoing supply tightness as demand has outpaced availability.

The Covid-19 pandemic has driven rapid growth in demand for semiconductor chips for data centre server capacity and smart devices. And after disruptions during the first half of last year, use of semiconductors in automotive manufacturing has accelerated, resulting in supply shortages. Automotive producers in China, Europe and North America have temporarily halted or reduced production as chipmakers have prioritised supplying the consumer electronics sector, having not anticipated the spike in automotive demand (see table).

Analysts at Barclays Capital expect global vehicle production will be reduced by around 480,000 units during the first quarter owing to the shortages, led by a drop of 246,000 in China, 100,000 in the EU and 37,000 in North America.

The Chinese ministry of industry and information technology (MIIT) will support domestic and foreign companies to increase investment and continue to develop production of integrated circuits, as production lines are all experiencing tight capacity, spokesperson Huang Libin said.

Global sales of electric vehicles (EV) jumped by 106pc year on year during the fourth quarter of 2020, and by 89pc in the second half, after declining by 17pc during the first half, estimates African graphite miner Syrah Resources. The automotive industry now requires a high volume of semiconductors for EVs, as well as petrol and diesel vehicles, including advanced technology for driver assistance systems, as well as mature technologies for applications like sensors and power management. It is the more mature technologies that are in particularly short supply, as manufacturers have focused on developing new technologies, particularly for 5G networks.

"We believe semiconductor supply shortages could take two to four quarters to fully resolve, although some chip shortages may be alleviated more quickly," analysts at Goldman Sachs said, noting that semiconductors take about a quarter to manufacture and equipment lead times can stretch to one or two quarters.

Taiwan Semiconductor Manufacturing (TSMC), the world's largest chipmaker, is working with its automotive customers to resolve the capacity crunch as a "top priority", chief executive officer CC Wei said. "The automotive market has been soft since 2018," and the automotive supply chain was affected throughout 2020 by the pandemic. "We only began to see sudden recovery in the fourth quarter. However, the automotive supply chain is long and complex, where many of our technology nodes have been tight throughout 2020 due to strong demand from our other customers," Wei said.

The Chinese telecoms industry accounts for an increasing share of semiconductor demand. The sector grew by 20.6pc in 2020 on a revenue basis and installed more than 600,000 fifth generation (5G) network base stations. The ministry expects another 600,000 base stations to be installed in 2021, said MIIT spokesperson Zhao Zhiguo, further driving demand for semiconductors, which are used in larger volumes in 5G base stations and mobile devices than in 4G networks. "We expect the silicon content of a 5G smartphone to continue to increase as compared to a 4G smartphone," Wei said, adding "we continue to expect faster penetration of 5G smartphone as compared to 4G over the next several years."

China had 200mn connected 5G devices in 2020 and MIIT plans to increase support for 5G network construction in key sectors such as industry, energy, transportation, medical care and education, providing sites and electricity supply for base stations. The commercialisation of 5G has so far enabled more than 1,100 industrial internet projects and online remote consultations in more than 60 hospitals in 19 provinces, as well as autonomous driving, smart grid and remote education projects, Zhiguo said.

The rise in semiconductor demand in 2020 was also seen in exports of semiconductors from key producer South Korea. The value of chip exports increased by 5.4pc from 2019 to $100.3bn, according to the country's trade ministry, the second-highest value ever recorded. Exports of system semiconductors and memory semiconductors increased, with system chip exports reaching a record high. South Korea's semiconductor exports to China increased by 1.7pc to $60.7bn and mobile phone exports rose by 7.3pc to $3.3bn. Chip exports to the US jumped by 25.8pc to $8.1bn and exports to Europe rose by 4.5pc to $2.3bn, as manufacturers sought to secure supply and restrictions on US-China trade exacerbated bottlenecks.

By Nicole Willing