Semiconductor wafer supply to remain tight in 3Q: NXP

US-based chipmaker NXP expects wafer supply from its foundry partners and internal fabs to remain "a challenge" for the foreseeable future, with strong demand from multiple industries making it difficult for the company to build its finished product inventories back up to normal levels.

Wafer supply picked up in the second quarter but remained tight, president and chief executive Kurt Sievers said yesterday, adding that "with customer demand outstripping supply, we are working diligently to secure additional supply to achieve a strong demand-supply balance".

Around 57-58pc of NXP's wafer supply is external. While the company is "not likely" to build a new fab of its own in the near-term, it does constantly need to update equipment in its facilities and is allocating part of its July-December capital expenditure toward "bottleneck busting" in its own fabs.

Demand from all of NXP's end-use markets — including automotive, telecoms, 5G applications, infrared and Internet of Things (IoT) applications — has rebounded strongly since last year's Covid-induced downturns. The company's revenue totalled $2.6bn in the second quarter, up by 42.9pc year on year and $26mn above the midpoint of its guidance for the period. It is targeting revenue of $2.775bn-2.925bn for the third quarter and expects further growth in the fourth.

With demand so strong and supply chains feeling the strain, the company is working closely with customers to "accommodate their most pressing requirements", Sievers said, noting that "a significant number of our customers are also taking action by placing non-cancellable and non-returnable orders for the medium-term".

NXP has increased its finished product inventory to 88 days-worth, up by seven days compared with the first quarter, but it may take a while to hit its target of 95 days-worth. "As fast as we get [supply from foundries], we build it and ship it to customers. So I don't really see our inventory levels getting back to anything like normal anytime soon," executive vice president and chief financial officer Peter Kelly said.

NXP's two Texas facilities are back up and running — "firing on all cylinders" after a storm forced their temporary closure in February. But the company remains vigilant in other parts of the world where Covid-19 spikes continue to put some of its other facilities at risk — particularly India and southeast Asia.

Auto sector's shifting approach to chip procurement

This year's severe global shortage of semiconductors has put a strain on the automotive industry, which started bouncing back in October-December 2020 more rapidly than expected and has struggled to source enough chips amid fierce competition from other industries.

The global shift toward electrification is also contributing to the strain, as electric vehicles have a significantly higher silicon content than traditional combustion engine vehicles.

The situation is encouraging many automakers to reconsider their approach to chip procurement, but it may take time for the supply chain to become strong enough for them to implement any changes, Sievers said.

"I see signs of a structural change in the behaviour of the auto [sector]," he said. One aspect is the realisation that "a just-in-time [procurement] system is not totally compatible with the 3-6 month manufacturing cycle time in semiconductors", although at the moment "the supply is not there" to enable a switch to longer-lead times.

Shifts are also underway with regard to transparency and collaboration. "We've never had so much clarity about what product in which application in which model year it will run at what volume. So this is becoming much better than it has ever been because structurally we are moving closer in a collaboration with the car companies," Sievers said, adding that binding forecasts are also coming into play that will "help to foresee and plan with the right capacities on our end".

NXP's automotive segment generated $1.26bn in revenue in the second quarter, up by 87pc year-on-year and accounting for 48pc of the company's total revenue.

By Ellie Saklatvala