Is it true the chip industry works with an eight-month lead time? Also, are orders on a take-or-pay basis, which means if my company orders 100 chips, we have to pay for 80 upon delivery regardless of whether we take 80?
Let's first try to depict what is a normal situation. The chip industry's average annual compound growth rate is 6 to 7 percent. We have our business plans, we know our projected cash flows and what investments we need to make. With customers, there are normal negotiations. When we are asked for some very special product, we might ask for a take-or-pay contract. Usually, though, that's not the case.
ST's policy is to say: "If you give us one year to 18 months of visibility, we will be better able to manage our capex and manage our risk". In the last few months, because of the surge in demand, we had to try and adapt ourselves in terms of capacity and capital expenditures. We are investing well above our normal run rate. It is normal that we have some price increase in the supply chain.
Is it the case for everybody in the industry?
This was not the case at some fabless semiconductor makers and foundries. Usually foundries -- semiconductor contract manufacturers -- operated exactly like an integrated manufacturer: they invest on the basis of a normal growth rate and the market is well balanced. But we know that in some cases some of them said: "If you want us to invest more, you have to commit, because we have taken the risk of the investment. You have to pay or to mitigate the risk with take-or-pay contracts". That was because of the huge surge in demand, which outstripped the compounded average growth rate.
Is it fair to say that when automakers canceled their orders last spring because of pandemic they lost their place in the line, leaving chipmakers no choice but to say, "Sorry, we can't help," when they came back looking for asking for more chips than before?
For the overall chip industry and for foundries such as TSMC automotive represents roughly 10 percent of their total revenue. Meanwhile, 80 percent goes toward personal electronics and the related infrastructure and the other 10 percent toward industrial equipment, IoT and healthcare. When the automotive industry woke up and said, "I want twice as many chips," there was simply no capacity left because so many other industries had already loaded the foundries with work.
How will they do this when it's not possible to increase capacity?
Starting in the second half of this year they might cut supplies to other industries. That means that the chip shortage might start to impact the availability of white goods and power tools.
Will ST also do this?
No. The auto industry accounts for one-third of our revenue, industrial represents one-third and final third goes toward personal electronics and communication infrastructure. We were already prepared to have the right allocation by industry because automotive is so important for us. Secondly, we want to be a key enabler of the auto industry's transformation. That's the reason why we were prepared to deliver increased volume to automotive in 2021 versus 2020 and as well as 2019 because we have the right visibility in terms of product mix and magnitude.
If the pain the auto industry is feeling now is only going to shift to other industries the key question is: When will the shortage end?
Our forecast is that we should start seeing an improvement to the overall situation in the first quarter of 2022. However, it's important -- and we are working on this with automakers and Tier 2 suppliers -- to avoid building inventory at the wrong end.
What does that mean?
We know that the automotive supply chain is very complex and fragmented. This makes it necessary to have stock piles of parts here and there, even for an industry that works according to just-in-time principles. We have to avoid building excessive inventory and better align the forecasts for car production and component production. We say this because right now we see some gaps we cannot explain, even if we take into consideration the ongoing transformation of the car industry. Our No. 1 duty is to reassure the automotive industry about our commitment and then to work as a team to avoid inflation. The current period is already difficult enough because of the overall geopolitical and economic behavior.
Could you elaborate?
There are so many companies saying they want to have their own fabs to manufacture and their own semiconductor designs. There is constant background noise related to trade conflicts. Europe, the U.S., China -- all say they want to be more independent when it comes to semiconductors. All this turmoil is not helping us operate smoothly. The risk of over-inventory is still there despite our vigilance.
Is ST ready to stop working with an automakers if it asks you to build up too much inventory?
If we have to choose between building up inventory and losing our customer, we will not lose our customer. We will try to find a middle ground that works for both parties.
Was ST put under increased political pressure to supply more chips to specific countries or regions?
When there is such a big gap, and with such high stakes in terms of GDP, jobs, etc., it is normal to have meetings and to discuss the matter with various governments. They are playing their role. However, during my meetings with high-level authorities I was never pressured by someone telling me to, "Do this or do that."
Is the current gap between supply and demand partially because the auto industry uses less technologically advanced chips?
Ten years ago, the auto industry was not among the early adopters of new technologies. That is no longer the case. Automakers have become pathfinders of new technology because of the accelerated transformation toward digitalization and electrification. A complex visual processor for ADAS [advance drive assistance systems] has chips that are at the same level of those used in the flagship smartphones of the latest generations. The inverter in an electric car is the most advanced technology found in any power device. Therefore, the automotive industry is at the same level as the world's most advanced industries in terms of the complexity of technology. That's the reason why automakers, Tier 1 suppliers and chipmakers are collaborating on a supply chain that will be totally different than 10 years ago. This is also one of the reasons why there is this gap between the accelerating demand of the auto industry and the capacity of the semiconductor industry.