China now, Beyond The Valley listeners, you or someone you know, may have struggled to

get their hands on, say, a consumer electronics product recently, maybe a games console.

Or maybe you've struggled to get your hands on a new car.

Well, where has this all come from?

Well, this is a result of currently, what is a global semiconductor or chip shortage

around the world.

And that's the topic of Beyond the Valley today.

Now, these chips are or micro processors are very tiny components that go into many of

the items we use on a daily basis, such as your smartphones, but even things like fridges,

or washing machines as well.

So they're incredibly critical.

And that's really why this global semiconductor shortage is such an issue and a crisis right

now that has impacted industries across the board.

So far, the automakers have really borne the brunt of it at this point, but you are seeing

expand to so many different industries as well.

So how has this happened?

And what's next?

Well, I'm glad to be joined by Sam Shead, who is our technology correspondent, out in

London, Sam, good to have you on beyond the valley for the first time.

Thanks for having me.

I'm pleased to be here.

Well, look, this is a topic you've been looking at for several months now digging deep into it.

And what's happening behind the scenes here, so just give us an overview of you know, how

we've got here?

Well, the simple answer is demand has been outstripping supply.

There's basically not enough chips to go around.

It's a little bit more complicated than that, though.

These chips are made at huge factories or foundries as they're otherwise known, sometimes

fabs too.

And these, these big factories can only make so many chips basically, they have to decide

which chips they want to make months in advance.

And this is where the problems come in.

So last spring, car companies started to reduce their production targets and chip purchases

as the virus spread around the world.

At the same time, chipmakers saw a pickup in demand for semiconductors used to support

things like remote working, and gaming, then the demand for automotive chips rallied back

a lot quicker than most people anticipated.

But the foundries were already busy making other more sophisticated chips for companies

like Apple.

And to make matters worse, Chip factories themselves have also been hit by Coronavirus lockdowns.

That's a great overview and some of the points we're going to dig deeper into with our guest

who we will introduce momentarily.

But Sam, I just want to ask you as well, a lot of major executives of companies around

the world have been commenting on this issue recently.

What have they had to say about what they're facing right now?

And sort of how they see this playing out even when it might end?

So opinions vary, but most people are kind of saying it's going to go on to next year

and possibly 2023.

Elon Musk, CEO of Tesla, he said last week that he sees things getting better next year

as more chip plants come online, but then yeah, as I said, there are some analysts who

think 2023 is more realistic.

That's a, that's a great setup Sam and you know, there's a lot of uncertainty as well.

Of course those are those are what these executives are saying there's so many variable factors

in all of this around the world, including you know how the Coronavirus situation continues

to play out.

And that's certainly going to feed into this.

Well, Sam, that was a great setup and I want to dig deeper into some of those topics with

our guests for this episode Peter Hanbury, a partner at Bain and company at the company's

technology, media and telecommunications practice focusing very heavily on semiconductors.

Peter, thanks so much for joining us on this episode.

Thanks for having me.

So Peter, let's just kick off the conversation with the question, you know, why are we facing

this chip shortage right now?

Yeah, that's a great question.

And a lot of industries are asking this exact question.

We like to think about it really in two phases with slightly different positives.

At first phase was really highlighted by the automotive chip shortage.

And what happened there is when COVID hit, they pulled back of their orders and the capacity

that they had reserved, went to other industries.

Combine that with a lack of traceability and visibility into their supply chains, lack

of inventory and, and they were hit pretty quickly and hard by the semiconductor shortage.

The second phase is a bit of a different story.

And this is where you're seeing books like PC makers, apple, Samsung Qualcomm being impacted,

and the story there is a bit more challenging.

What's driving that is the demand for electronics as folks have shifted to work from home have

increased significantly.

And these industries are now being impacted by just structurally there's more demand than

there is supply available.

And so instead of the auto industry losing a small portion of the semiconductor market

that they used to have access to, this is really the overall semiconductor market has

demand significantly above supply.

And that's a much more challenging structural problem, just given how long it takes to add

capacity in the industry.

So when it comes to the length of the chip shortage, Peter, you've got people like Elon

Musk saying this is a short term phenomenon.

And that things will be back to normal next year, because more and more plants are going

to come online.

But the factories that have been announced by the big chip makers like tsmc, and Intel,

they're going to take years to build.

So those two things seem to be at odds with one another.

What's the true picture there?

That's it's a good point.

And I think there are two ways in which this crisis is all the way number one is, you know,

we build more factories.

Typically to build a new factory, it takes about three to four years.

And so there is some capacity that's coming online, for example, Bosch and Dresden and

Infineon and Villach announced fabs in the 2018 timeframe, and those are just starting

to come online, and they're gonna help this situation a bit.

But like you noted, a number of the announcements made recently, you know, are things that are

not going to show up online until 2024.

So in the short term, you know, the destiny of this crisis from a supply perspective is

really driven by decisions that were made back in 2018.

So there will be some relief from a supply perspective, probably not enough to solve

the crisis before q2 of 2022.

The other way the crisis gets solved a bit faster is from a demand perspective.

You know, if we start seeing demand for PCs, smartphones, servers start declining, for

example, as folks go back to work, that's the other way that you could solve this crisis

maybe a bit faster.

There aren't a lot of indications that that's happening right now.

But that's really the best lever for the crisis to be solved faster than what we currently think.

And as you touched upon there, there are many different types of chips in the world.

There's the high end expensive ones that go into your phone, and then there's the much

cheaper, slightly less sophisticated ones that end up in cars.

Where is the shortage?

And how much does it come from chip makers prioritizing these high end chips?

That are higher margin products?

Yeah, that's a great point.

And you know, if you can think about the semiconductor, people think about the semiconductor market

is one market and it's really not it's 20 to 30 separate markets that are really oriented

by technology.

So a lot of folks think of the bleeding edge chips that go into your smartphone or your

PC.

Those are really the very most advanced chips that are available.

And those chips are designed every two years in magic with a Moore's Law events, and then

capacity is built for them.

So those bleeding edge chips have some shortage, but the factories are essentially built as

the process goes on and demand materializes.

So that very, very bleeding edge is not where you're seeing as much of the challenge.

There are also little way lagging edge shift, you know, things that sit on old six inch

wafers, those are in shortage.

But you know, the capacity is a little bit faster there, there's more players who can

do this, you know, a lot of China's push for self sufficiency means that they're building

a lot of capacity there.

So again, shortage there, but you know, there's some potential relief insight, it's really

those chips that sit in between that is the challenge.

And these would be, for example, from 28 nanometers to 130 meter, there's not many players who

can build these type of chips, because it's a very sophisticated technology, there's a

lot of overlap, and the demand for those chips from PC makers need those type of chips for

display drivers.

But automakers need those type of chips to control their brakes and ECU that go into,

an automobile.

And so there is where you're really seeing a lot of the crunches, you've got kind of

duplicative demand across lots of different industries, and very limited ability to add

supply on that space.

So that middle range of eight nanometers at 130 nanometers, where a lot of the shortage

is most pronounced.

And one of the big issues I guess, with with the the semiconductor industry is the concentrated

supply chain, you know, you may have sort of one company or two companies that are able

to create equipment or make equipment that goes in to eventually manufacturing those

chips, you've got the likes of Samsung tsmc, and Intel that can only make these sort of

leading or bleeding edge semiconductors.

You know, a good example is is asml.

Over in the Netherlands making that extreme ultraviolet lithography machine, you know,

they're one of the only companies in the world that is able to do that as well.

And, you know, we've seen instances reports of the US trying to block shipment of, you

know, asml equipment out to China, and that could hold back China's development in the

semiconductor industry as well.

So as you look at the concentration of the semiconductor industry and the supply chain,

even if some of these short term bottlenecks get resolved, are these structural issues

a concern over the long term?

And you know, could that eventually sort of spout another crisis where we have further

shortages?

Yes.

So the semiconductor industry in general has a number of structural challenges that lead

to these types of issues.

You know, one, the lead times to add capacity or produce an individual chip are extremely

long, you know, to once you design a component in it's very hard to change.

And then three, as you noted, the value chain is very specialized, and concentrated.

And so the most pronounced example that many people focused on is tsmc, at the bleeding

edge of the logic industry, you know, they have about 80% share for the most bleeding

edge technologies right now.

But you're totally right, that if you look at other places in the value chain, you'll

see similar dynamics.

So for example, asml and lithography at the ??? layer deposition.

The resist industry is a material that's used in the manufacturing and highly concentrated

in Japan.

And so you know, you see a lot of this and really the driver is these are very specialized

process.

You know, some of the materials used are multiple nines of guarantee significantly more pure

and complicated than any other industry in the world uses.

And the r&d required to create those as well as the scale required to amortize those upfront

costs are huge.

And so you see a lot of what I would consider natural monopolies in different parts of the

semiconductor industry, driven by the economics associated with producing these complicated

materials, equipment, manufacturing processes, and the specialization of skill, there's just

not that many people who can do it.

And part of the the conversation around supply chain has moved on to countries like the US,

for example, talking about reshoring and in particular, reshoring manufacturing as well

trying to bring back some of that manufacturing onto us soil.

And at the same time, you've got China talking about trying to become more self reliant in

semiconductor industry as well, you know, how much of a challenge those two things you

know, for these countries, and how practical is it?

Yeah, no, it's it's a it's a great question.

And a lot of the emphasis in news recently has been about you know, different countries

and make different types of investments that industry at a high level You know, there's

really two different goals that you could use, or could be pursuing from a government

intervention perspective.

You know, one is what the auto industry wants, you know, they want to add capacity and a

lot of existing technologies, they don't need the bleeding edge.

So they want to go invest, to basically build new capacity, or the industry on all the existing

technologies.

That's an expensive proposition, it's probably $40 billion to add five or 10% of capacity

to every existing node and technology that's available.

But it's possible.

And for a lot of these technologies, you know, you might have 2030 different companies that

could actually do it.

And so that goal is actually you know, quite feasible.

The second goal is more oriented around national security.

And that one's a lot trickier, because what you wouldn't be hoping to achieve is access

to the most advanced technology for artificial intelligence, robotics, to code, crafting,

things like that.

To do that, you need to constantly be at the leading edge, you need to be able to invest

three or $4 billion a year into r&d, every two years, you've got a new technology, so

you got to go build a $15 billion facility, it's very expensive, it's, you know, probably

in the range of $150 billion over just 10 years, to stay at the bleeding edge of Moore's law.

And then added to that you've only got three players who can do that today.

tsmc, Intel and Samsung.

And so if you think about those different goals, it becomes very challenging to think

about, well, how would a European player or Japan, do this?

Well, they don't have one of those three kind of champions or remaining players left.

And so it's very challenging for them, they have other levers they can pull, like asml

sits in Europe, that's a very important pinch point in the supply chain, a lot of the resist