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  • Hello, and welcome to another episode of CNBC's Beyond the Valley, I'm Arjun Kharpal in Guangzhou,

  • 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

  • coming from Japan, so another big point of supply chain, so they have other levers that

  • they can pull.

  • But being at the bleeding edge and becoming the fourth player with tsmc, Intel and Samsung,

  • that's going to be very challenging.

  • And if you've had a crystal ball Peter, and you were looking into the future, how do you

  • think this chip shortage resolves itself?

  • You know, there's, there's all of these bottlenecks that still exist, and there's more and more

  • demand for chips to be put into every single thing we have.

  • So where do we go now?

  • Yeah, it's, it's probably what the, I would say, million dollar question, but that I was

  • thinking billion, though, it's probably more like $100 million question.

  • Yeah, it's, uh, you know, if you think about kind of where the industry is going, there's