A transformation of the global semiconductor supply chain has begun to take shape, and is supported by the US government, due to the economic effects of the protracted chip shortage and US trade policy, says Fitch Ratings. The US Innovation and Competition Act (USICA), which was passed by the Senate and endorsed by the White House in June, would allocate significant funding for domestic chip production to alleviate supply chain risks and ensure dependable semiconductor sourcing if passed by the House.
Fitch expects the beneficiaries of the policy would be foundry providers that intend to produce leading-edge nodes, such as Intel (A+/Stable), Samsung (AA-/Stable) and Taiwan Semiconductor Manufacturing Company (TSMC). Capital equipment manufacturers such as, KLA (BBB+/Stable) and ASML Holdings (A-/Stable), who supply the tools used in advanced semiconductor production, would also benefit. However, near-term credit effects for Fitch-rated semiconductor companies are neutral.
The bill is intended to increase global competitiveness in industries deemed critical, with $250 billion of government investment. Approximately $52 billion is to fund semiconductor research, design and manufacturing initiatives. The US Commerce Secretary expects implementation of the policy to unlock private investment, resulting in $150 billion or more in funding for 7 – 10 new US-based factories.
Several companies have announced ambitious expansion plans in the US. Intel expects to invest $20 billion in two new manufacturing facilities in Arizona, Samsung intends to spend $17 billion for a new plant in Austin that would support the advanced 5 nanometer (nm) process, and TSMC announced a $12 billion plan to build a new 5nm plant in Arizona with reports suggesting the company is considering up to five additional plants. Fitch believes federal and state support are essential to unlock private investment and ensure projects come to fruition.
US policy makers view the semiconductor industry as strategically important because it supplies the fundamental enabling technologies for advanced defense, communications, big data and artificial intelligence (AI), among other industries. The ongoing semiconductor shortage, which was driven by a confluence of factors, including stronger than expected demand and insufficient capacity, has highlighted supply chain vulnerability. It also underscores the need to secure a dependable source of semiconductor components, particularly as America’s share of semiconductor production declines. US share of global production has declined to just 12%, from 37% in 1990, according to the Semiconductor Industry Association,
The global semiconductor shortage has enhanced the bargaining position of foundries. TSMC is benefiting from improved pricing power, with the company announcing price increases of up to 20%. Some chip consumers are making upfront payments to secure supply. Tesla, for example, is expected to pay in advance to secure capacity, while Apple has reserved TSMC’s initial capacity at 4nm for its latest generation MacBook.
Concentration among chip manufacturers and by geography could result in further downside risk for chip consumers. Fitch estimates TSMC represents 50%–55% of global semiconductor output. TSMC is the only independent foundry with capability at leading edge processes of 7nm and below, which enable everything from the latest smartphone model to the graphics processing units utilized in data center and AI applications.
TSMC’s operation are primarily centered in Taiwan, resulting in heightened geographic concentration risk, as earthquakes, droughts and blackouts have challenged manufacturing. Recent earthquakes have temporarily disrupted the operations of Micron Technology (BBB-/Positive) while sparing TSMC. Ongoing droughts have the potential to affect TSMC’s production volume, as it uses 63,000 tons per day of water, while blackouts in May affected electricity throughout the country. Taiwan is also dealing with increased bellicosity from China and a Covid-19 surge. Fitch Ratings