According to Haijun Zhao, the co-CEO of China’s Semiconductor Manufacturing Corp. (SMIC), even though Chinese demand accounts for 40% of global chip sales, the global share of the country’s foundry capacity is still below 10%. In fact, he pointed out that China’s semiconductor manufacturing capacity had to satisfy at least one third of the domestic demand.
Participating in a summit, the SMIC leader used the occasion to offer his take on the ongoing chip shortage crisis. As Zhao observed, the pandemic had accelerated the emergence of a new generation of electronic products. “The upgrade should have taken five to ten years,” said the CEO, “but it was accomplished within a short span, further driving the demand for EVs, 5G handsets, smart home devices and equipment necessary for remote working.”
Zhao estimated that a 5G phone would require 25% – 30% more chips than a 4G phone, and the entire smartphone industry accounted for approximately half of the global foundry industry. With around 500 million new 5G phones expected this year, it is not surprising that foundry capacity has been strained. A surge in EV demand adds to the burden as well: an electric vehicle generally requires four to five times the amount of chips needed in internal combustion engine cars.
The SMIC CEO pointed to how prices had been susceptible to slight changes in supply and demand: prices tend to soar even with a 5% capacity shortfall. Likewise, prices plummet when 5% of the capacity is idle. “When people react to supply chain fluctuations with panic, it causes a snowballing effect that pushes capacity shortage from 5% to 50%.
Integrated Device Manufacturers held primarily responsible
In addition, Zhao argued that the foundry business only accounted for 20% of global semiconductor production, while IDMs, concentrated in the US and Europe, are responsible for the remaining capacity. With the pandemic impacting parts of the IDMs’ operations, according to Zhao, it wasn’t surprising that a shortage crisis was coming our way.
As global chip shortage continues, the SMIC leader’s observation weighs against speculations that hoardings from Chinese electronics industry partly contributed to the current crisis. In early October, TSMC chairman Mark Liu drew attention to the issue of chip hoarding, and it has been speculated that the recent U.S. push for TSMC to turn in confidential information related to its clients fueled speculations in the industry that it had targeted China as a source of the crisis.
Taking precautions, Chinese electronics industry began stockpiling chips as early as 2019, when Huawei came under U.S. sanctions and subsequently faced serious difficulties with making its own chips. Huawei itself began to stockpile chips before the sanctions took effect in September 2021.
Ray Yang, a senior analyst from Taiwan’s Industrial Technology Research Institute, nevertheless echoed SMIC’s observation that IDMs were the primary suppliers of global auto chips. In fact, auto chips only represented 4% of TSMC’s revenue in 2020.