Global Chip Shortage’s Latest Worry: Too Few Chips For Chip-making

The wait time it takes to get machinery for chip-making—one of the world’s most complex and delicate kinds of manufacturing—has extended over recent months. Early in the pandemic it took months from placing an order to receiving the equipment. That time frame has stretched to two or three years in some cases, according to chip-making and equipment executives. Deliveries of previously placed orders are also coming in late, executives say.

As a result, hopes of quickly overcoming the global chip shortage are dimming as it stretches into its third year. What began as a pandemic-era aberration of supercharged demand for laptops and other chip-hungry gadgets has spiraled into a structural problem for the industry. Now many chip executives say the problem will persist into 2023 and 2024, or even longer.

“There’s this wishful thinking that by the end of 2022, supply will be balanced with demand,” said Tom Caulfield, chief executive of contract chip manufacturer GlobalFoundries Inc. “I just don’t see it.”

Doug Lefever, chief executive of Advantest America Inc., said typical lead times on his company’s machines, which test whether newly made chips function correctly, have doubled or more. The company’s testing machines use some 250,000 parts, and a hiccup in supplies of just a handful can cause delays.

“I think we’re in it for quite a while before we get completely back to standard lead times,” Mr. Lefever said.

Ganesh Moorthy, CEO of Microchip Technology Inc., a maker of microcontroller chips that process data in all kinds of electronic devices, including chip-making equipment, said his company now is treating chip-equipment suppliers as priority customers, not unlike the way it treated medical-device manufacturers at the onset of the Covid pandemic.

“We have taken the posture that if any equipment manufacturer identifies a specific Microchip product that is a bottleneck for them, it goes right to the top of our priority list,” he said.

Chip companies are pressing for such preferential treatment, arguing that if deliveries to semiconductor makers are given priority, the shortage will ease more quickly. A recent industry white paper argued the benefits of such a “multiplier effect.” A sophisticated testing tool requires 80 specialist chips that can be reprogrammed after they are produced, the analysis said, but then aids in making 320,000 of those same chips each year.

Tools aren’t the only headache. Chip makers point to the challenge of hiring people to work in new factories, supply-chain hiccups in essential chemicals and a shortage of so-called substrates that connect chips to circuit boards as compounding the relative dearth of semiconductors.

Meanwhile, demand is showing little sign of ebbing. Chip-industry sales topped $500 billion for the first time last year and should roughly double by the end of the decade.

Lead times for chip deliveries remain at historic highs. In April they averaged more than six months, according to an estimate by Susquehanna Financial Group, almost double where they stood at the height of the last boom period.

The pain could ease in some industry segments this year, said Peter Hanbury, a partner specializing in chip technology at Bain & Co. With new factories coming online that produce older-generation chips that have been a bugbear for auto makers and others, the supply constraints there could lift, he said, although he expects supplies of cutting-edge chips at the heart of more advanced electronics to remain tight.

ASML Holding NV, a Dutch company that makes some of the most cutting-edge and expensive chip-making equipment in the world, is expecting demand to outstrip supply “well into next year,” CEO Peter Wennink said recently. The company is working with suppliers to see if it can make more tools to meet demand, but that wouldn’t happen until 2025. Even once they are delivered, it would take time for chip makers to fully use them.

Equipment-delivery issues have already dented sales for some companies. Tim Archer, the chief executive of Lam Research Corp., one of the world’s largest chip-equipment companies, said in April that component shortages meant the company couldn’t fully benefit from strong demand.

The disruptions come as demand for chip-production tools is on fire, with chip makers embarking on expansion plans. Taiwan Semiconductor Manufacturing Co., the world’s largest contract chip maker, last year said that it planned to spend $100 billion through 2024 to grow its manufacturing capacity. Intel Corp., the U.S.’s largest chip maker by sales, is building factories in Arizona, Ohio and Germany that could cost hundreds of billions of dollars over the next decade.

Intel CEO Pat Gelsinger recently said the company had pushed out to 2024 any hope supply and demand would balance, a year later than he expected only a few months ago. “Equipment shortages are really impinging the ability of the industry overall to ramp supply at the pace we earlier thought,” he said. Intel’s new factory plans, though, remain unchanged, he said.

The situation is causing executives to plan more long-term. Gregg Lowe, CEO of North Carolina-based chip maker Wolfspeed Inc., said his company’s recently opened factory in New York was aiming to ramp up more quickly than initially planned to capture demand for electric-vehicle charging systems, where its chips are prevalent. With current wait times, Wolfspeed will have to make decisions sooner on future expansion, he said.

More than 90 chip factories are expected to start production globally between 2020 and 2024, according to SEMI, an industry group—a huge number in an industry where a single manufacturing tool can cost tens of millions of dollars. Even with the supply issues, global equipment sales this year are expected to be more than $100 billion, SEMI estimates, a threshold many industry veterans thought it would take longer to surpass.

“Five or six years ago, I would have said $75 billion is a stretch,” said Sanjay Malhotra, a SEMI vice president who spent 25 years of his career at Applied Materials Inc., the largest chip-equipment maker.

Although the demand peaks during the pandemic have eased and higher inflation is weighing on consumer spending, chip executives say long-term market shifts such as the switch to electric vehicles, growing industrial automation and the ubiquity of smart devices are keeping factories booked up and prolonging the chip shortage.

“Demand has not come to the point where it is giving us a chance to dig out of the hole,” Mr. Moorthy of Microchip said. “The hole just gets deeper every quarter.”

This story has been published from a wire agency feed without modifications to the text