Wednesday, January 26

The chip shortage is going to get worse


The number of Covid-19 infections is on the rise in Malaysia, threatening to exacerbate shortages of semiconductors and other components that have plagued automakers for months.

The Southeast Asian country has historically not had the kind of importance to technology supply chains that Taiwan, South Korea or Japan have. But in recent years, Malaysia has emerged as a major center for chip testing and packaging, with Infineon Technologies AG, NXP Semiconductors NV, and STMicroelectronics NV among the key vendors operating there.

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Now Covid-19 infections are skyrocketing in the country, jeopardizing plans to lift the lockdowns and restore full production capacity. The seven-day average of reported daily infections has exceeded 20,000, down from just over 5,000 at the end of June.

Ford Motor Co. said last week that it would temporarily suspend production of its popular F-150 pickup at a US plant due to “a semiconductor-related parts shortage as a result of the Covid-19 pandemic in Malaysia.”

The country’s authorities are racing to address the outbreak and have granted exemptions to certain manufacturers in an effort to keep the economy on track. Companies were allowed to continue operating with 60% of their workforce during the June closures and will be able to return to 100% when more than 80% of their workers are fully vaccinated. On August 23, the number of reported infections dropped to 17,672.

But the situation on the ground remains volatile. Factories have to close completely for two weeks for sanitation reasons if more than three workers hire Covid-19 according to unofficial guidelines. The delta variant is proving particularly infectious and difficult to stop.

“This could be very detrimental to Infineon and other companies that have plants of a few thousand workers,” said Samuel Tan, semiconductor analyst at Kenanga Investment Bank Bhd. In Kuala Lumpur.

Local businesses are reporting such closures through trade-in filings. STMicro and Infineon, both key auto suppliers, had to close facilities.

The situation could exacerbate the semiconductor shortage, which is already at crisis levels. Chip lead times – the gap between ordering a semiconductor and receiving delivery – increased by more than eight days to 20.2 weeks in July from the previous month, according to research by Susquehanna Financial Group. That gap was already the longest wait time since the company began tracking data in 2017.

Automakers have lost sales after a series of unexpected shocks in the past year, including a cold snap in Texas that hampered factories there and a fire in Japan at a critical auto chip plant.

Toyota Motor Corp. said last week it would suspend production at 14 plants because suppliers, particularly in Southeast Asia, have been hit by new infections and Covid shutdowns. It has clustered partners in Thailand, Vietnam and Malaysia. Thailand and Vietnam are also seeing sharp increases in reported infections, as the delta variant spreads.

Malaysia’s position as the primary base for chip testing and packaging is critical because those are the last steps of semiconductor production. Electronic and electrical products represent 39% of the country’s total exports, according to data from the Ministry of Commerce and Industry.

“Malaysia is a key player in the global semiconductor trade,” said Wong Siew Hai, president of the Malaysian Semiconductor Industry Association, in an interview. “Therefore, any disruption in any part of the supply chain will have knock-on effects in other parts of the ecosystem.”

Vaccines are critical to ensuring that the country can play its role in the technology supply chain, he said. About 57% of the total population has received at least one dose, according to the Ministry of Health.

The government has forged ahead with its battle against the outbreak through a transition as prime minister. Officials are working with large companies to prioritize vaccinating all staff as soon as possible. And because this is the third major lockdown in Malaysia, companies in the country are keeping some emergency inventory to cushion the impact of factory closures, Tan said.

Still, Infineon said in an earnings call in August that manufacturing bottlenecks in Malaysia are likely to continue to weigh on sales in the current quarter. Chief Executive Officer Reinhard Ploss told analysts that the total impact of the shutdown was in the millions of euros in “double digits high,” although the company expects plants in the Southeast Asian country to be operating at normal capacity later this month. .

STMicro recently suspended its assembly plant in Muar due to the pandemic and resumed operations after 11 days, CEO Jean-Marc Chery said on an earnings call in late July. The incident will decrease the company’s ability to serve customers, according to CFO Lorenzo Grandi, and both sales and gross margin will be affected in the third quarter.

European partner NXP didn’t mention anything about Malaysia in the last earnings call in early August, but the company also has a chip assembly and testing site there.

Malaysia’s automotive supply problems are not limited to chips. The country is also a key production base for multilayer ceramic capacitors, or MLCCs, a component required by a variety of products, from smartphones to cars. Research firm TrendForce said in July that Malaysia’s policy of restricting the movement of personnel will reduce the supply of MLCC.

In recent weeks, Nissan Motor Co. and General Motors Co. have warned that component shortages are worsening due to lockdowns in Malaysia, and the Japanese automaker shut down production lines at its Smyrna, Tennessee, facility during two weeks in August.

Before the disruptions in Malaysia and other parts of Southeast Asia, the chip shortage was already forecast to cost auto companies more than $ 100 billion in lost production this year alone. The extent of the damage may ultimately be determined by the ability of governments like Malaysia to fight new outbreaks.

IHS analysts Mark Fulthorpe and Phil Amsrud said packaging and testing operations are particularly vulnerable to the virus because they require more people than chip manufacturing, a largely automated process.

“As this requires more labor than wafer manufacturing processes, activity is more easily affected by public health measures that impact workforce participation,” they wrote in a recent report.

© 2021 Bloomberg


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