semiconduxtors – The OM Blog by Heizer, Render, & Munson

OM in the News: The Chips That Run the World

Taiwan Semiconductor Manufacturing Co.’s chips are everywhere, though most consumers don’t know it. The company makes almost all of the world’s most sophisticated chips, and many of the simpler ones, too. They’re in billions of products with built-in electronics, including iPhones, PCs and cars—all without any sign they came from TSMC. TSMC has emerged as the world’s most important semiconductor company, with enormous influence over the global economy, writes The Wall Street Journal (June 19-20, 2021). With a market cap of around $550 billion, it is the world’s 11th most valuable company. But its dominance leaves the world in a vulnerable position. As more technologies require chips of mind-boggling complexity, more are coming from this one company.

tsmc2 — A TSMC employee with a 8-inch wafer.

It will be difficult for other manufacturers to catch up in an industry that requires hefty capital investments. And TSMC can’t make enough chips to satisfy everyone—a fact that has become even clearer amid a global shortage, adding to the chaos of supply bottlenecks, higher prices for consumers and furloughed workers. The situation is similar in some ways to the world’s past reliance on Middle Eastern oil.

It now makes around 92% of the world’s most sophisticated chips, which have transistors that are less than 1/1,000 the width of a human hair. (Samsung makes the rest). Most of the 1.4 billion smartphone processors world-wide are made by TSMC. It also makes 60% of the less-sophisticated microcontrollers that car makers need. As carmaker after carmaker has idled production because of chip shortages, TSMC has little incentive to reallocate production. The less lucrative auto chips make up only around 4% of its revenues.

TSMC’s hard-driving culture and deep pockets make it hard to create a more diversified semiconductor supply chain. Once a chip producer falls behind, it’s hard to catch up. Companies can spend billions of dollars and years trying, only to see the technological horizon recede further. A single semiconductor factory can cost $20 billion. One key manufacturing tool for advanced chip-making that imprints intricate circuit patterns on silicon costs $100 million. TSMC’s own expansion plans call for spending $100 billion over the next 3 years.

Classroom discussion questions:

Why are chips critical to the US economy?
What will need to be done for the US to be “semiconductor independent?”

OM in the News: The Chip Shortage Is Far-Reaching

The global chip shortage hobbled auto makers world-wide. Now, other industries are feeling the squeeze, reports The Wall Street Journal (May 1-2, 2021).

It has hit makers of home appliances, heavy-equipment, servers and boats. It is confounding multinationals to startups. Even companies that don’t use chips as their core business, such as freight operators and retailers, find themselves affected. The scarcity means higher price tags for consumers, longer waits for goods, empty store shelves and swaths of the business world racing to secure whatever supply they can. Chip makers can’t keep pace, driving up prices for parts, thinning out supply and spurring panic buying.

chips

They have also contributed to escalations in the cost of raw materials for electronic goods in recent months. An index measuring the price of inputs for electronics companies in March soared to the highest level recorded in more than two decades.

The chip crunch has spared few companies, even some tech giants that were mass buying to cushion themselves from the U.S.-China trade fight. Microsoft’s hardware sales were dented by the shortage. Apple is seeing sales fall, particularly among its tablets and laptops. Strained chip supplies have pushed Whirlpool to switch production lines frequently, enabling it to churn out various products based on which components are on hand that day. Microcontrollers—an inexpensive chip used widely in electronic devices—are almost nowhere to be found.

Many semiconductors cost less than a can of soda. But they are an important manufacturing component for 12% of the U.S. GDP, and reduced supply can boost prices for some categories of products by as much as 3%. Semiconductors are a $442 billion industry. Total semiconductor unit shipments are expected to increase 13% this year to a record 1.13 trillion units. Intel’s CEO said this week that a global chip-supply shortage could stretch 2 more years.

Classroom discussion questions:

1.What can operations managers do to protect their supply chains?

2. How did this shortage, especially in the auto industry, occur?

OM in the News: Intel Speeds Up Its Chip Revival

Intel is making major plays in the field of semiconductor manufacturing, reports Industry Week (March 24, 2021). The California company announced it would spent $20 billion on two new semiconductor factories in Chandler, Arizona. The plants are expected to employ 3,000 people in “high-tech, high-wage” manufacturing jobs.

Intel’s plan is to challenge rival chip manufacturers around the world like Samsung of South Korea and TSMC of Taiwan, which currently produce many of the computer chips used in electronic products from cell phones and laptops to electric vehicles and refrigerators. The U.S. now accounts for just 12% of global semiconductor manufacturing capacity, down from 37% in 1990, as other countries have subsidized their chip makers.

intel

The $20 billion plants will produce Intel’s “first large-scale foundry operation,” and it has plans to pick more sites for foundries in the U.S. and Europe.

Semiconductor foundries, like those operated by TSMC, typically produce chips designed by outside customers, like Qualcomm or Apple, which don’t have chip production facilities of their own. Intel already designs and produces its own chips, but its new foundry business will allow other companies to leverage Intel’s production lines and proprietary chip construction techniques.

The move to enter the semiconductor foundry field comes at an opportune time for Intel. GM, Ford, and Honda, among other automakers, have run into vehicle production bottlenecks caused by a shortage of semiconductors. That shortage, in part, has been driven by an increased demand for computer electronics during the very pandemic that crushed vehicle production in the spring of 2020 that automakers are currently trying to recover from.

Classroom discussion questions:

Why did semiconductor production shift to Asia?
Why is the U.S. government now trying to strengthen chip manufacturing in this country?

OM in the News: Seeking Semiconductor Self-Sufficiency

The U.S. is looking to jump-start development of new chip factories here as concern grows about reliance on Asia as a source of critical technology, reports The Wall Street Journal (May 11, 2020). A new crop of cutting-edge chip factories in the U.S. would reshape the industry and mark a U-turn after decades of expansion into Asia by many American companies.

The pandemic has underscored longstanding concern by the U.S. about protecting global supply chains from disruption, especially from Taiwan Semiconductor Manufacturing (TMSC), the world’s largest contract chip manufacturer. TSMC is one of only 3 companies capable of making the fastest, most-cutting-edge chips. U.S. officials are in talks with Intel, the largest American chip maker, and with TSMC, to build factories in the U.S. TSMC said it is open to building an overseas plant.

Strengthening U.S. domestic production and ensuring technological leadership is “more important than ever, given the uncertainty created by the current geopolitical environment,” says Intel’s CEO. Chip-factory development plans have gotten under way as concern mounts about the fragility of the Asian supply chain and the defense industry’s access to domestically sourced advanced chips.

The U.S. already has dozens of semiconductor factories, but only Intel’s are capable of making the fastest and most-power-efficient chips (those with transistors 10 nanometers or smaller). Intel, however, mostly makes silicon for its own products. Among foundries that make chips on contract for other companies, only TSMC in Taiwan and Samsung in South Korea make chips at 10 nanometers or lower.

U.S. chip makers have backed off on building cutting-edge chip factories domestically largely because of their cost, which can surpass $10 billion, and a rapid development cycle that means the benefits of being ahead don’t last long. But other governments, including China, Taiwan, Singapore and Israel, have poured generous financial support into developing their own domestic manufacturing.

Classroom discussion questions:

1, How does this idea mesh with the theory of comparative advantage (see Ch. 2 in your Heizer/Render/Munson text)?

2. Where do Intel and TSMC fall on the international operations strategies graphic seen in Figure 2.9 on page 48?