This article first appeared in The Edge Malaysia Weekly on September 20, 2021 - September 26, 2021

MORE than a year of disruptions in production and a surge in demand for electronics have made for an unprecedented year for semiconductor companies, which have been ramping up their output since the second half of 2020.

While steps are being taken to resolve the global chip shortage, the end is not yet in sight. Local technology firms The Edge spoke to are bracing for the shortage to persist over the next two years.

The chip crisis stems from a confluence of factors. The numerous lockdowns as a result of the Covid-19 pandemic has disrupted the operations of semiconductor firms, resulting in less supply. Other factors contributing to the shortage include the accelerated digital transformation and technology adoption around the world.

The ongoing US-China trade war; the fire that broke out at the Renesas Electronics Corp-owned chip plant in Japan; Taiwan — one of the most important links in the world’s tech supply chain — being hit by the worst drought in half a century; and a harsh winter storm ravaging computer-chip facilities in Texas have only exacerbated the imbalance. Renesas accounts for 30% of the global market for microcontroller units used in cars; two-thirds of the chips produced at the facility are for the automotive industry.

The pandemic and resulting supply chip shortages have created a perfect storm that threatens not just the semiconductor industry but also others — from automotive to consumer electronics and household appliances.

According to an analysis by Goldman Sachs, the semiconductor shortage has affected as many as 169 industries in the US in some way, which could lead to prices of goods rising as much as 1% to 3%.

Malaysia is one of key players in the global semiconductor supply chain and is the US’ largest semiconductor trading partner. Today, about 7% of total global semiconductor trade flows through Malaysia, which also accounts for 13% of global chip assembly testing and packaging.

The US, which dominates global semiconductor industry sales with almost 50% market share, has been importing more semiconductors directly from Malaysia than from any other country. US trade with Malaysia accounts for 24% of all American semiconductor global trade.

So, how has the chip shortage impacted the Malaysian semiconductor and semiconductor-related companies? Are they seeing more business opportunities or market challenges?

Dagang NeXchange Bhd (DNeX) group managing director Tan Sri Syed Zainal Abidin Syed Mohamed Tahir says the global chip crisis could last until 2023.

“As Malaysia is crucial to the global semiconductor industry, with many back-end chip packaging and testing operations performed here, the surge in Covid-19 cases has exacerbated the chip shortage globally,” he tells The Edge.

Syed Zainal, who is also executive chairman of SilTerra Malaysia Sdn Bhd, points out that the recent temporary closures of local semiconductor facilities to curb the spread of the virus has in turn increased the severity of supply chain disruptions and lengthened the lead time for chip supplies.

“Against this industry backdrop and from the numerous enquiries we have received, the chip shortage will likely be longer than initially expected,” he says.

ViTrox Corp Bhd co-founder, executive director and executive vice-president Steven Siaw Kok Tong sees the tight supply and shortage situation persisting through 2022, before improving with better demand and supply forecasting and management.

“It will take time for the industry and supply to catch up with the demand due to the complexity in the semiconductor chip-making process. Furthermore, the rapid acceleration of major semiconductor application trends in digitalisation, artificial intelligence, fifth generation (5G technology) and automotive electronics is compounding this scenario,” he tells The Edge.

However, Siaw, who is ranked by Forbes as Malaysia’s 49th richest man this year with a fortune of US$325 million, believes that the worst is over given that all the black swan events have occurred, while mitigating strategies are already in place to overcome these challenges.

“Moving forward, the crisis may worsen in the event the Covid-19 pandemic situation takes a negative turn due to the emergence of new or unknown variants that are more infectious and detrimental. This may result in unplanned capacity reduction due to operations disruptions, shutdowns or a reduced workforce,” he warns.

JF Technology Bhd CEO Dillon Atma Singh observes that the Delta variant has exacerbated the situation, causing further disruptions to the semiconductor supply chain with various temporary factory closures, as well as logistics disruptions not only in Malaysia, but also in other semiconductor manufacturing countries such as Taiwan.

“Lead times for semiconductor component deliveries continue to rise as a result, and the situation is likely to persist until Covid-19 vaccination rates globally increase and as manufacturing capacity is added in most areas of the semiconductor manufacturing supply chain,” he says.

On a positive note, as far as demand for semiconductor components is concerned, Dillon notes that there are many growth catalysts such as the huge number of new applications that will be adopting 5G.

“Electric vehicle (EV) is another significant growth catalyst and we already hear a lot about automotive companies moving away from combustion engines altogether in the next decade or so. These growth catalysts are going to result in tremendous demand for billions of semiconductor components, which bodes well for our industry. At the same time, the pressures on the supply chain will continue to remain a challenge,” he says.

More boon than bane for local tech players

Closer to home, what is the impact of the chip shortage on Malaysian companies and local businesses? What should they do to mitigate the effects?

While the shortage has impacted various industries, including video cards, video game consoles, consumer electronic products and home appliances, the automotive industry seems to be the worst hit.

DNeX’s Syed Zainal acknowledges that the global auto sector has been badly hit by the shortage as there has been an increased use of semiconductors in vehicles, driven by the adoption of technologies such as driver assistance systems and autonomous driving.

“Things were also made worse when automakers miscalculated the demand for vehicles. When the pandemic started, automakers scaled back chip orders in anticipation of a decrease in demand. However, when demand started to rise, the chipmakers could not cater to the surge, which was also driven by a rise in demand for consumer electronic products,” he explains.

According to Reuters, global motor vehicle and parts production contracted by 22.5% in the second quarter of 2021 amid the global semiconductor shortage. Fortunately, in Malaysia, the local auto industry has been improving since end-2020 and is less affected by it.

“This is because the motor vehicles produced, in particular the mass-market and national makes, use fewer chips as compared to those in advanced economies. Moreover, the SST (sales and services tax) exemption on purchases of passenger cars has led to an increase in demand for vehicles in Malaysia,” says Syed Zainal, who is the former managing director of national car maker Proton Holdings Bhd.

He adds that Malaysia is among the larger net exporters of semiconductor products. As such, the strong demand for semiconductors has benefitted many companies in Malaysia.

For instance, semiconductor foundries such as SilTerra have experienced a surge in orders, while local outsourced semiconductor assembly and test players and automated test equipment manufacturers have also benefitted, says Syed Zainal.

“The current situation opens up ample business opportunities to SilTerra. We are seeing an increase in demand for semiconductor chips from our customers across China, Taiwan, Europe and the US. We are now racing to fulfil our demand backlog, which has been stretched to the second quarter of 2022.”

Siaw says the global chip shortage has led to an unprecedented surge in ­semiconductor equipment demand across all processes, which in a way has been a boon for ViTrox.

“We are fortunate to be offering solutions in the right industry, more so during this period of uncertainties and uneven economic recovery caused by the pandemic. However, we also experience occasional bottlenecks with our supply chain and materials due to the same factor,” he adds.

Siaw stresses that ViTrox needs to constantly employ mitigating strategies by rescheduling its equipment delivery priorities with customers and establishing alternative supply sources to capture and secure incoming business opportunities.

JF Technology’s Dillon says the group is also a beneficiary of the overall global semiconductor demand growth, as each semiconductor component requires testing, and its cutting edge and highly-customised test contacting solutions are critical components of the semiconductor test process.

“Semiconductor manufacturers will be actively adding capacity to address demand needs and this is a definite boon for JF Technology as potentially more of our products can be deployed and the recurring sales of test consumables associated with our test contacting products can be increased,” he adds.

To address the anticipated increase in demand, Dillon says JF Technology has broken ground for its new four-storey building expansion, which is expected to be completed in the fourth quarter of next year.

“That will allow us to increase manufacturing capacity and floor space to house more research and development resources to develop new products and cater for future customer demand.”

The Semiconductor Industry Association has highlighted that semiconductors are essential components of the technologies that control and enable critical infrastructure and life-critical equipment, such as healthcare and medical devices, water systems and the energy grid, transportation and communication networks, and the financial system.

Semiconductors also underpin the information technology systems that enable remote working and access to services across every domain, including medicine, finance, education, government and food distribution. Therefore, semiconductor and related supply chains are necessary to support the greater range of services that will be digitised in order to keep the global economy productive and to accelerate the economic recovery.

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