Ways To Address The Materials Crunch

Stellar growth over the last two years and the seemingly insatiable demand for chips, at least through 2025, is sparking massive investment by chip firms — as much as $500B over the next five years. But without significant boosts in raw materials, parts for tools, and silicon to fuel facilities, such numbers are unlikely to be met.

Materials are the Achilles heel to the rapidly expanding chip industry, according to Lita Shon-Roy, president and CEO of market analyst firm Techcet. The causes are widespread, stretching from one end of the supply chain to the other. Case in point: Neon, which is used in lithography tools, has been in short supply since Russia invaded Ukraine, the seat for 50% of the industry’s supply. Companies are expanding capacity elsewhere but quantities remain tight. In another example, a 3M plant in Belgium producing PFAS was temporarily closed, threatening supplies for photoresist and antireflective coatings.

In all, the industry is taking a long look at how it might move from reactionary to proactive mode when it comes to material supplies, including global redundancy so that a single plant closing will not cause scrambling across the industry.

“We all remember when the Sumitomo plant fire in 1993 caused a huge shortage in epoxy resin,” said Sanjay Malhotra, vice president of corporate marketing at SEMI. “We need to build redundancy into the system for business continuity reasons. It’s important to be globally diversified. While it’s understandable that companies try to avoid depreciation of underutilized assets, there is a necessary cost to ensuring necessary stock levels to avoid shortages.”

Bill Wiseman, senior analyst at McKinsey & Co., suggested several ways U.S. companies could fill gaps in the materials supply chain, ranked by market size, ease of moving to the U.S., and current percentage imported (see figure 1). Wiseman identified quick wins as assembly and specialty gases and chemicals. Bulk chemicals and gases are in the category of organic movement. He characterized IC substrates, photolithography, and wafer fab equipment as IP-rich markets that are hard to move into, and an area for joint ventures and IP licensing agreements.

Fig.1: Potential sectors to explore for US expansion. Source: McKinsey

For assembly and packaging companies, the shortage in substrates is serious. “We’ve done extensive modeling and what we’ve shown is that the buildup substrate shortage in high-performance applications is in really short supply,” said Jan Vardaman, president of TechSearch International. “It was a terrible situation last year, it’s really bad this year, and next year is a train wreck. It’s going to take until 2024 to 2025 to build the capacity to solve this problem.”

Vardaman noted that the substrate shortage actually has little to do with the pandemic and more to do with a rapid industry transition to advanced packaging and larger, multilayer substrates. She estimates current investments in new factories will take two years to come online.

The shortage of neon gas, used as the main carrier gas in KrF and ArF (248nm and 193nm, respectively) lithography, is directly tied to the Russian war on Ukraine. Neon is a byproduct of steel production and is largely produced in Ukraine, Russia, and China. About 50% of the global supply of semiconductor-grade neon (>99.9995%) was globally supplied by two Ukrainian firms, Ingas and Cryoin, which were forced to shut down production in Mariupol and Odessa in Ukraine in recent months.

Only a few companies in the world have the capability to attain semiconductor-grade neon. Linde is one such company. It announced a $250 million expansion of neon capacity at its facility in La Porte, Texas. Even though leading chipmakers did stockpile neon beginning in February, and modern tools have recycling capability, there is a need to replenish the gas periodically. China and Korea also are increasing neon production capacity.

Beyond neon, companies are increasing reaching out to alternative suppliers for key metals they obtained from Russian firms in the past. These include titanium, copper, nickel, palladium, and platinum.

Global demand for cleaning chemistries, according to Techcet, will grow by 37% to 49% through 2025 for semiconductor-grade HCl, ammonium hydroxide, IPA, sulfuric acid, and hydrogen peroxide. Shon-Roy stated that in the U.S., most suppliers are in a sold-out position, and firms are waiting to see if the Chips Act passes to determine whether subsidies will relieve the burden of new capacity expansions.

“The materials at highest risk of interruption are gases and chemicals, and without significant investment, U.S. fabs increasingly will rely on imports, primarily from Asia, to meet surging demand,” said Techcet’s Shon-Roy. Reluctance to invest comes especially from industrial chemical suppliers that serve many industries, not just semiconductors.

Smart investments
Localized incentive packages like the European Chips Act and the U.S. Chips Act target supply chain issues as well as workforce development, because factories are not functional without engineers and technicians running the systems (see figure 2).

Speaking about ways to build a better ecosystem for semiconductor manufacturing in the U.S., Wiseman noted, “About 300,000 engineers in the U.S. are planning to retire out of the workforce in the next eight years, so either people are going to work longer or we need 1.5X more H1-B visas, increase STEM graduates by a factor of two, or increase Green cards by a factor of 5.”

Fig. 2: Levers to address engineering shortages include increasing H1-B visas by 45%, increasing number of Green cards approvals by 500%, and increasing STEM graduates by 174% (2019 benchmark). Source: McKinsey

According to Wiseman, it was the ramping of net wafer output from 3% to 7% year-to-year that led to severe supply chain issues. Likewise, for the global materials market, chemical and materials suppliers have not kept pace with consecutive years of double-digit revenue growth. Globally, the materials market grew by 15% to $59 billion in 2021, according to Techcet (see figure 3). The firm expects a slowing of growth rate to 8% this year and perhaps 2% in 2023, so more materials will be required to fill the need.

Fig. 3: Wafers and chemical revenues will see the greatest ASP increases. Wafers, consumable components, precursors, cleans and CMP are growing the fastest. Source: Techcet

2021 and 2022 will be the first years in a decade that silicon wafers posted two consecutive years of profit. This is the main reason for the lack of investment in new wafer capacity, which like wafer fabs takes two years to reach production levels. However, even with announced expansions, in 2024 the silicon supply will be insufficient for 200mm and 300mm wafers.

Tool component shortages became evident recently as Lam Research, Applied Materials, and other tool vendors reported deferred revenue caused by incomplete delivery of tools to fabs. Speaking in April at the company’s Q42021 earnings call, Lam’s Doug Bettinger, executive vice president and CFO said, “These headwinds are partially Omicron and labor-related, partially supply or scaling-related, and partially due to freight and logistics constraints. Our expectations are that the broader supply chain issues in the industry will persist for a while, and we’ll exit the March quarter with incremental supply or shipment delays, potentially causing another growth of as much as $500 million in deferred revenue.”

Lam said its deferred revenue in Q4 was caused by delays from only one vendor, and that those parts have been delivered successfully.

Fig. 4: When chips needed to produce a fab processing tool are not available, it has a disproportionate impact on the downstream electronics industry. Source: SEMI

In some cases, tool makers run into problems getting the chips needed for their tools to operate — a cyclical problem described by SEMI (see figure 4). FPGAs, microcontrollers, RF, sensors, and power management chips for tools make up less than 1% of the overall semiconductor industry. However, when they are not supplied to tool manufacturers, it has a disproportionate effect on semiconductor and system production.¹ Essentially, 100 chips in an ATE system are used to test 10 million MCUs that produce 100,000 cars, compounding the influence of any single missing part.

Shortages extend all the way down to the raw materials level, including stainless steel, motors, MFCs, pneumatic valves, photoresist filters, etc., which are used in fab tools and delivery systems.

“It’s important to remember that tool lead times were already long going into the pandemic, so the existing 6-to-12-month lead times for process tools became 12-to-24-month lead times,” said Fred Bouchard, sales manager for Sparetech, a supplier of equipment components.

SEMI’s Malhotra said he is seeing some easing on both the semiconductor side and the equipment delivery side in recent weeks, but companies are nevertheless pursuing ways to better manage the supply chain.

Will second sourcing return?
Second sourcing is a common practice where electronics or system companies have their primary IC supplier for a given part, but also a second supplier to fill the need when the primary supplier cannot fully meet needs. Second sourcing works well in instances of factory fires or severe yield excursions that impact a company’s ability to deliver chips.

In the days when 200mm wafer processing was the leading edge, second sourcing of many components and materials was common. But with the transition to 300mm processing, many IC makers with OEM service agreements abandoned the second-source model.

“In Asia, they never stopped second sourcing,” Bouchard said. “Fabs in Taiwan and Korea have perhaps hundreds of suppliers in the area who supply parts to them, and many of those same firms are active in U.S. and Europe. But 300mm fabs have service contracts with the OEMs, so there tends to be no second sourcing in the U.S.”

Bouchard noted that when Intel transitioned to 300mm, the company largely dismantled its 200mm second sourcing programs, which affected the industry itself due to the company’s large buying power. “Because cost has always been the key driver for winning contracts in the industry, there was a disincentive to strengthen the supply chain. Profitability of the supplier just doesn’t come into it.”

Conclusion
While the chip industry works to mitigate these supply chain issues, the movement to more long-term contracts, better transparency with suppliers, and localized supply of materials seem real.

“In fabs, people are now more diligent about limiting usage levels and recycling for neon and other materials in short supply,” said Malhotra. He added that while not every region has access to all raw materials, refining and purification operations certainly can take place in the regions where materials are used. Regional initiatives can ensure redundancy in package substrates, components and critical materials.

McKinsey’s Wise added that collective action is needed to increase talent availability and establishing a collective stance on sustainability goals.

“What we see is investment by materials suppliers is slow and they want to see the numbers, they want to see the ROI,” added Shon-Roy. “It takes people with good economic sense, who realize that now is the time to act.”

Reference

1. A. Manocha, S. Malhotra, “Chipping in for Equipment Suppliers: The Equipment Multiplier Effect on the Chip Shortage,” May 2022, SEMI blog, https://www.semi.org/en/blogs/business-markets/chipping-in-for-equipment-suppliers-the-equipment-multiplier-effect-on-the-chip-shortage.

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