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    The Auto Shortage Is a Riddle, Wrapped in a Mystery, Inside an Enigma

      Aug 5, 2021

    VLSIinsiders’ cloudside chat — August 05, 2021

    This week Andrea Lati, Dan Hutcheson, John West, and Risto Puhakka discuss what insiders are saying about …

    • The Auto IC shortage
      • Lots empty
      • Auto IC Sales growth slowing
      • Prices flat
    • How the 4Q21 Forecast is shaping up

    About VLSIinsiders: Every week our analysts have a cloudside* chat to discuss current events and key issues of concern, while sharing what they’ve heard over the past week from the semiconductor industry insiders.
    * cloudside chat: A fireside chat without the fire and is across the clouds of the internet

    Other VLSIinsiders

    Transcript

    VLSIinsiders' Cloudside Chat — August 05, 2021

    DAN HUTCHESON: Welcome to this week's VLSIinsiders. This is Dan Hutcheson.

    ANDREA LATI: This is Andrea Lati.

    JOHN WEST: This is John West.

    RISTO PUHAKKA: And this is Risto Puhakka.

    DAN HUTCHESON: So, guys, you know, as usual, we always start off saying there's not a lot to talk about, but, you know, we're in this situation with the auto shortage. And for us, as we were talking earlier, I use Winston Churchill's famous quote that, “It's a riddle wrapped in a mystery, inside an enigma.” So, you know, we've got this problem where there's lots of, you know, there's empty lots yet the car companies are having sales, fall sales. We've got auto ICs sales growth is slowing. We got prices of ICs are flat. What are you seeing? Especially you, Andrea, you've been looking at the numbers pretty closely.

    ANDREA LATI: Yeah, it's, uh, you know, we're in this still crazy year, Dan, so things are a little bit hard to navigate. Because, again, COVID, overall, has created a lot of pressure throughout the whole supply chain, the entire economy. So, what's really hard to dissect is really, you know, where these shortages are because we know that they are not across the border. There are parts that, you know, are not very hard to find like if you look at processors, APUs, you know, graphic cards. I think, you know, I think the supply there is plentiful at this point, but then I think we're seeing this ease is primarily trailing edge parts. This is probably due to also 200 millimeters. That has been very tight for a long time now, and people, you know, or companies have been reluctant to switch to 300 because of the cost, right? And so, I think that's where, I think most of the issues are. And I think, also what can sort of constraint growth dies because of this shortage is that added the trailing edge. Customers might stop buying also other devices, so that will probably, you know, could, you know, constrain growth. But again, it's a little bit difficult to navigate right now, because again, it's, you know, the data that we're getting from all fronts is quite mixed. And the pricing that the spot price that we track on weekly basis has been actually quite weak, right? And you have to wonder, is it because these shortages are impacting demand there? Or is it because you know, supply has caught up with demand and now maybe we have gone a little bit into the more of an oversupply situation, at least in the stock market. So again, we'll know more, you know, as the days go by, but it's still I think the whole situation is a little bit influx as far as market dynamics.

    DAN HUTCHESON: Okay, what about the fourth quarter?

    ANDREA LATI: Well, I think we're still going to have a pretty good fourth quarter for both semiconductors and equipment, guys. I think, actually, the equipment market, we're probably going to end up raising our forecast from 32% to about 35-36%. There is…

    DAN HUTCHESON: That’s for equipment?

    ANDREA LATI: For equipment, yes. So, we, you know, their second half actually starting out will be very, very strong. And, there's pretty much no seasonality this year there. So, I think they should hit about 35 to 36% this year which is quite remarkable. And for the semiconductors and ICs, we're looking at about 25%. And we'll have to see what happens with legalization rates in the fourth quarter because, again, unit volumes have been very strong. But on the other hand, there is more equipment coming in the market. But I still think that we're still going to be in a pretty tight capacity utilization, even the fourth quarter, but we'll know more when we do the next update.

    DAN HUTCHESON: Yeah, hey, Risto, what's your take?

    RISTO PUHAKKA: Basically, I mean, just going, there have been couple, a couple of things that crossed my mind we talked about actually earlier. One is that, you know, when we look at the trailing edge manufacturing, especially 200-millimetre-thick capex has been historically extremely low, you know. The business model has been supported for really more than 5% of revenues, capex and still a third of that, capex goes actually the back end, that we are actually there, the whole industry is paying this investment, lack of investment for not for a couple of years, we've talking like 10-year underinvestment cycle. So, the industry may pay actually, as a whole, for this part of the segment. And then the question is how you're going to get that capacity, you know, upgrading 200 building or 200 converting to 300. So that seems to be one of the cases. And then the second thing, just overall equipment market, just looking at incoming data, you know, the second half is still accelerating sales growth. So, which indicates that there is a very low seasonality on the fourth quarter for equipment, so we're looking really strong, really strong equipment here across the board.

    DAN HUTCHESON: So, the west coast is where all the, all of the Asian cars come through specific Toyotas and you were telling me about a Toyota lot you drove through by the other day, is it?

    RISTO PUHAKKA: Yeah, it was a was just totally empty here locally, just totally empty. It's just a couple of cars and a lot.

    DAN HUTCHESON: It was strange because the ad I saw was from Toyota last night.

    RISTO PUHAKKA: Yeah, that was not the back lot. That was the front lot. You’re a car salesman, you probably want to keep carts in your front lot, even if you're short.

    DAN HUTCHESON: Yeah, so, John, what are you seeing on your end of the world in the UK, Europe?

    JOHN WEST: Everything seems to be coming back to life again. I think people are getting back to the office, factories, and everything is running at full steam. I think the real issue we've got now is that if some, one person in the factory gets COVID, and the whole factory shuts down, or the whole restaurant or the whole hotel, so that's being having some impact, but generally speaking, I think Europe is positive. Business is great. The subsystem companies I've been speaking to, they're on a roll. They're just telling a great time right no and the discussions are moving towards actually how much capacity they'll need next year, the year after, because, you know, a lot of them have added capacity this year and they're already running out. So, the next decision is okay, do we have more or do we wait? So, I'd say generally it’s very optimistic, but on a shortage view, it's kind of interesting. I think the biggest subsystem suppliers seem to be doing better than the smaller ones and I think that maybe they have more buying power or more influence when it comes down to getting the raw materials. So, we've heard from some of the smaller suppliers that they're at the back of the queue for, you know, for some key components or key raw materials. But yeah, overall, no let up. It's been very, very strong Q2, Q3 looks like things are saying.

    DAN HUTCHESON: Okay, um, any, what's your take on the fourth quarter, it's going to be a good quarter, above average?

    JOHN WEST: I don't know, we're just looking at what's happened in the first half is exceeded all expectations, which means the second half actually has to cool off a little bit to make our year forecast, you know, viable. So, I'm looking at our forecast right now to figure out just whether we need to increase Q4 and increase the year as a whole, because right now, there's just no let up.

    DAN HUTCHESON: You know, one of the hard things that I found in forecasting the market this year, or you know, and I think the companies that are going public and haven't explained to investor what's going on and investors don't seem to get it is that you know, things were so low last year, when you try to forecast this year based upon any reasonable comp. You would never say the quarters going to be up 30% or 40% year over year, which is some of the numbers we're seeing. But it's mainly because last year was so damn low. And we're actually running at pretty normal level, but you're getting these huge growth rates, right?

    RISTO PUHAKKA: Yeah, I have to remind you that the equipment is different because it grew 18% last year, it did not decline.

    DAN HUTCHESON: That’s a weird one, right?

    ANDREA LATI: Risto, with equipment, actually, their first half was still much weaker than the second half.

    RISTO PUHAKKA: Yeah, yeah.

    ANDREA LATI: If you look at the pack the quarterly pattern, so again, even there, if you compare, you have to be very careful.

    RISTO PUHAKKA: Okay, yeah, yeah.

    ANDREA LATI: Year over year basis is special. But yeah, in terms of quarterly, you’re right, Dan. It's not, it's more subdued than when you compare year to year basis.

    DAN HUTCHESON: And the more we parse it, the you know, in terms of go to quarterly or go to monthly, the weirder it looks.

    ANDREA LATI: Yeah, yeah.

    DAN HUTCHESON: And, you know, so when you come out to investors right now, like when TI came out a week or two ago and said, we think you know, next quarter is going to, the growth will be softer. Well, it has to be because the third quarter of last year was coming out of the COVID recovery. So, you're, you know, you're just stepping back to normal, but it's because the base is so low, has nothing to do with what's the absolute level.

    RISTO PUHAKKA: Yeah, yeah.

    DAN HUTCHESON: So, it's kind of a crazy time. Well, anyway, I think that's about all we had to talk about today. Thanks for taking the time, guys.

    RISTO PUHAKKA: Sure.

    ANDREA LATI: Thank you, Dan.

    JOHN WEST: Thanks.

    RISTO PUHAKKA: Thank you.