SupplyChainMonitor Uncovering Geopolitical, Financial Risks in Semiconductors
Semiconductors are essential to many industries; if they are in your production line, you need to pay attention. Two risks to the semiconductor and related devices industry (SIC 3674) are now growing. The industry boomed from post-COVID demand and supply shortages, yet those trends are moderating – all while monitoring geopolitical tensions and supplier bankruptcy risk have become increasingly critical. China’s interactions with Taiwan could affect available supply, coupled with pledges to massively increase capacity from major producers could result in marginal operator bankruptcies. Based on financial risk data and scoring from SupplyChainMonitor, our clients that are semiconductor buyers are being advised to seek out “just-in-case” scenarios to mitigate such risks in the years ahead.
The stage has been set for established semiconductor foundries to succeed. The largest operators are now in a strong financial position (FRISK® “9” or “10”) or at least stable (FRISK® “6,” “7,” and “8”). Thus, for these specific manufacturers listed below, financial risk is not an issue.
|Taiwan Semiconductors Manufacturing Co., Ltd.||Taiwan||10|
|Samsung Electronics Co. Ltd.||South Korea||10|
|United Microelectronics Corporation||Taiwan||8|
|Semiconductor Manufacturing International Corporation||China||9|
|Hua Hong Semiconductor Ltd.||China||6|
|Powerchip Semiconductor Manufacturing Corporation||Taiwan||7|
|Vanguard International Semiconductor Corporation||Taiwan||8|
|Nextchip Co. Ltd.||South Korea||9|
|Tower Semiconductor Ltd.||Israel||10|
FRISK® scores in the green and blue zone signal low bankruptcy risk versus the average public company.
One major concern, evident in the list above, however, is that the vast majority of semiconductor product supply comes from the Asia-Pacific region. Asia-Pacific is increasingly vulnerable to disruptions.
Taiwan Semiconductors Co., Ltd., and Samsung Electronic Co. Ltd. represent about 70% of all global semiconductor chip supply. With such a high concentration, geopolitical risk is front and center.
|Semiconductor Businesses||All Industry Businesses|
|Company||FRISK® scores||All||% FRISK® scored||FRISK® scores||All||% FRISK® scored|
Total company coverage in the semiconductor industry and across all industries of major countries in APAC.
In fact, the U.S. blacklisted China’s leading manufacturer, Semiconductor Manufacturing International Corporation, on trade exports over concerns of military ties. Moody’s commented in a May 2022 research report that such restrictions have delayed its technological advancements:
“U.S. restrictions on suppliers' exports of certain equipment, accessories and raw materials to SMIC have slowed capacity production of SMIC’s 14-nanometer chip — its most advanced semiconductor chip with volume production. The restrictions have also delayed the development of new advanced chips."
This negatively impacted trade relations and tensions continue to mount. There are many other examples of worrying exchanges, but to underscore the issue from China’s viewpoint, their foreign ministry recently warned against U.S. political leaders simply visiting Taiwan.
Ultimately, even reduced supply, never mind outright blockages, from the APAC region would result in a continued or worsened supply chain crisis across the globe.
Certain industries are already taking action to nearshore production and/or localize alternative vendors – and the same transformation is occurring with semiconductors. SupplyChainMonitorTM helps professionals in sourcing, vendor management, purchasing, etc. to analyze such risks more effectively. Total coverage now exceeds 30 million companies worldwide to help implement dual sourcing and redundancy strategies.
With SupplyChainMonitor, subscribers can identify that well over half of all semiconductor suppliers come from the Asia-Pacific region. They also recognize that Taiwan has one of the highest risk ratings for international tension from the Economist Intelligence Unit and, most importantly, can use the service to look for backup suppliers in other regions.
Since the Senate and Congress have passed the CHIPS bill of $52 billion in subsidies and tax credits, the build out of U.S. microchip factories will help counteract this supply vulnerability. Intel Corporation (FRISK® score “10”) announced a $20 billion investment into two proposed Ohio chip-manufacturing factories while GlobalFoundries claimed it would build a factory in New York. Samsung also announced its plans to build a $17 billion chip facility in Taylor, Texas. However, timing is a major issue as it can take years before a new facility is operational.
There are knock-on effects that could come from an industry-wide capital investment boom if it ends up leading to overcapacity. Global semiconductor capex is estimated to reach a record high of $190 billion in 2022 between memory and non-memory chips. That is not even factoring in the CHIPS bill, which will further subsidize the industry. In a few words, an overbuild in manufacturing capacity could quickly lead to the next bust cycle.
Case in point: in 2020, Chinese semiconductor foundry Tsinghua Unigroup Ltd. carried $31 billion in debt and defaulted on $3.6 billion worth of bonds. One bank lender requested that the company enter into a comprehensive debt restructuring. Strategic investors injected about $9.4 billion in capital to support operations. Among the investors was Foxconn Technology Co Ltd, which made a strategic investment of $798 million to diversify beyond its electronic assembly operations with Apple Inc. Being a state-owned enterprise and finding deep-pocketed investors is all that allowed Tsinghua Unigroup to survive.
Certainly, major foundries like Taiwan Semiconductors and Samsung Electronic, as well as new entrants like Intel, are well capitalized to weather the cyclical industry's storms. However, other smaller-scale operators with related products and services may not be so fortunate in a down cycle. Below we identified three high-risk semiconductors, as denoted by their respective “red zone” FRISK® scores.
|Schweizer Electronic AG||Germany||2|
|Skywater Technology, Inc.||U.S.A.||3|
|Nepes Corporation||South Korea||3|
FRISK® scores in the red zone signal higher bankruptcy risk than the average public company.
These operators have been taking advantage of the semiconductor upcycle by showing significant growth. However, all have high financial leverage while reporting persistent net and cash flow losses. Working capital is either marginally sufficient or negative. Rising interest rates, the inherent capital intensity of the chip business, and their weak financial health could eventually result in funding issues. An industry downturn would only exacerbate their problems and accelerate financial distress and/or bankruptcy.
Although the semiconductor shortage is easing, geopolitical risks and financial troubles of individual suppliers could result in another leg of this supply chain crisis. SupplyChainMonitor helps professionals assess geographic, industrial, and vendor-specific risks in pursuit of policies and strategies to effectively minimize disruption events. Managing these risk categories will allow you to grow sales faster, meet supply requirements, improve lead times, and protect your company’s reputation. If your team wants to get started with SupplyChainMonitor, please contact us or give us a call at 845.230.3000.