Over-investment into semiconductors amid shortage may lead to overcapacity, warns Natixis

CORPORATE investments company Natixis, in a report on the global shortage in semiconductors, has flagged the danger behind several governments' response to the shortage - that of turning inward and investing in the industry to increase capacity and keep up with global demand.

In the report published by its research arm, Natixis said that a fully self-sufficient supply chain is too complex and demanding a task for a single economy. It suggested that countries will have to continue relying on a global supply chain to fulfil needs: currently, the well-developed technologies in the US dominate only the high end of the chain, and the market also needs chip producers from places like Taiwan, South Korea and China to complete the supply chain.

Asia is the biggest market for semiconductors, accounting for 62 per cent of the world's demand in 2020, on the back of rising demand for consumer electronics, auto chips and electric vehicles.

The Natixis report pointed out, however, that it is not saying that taking the route to self-reliance is the wrong one. Because electronics drives exports and economic growth, countries have, understandably, sought to insulate their supply chains from external factors like geopolitics, global shortages and trade wars.

But the report warned that over-investment into the industry runs the risk of overcapacity by the time these expansion efforts bear fruit. This is because semiconductor firms are not agile enough to respond to short-term and immediate capacity additions. With capital expenditures to step up production taking a while to materialise in measurable yield and output increases, a resulting overcapacity could trigger a drastic fall in semiconductor prices.

Instead, the report recommends better industry policies and more investment into higher value-added types of semiconductors, which are less likely to experience overcapacity because of their higher barriers to entry.

Countries and firms can do so by means of extreme ultraviolet (EUV) and lithography equipment, which have been crucial in advancing semiconductor production. However, EUVs are extremely limited in supply, with only a few produced each year; they are even harder for industry newcomers to procure.

Nonetheless, a focus on high-end chip production will subvert risks of a bottleneck where high-end chips are produced only by a few firms, and add to countries' self-sufficient capacity, said the report.