Obscure Taiwan company's rise shows profit, pain of chip crunch

Taipei

NAN Ya Printed Circuit Board is hardly a household name in the tech industry. But the obscure Taiwanese company makes an essential component for chipmaking that has become the latest bottleneck for automakers and electronics companies suffering from semiconductor shortages.

The component goes by the unwieldy name of Ajinomoto build-up film (ABF) substrate and it's one of the least glamorous niches in the chips industry. It's part of the packaging that protects the handful of chips needed to power your computer or car and allows communication among them.

Many of the world's most advanced semiconductors can't run without the substrates. So while giants like Intel and Taiwan Semiconductor Manufacturing spend hundreds of billions trying to alleviate chip shortages, the lack of that single component could hinder production for years.

Supplies are likely to remain constrained until at least 2025 due to limited capacity, according to people familiar with the matter. Top executives from Intel, Nvidia and Advanced Micro Devices have all warned about shortages in recent months.

Broadcom recently told customers the lead time for its main router chips is going up from 63 weeks to 70 weeks due to a lack of substrates, according to one person who asked not to be named as the information is not public.

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The crunch shows how vulnerable global supply chains remain to disruptions almost two years into the Covid-19 pandemic. Companies and investors have almost no visibility into where the next shock could come from. "This crisis caught a number of players off guard," said Peter Hanbury, a partner at Bain & Co. "As demand for PCs, gaming cards and cloud services increased with Covid-19 and working from home, this critical component suddenly became a real bottleneck for many players such as AMD and Nvidia."

The squeeze is turning low-profile companies such as Nan Ya into stock market stars. Its shares have soared 1,219 per cent in the past three years through Sept 15, and analysts project more to come.

ABF substrate makers such as Unimicron Technology, Kinsus Interconnect Technology, and Ibiden have all seen their stocks climb too. "Profits at these companies are expected to keep soaring for years to come as shipment quantities skyrocket," said Hideki Yasuda, an analyst at Ace Research Institute.

Nan Ya rose by 0.1 per cent on Thursday, while Unimicron gained 2.8 per cent and Kinsus added 0.5 per cent.

ABF substrate is a relatively new component, pioneered by Intel in the late 1990s as it developed more powerful microprocessors. It takes its name from Ajinomoto, a Japanese company that produces the substrate's film-like insulation.

The material was first adopted as the preferred packaging technology for central processing units in personal computers and servers because it facilitates speedy computations by high-end chips.

Sales of ABF substrates surged in the early 2000s with the Internet boom, then took a hit as smartphones began replacing PCs in the late 2000s. Substrate makers' fortunes started to recover around 2018 as countries began to roll out fifth-generation wireless services, which led companies such as Broadcom that make networking chips to adopt the material for use in routers, base stations and related applications.

The advent of 5G also boosted demand for more powerful server chips to handle cloud computing, artificial intelligence (AI) and smart-driving technologies. The cost of ABF substrate, usually quoted per chip, starts at about 50 US cents a chip and tops US$20 for premium server CPUs.

Major semiconductors companies such as Intel, AMD and Nvidia now all depend on ABF substrates to produce the most powerful chips in the world.

But substrate makers have been reluctant to invest aggressively in capacity because of money-losing slumps in the past.

Supply is expected to rise at a compound annual growth rate of 16 per cent through 2024, while demand is estimated to climb 18 per cent to 19 per cent, Citigroup analysts Grant Chi and Takayuki Naito forecast in early July.

Owen Cheng, an analyst at President Capital Management, wrote in a note this month that the gap between demand and supply will rise as much as 33 per cent next year compared to this year because of growth in technologies such as high-performance computing and AI. That will probably benefit the likes of Nan Ya and Unimicron. "Nan Ya could raise its ABF substrates price by 35 per cent in 2022," Mr Cheng wrote.

The ABF situation adds to a series of bottlenecks in the chip industry that have hampered the global recovery from Covid-19, hitting even giants such as Toyota Motor and Apple. Companies around the world are struggling to produce enough to meet demand.

Intel warned in July that revenue in its client computing group will decline sequentially due to constraints from substrates and other components. Broadcom, which sells to companies like Apple and Cisco Systems, declined to comment on its wait times.

Some customers are taking matters into their own hands. AMD chief executive Lisa Su told analysts in April that the chipmaker would put its own money into increasing capacity at suppliers. "On the substrate side, in particular, I think there has been under-investment in the industry," she said. "And so we've taken the opportunity to invest in some substrate capacity dedicated to AMD, and that will be something that we continue to do going forward."

Auto chip suppliers will use more ABF substrates as vehicles grow increasingly electrified and digitised. They are, however, struggling to get top priority among substrate makers because they lack the bargaining power of major semiconductor companies such as Intel, people familiar with the situation said. That could mean more direct investment in substrate producers or the entry of new ABF substrate players. BLOOMBERG