As the automotive industry transitions to hybrids and fully electric vehicles, advanced driver assist systems (ADAS), self-driving, the software-defined vehicle (SDV), and vehicle-to-everything (V2X) communications, a wrench has been thrown into the works. Semiconductors, upon which all of these technological advances rely, are now the subject of fractious geopolitics. The world had spent decades globalising industry. Now country-of-origin is a priority.
Automotive companies and their partners in the semiconductor industry are working furiously to simultaneously negotiate those several complex, interrelated technological evolutions while also dealing with disruptions in global supply chains.
What market turmoil taught the auto industry
The fabless semiconductor model was pioneered decades ago. For a very long time it has been hard to justify the capital expenditures required to own and run a fab, and now it is unremarkable to establish an IC company without in-house manufacturing capability.
The fabless approach is perfectly viable until it isn’t – and now, because geopolitical tensions have been ratcheted up, chip companies have to reconsider their manufacturing strategies. Import/export rules are in flux, and tariffs have become unpredictable and occasionally punitive. All of a sudden, where a fab is located and the nationality of its investors have ramifications that can suddenly turn any company in the semiconductor supply chain into a geopolitical football.
A recent example is Nexperia, based in The Netherlands but owned by Wingtech in China. Geopolitics have compelled the governments of both countries into actions they otherwise might not have taken. The geopolitical pressures and the responses to them inevitably created consternation among everyone involved, including participants in the automotive market who depend on Nexperia as a supplier.
This was hardly an isolated incident of turmoil in the automotive IC market (or the larger IC market); Nexperia’s experience is merely recent and one of the most publicised examples of how geopolitics is roiling automotive industry supply chains.
This ongoing geopolitical turmoil is demonstrating to markets that it can be advantageous for IC manufacturers to support at least a hybrid manufacturing model, if not a fully integrated manufacturing strategy, because maintaining the ability to manufacture circuitry, components, and sensors based on core IP (intellectual property) – with the option of outsourcing the production of commodity devices – can be a bulwark against supply chain disruptions. The same rationale can and often does extend to other critical steps, such as testing devices based on core IP.
This is playing out differently for different companies. At TDK-Micronas we recently brought more of our operations in-house, decreasing dependency on external sources (we have locations in Europe, while our manufacturing partner was in Taiwan). We’ve expanded our in-house backend packaging and testing operations, leading to a 30% increase in maximum wafer throughput per day. This includes investments in automation systems, including wafer handlers and testing equipment, that allow us to process more wafers, package more ICs, and test them.
We are also adding in-house production capacity for micro electromechanical systems (MEMS). The additional capacity will accommodate growth in demand for our MEMS products, and will be dedicated mainly to our most advanced products, though it will also be capable of producing legacy products. Adding this capacity locally will, in one stroke, create more flexibility in our supply chain, decrease our dependency on a single source in Asia, and mitigate geopolitical risk.
We can also open our fab to other MEMS designers, creating an additional revenue stream, ensuring high utilisation of the capacity with less exposure to potential swings of demand of our own products.
Texas Instruments, meanwhile, which already has extensive in-house manufacturing, recently announced plans to spend up to $60 billion to build enough factories that it will be manufacturing more than 95% of its own products in-house by 2030. Contract manufacturing giant TSMC is expanding internationally, geographically diversifying its mostly Taiwan-based operations with new foundries in the United States, at an eventual total cost of $65 billion.
Measured reactions
Despite geopolitical pressures, supply chain diversification has been measured, understandably given the difficulty and the vast sums of money involved.
Layer upon that uncertainty regarding the technology itself. For example, a few years ago, the automotive industry seemed to be moving rapidly and inexorably toward electric vehicles (EVs). Demand appears to be shifting back to drivetrains that encompass internal combustion engines (ICE). Consider that this trend, nominally about technology, also has a geopolitical dimension.
It all makes supply chain diversification fitful. Geopolitical attitudes keep shifting. Market demand has vacillated. Any conditions the semiconductor and automotive industries respond to today could unexpectedly change next year, or the year after.
Even with all the unpredictability, it is important to understand there are strong countervailing, stabilising influences, including the list of automotive technology trends themselves. Electrification in the automotive market is proceeding. ADAS technology is always being improved. The evolution toward SDVs is continuing apace. The architecture of motor vehicles continues to include more electronics organised in increasingly centralised architectures – and that is true not just of EVs and hybrids, but ICE vehicles too. In-cabin electronics will continue to be refined, and development of V2X technology continues apace. That the automotive industry will have ongoing need for ICs, sensors, and components will help smooth things out from the demand side.
Hybrid cars, hybrid suppliers
The automotive industry is still moving forward; and the geopolitical conditions are what they are. Advantages will continue to accrue to IC suppliers who maintain selective in-house manufacturing and other critical supply chain steps.
The just-in-time (JIT) manufacturing model has been widely adopted in the automotive and semiconductor industries, but JIT-based supply chains have proven sensitive to major disruptions. Given the frequency of major disruptions recently (e.g., a pandemic, tariff wars), it has become an entirely reasonable strategy to maintain several months’ worth of inventory.
That speaks of the relative ease of assuring continuity of supply, but the advantages of in-house manufacturing go beyond that. Process control and traceability is extremely important in automotive compliance. Automotive semiconductors require long-term traceability, quality assurance, and continuity of development. In-house manufacturing makes it much easier to perform continuous audits and achieve truly low part-per-million (ppm) defect rates, goals that can be supported by also performing in-house testing, including wafer-level testing. The participation of external partners can result in scalable volume production.
Geopolitical benefits include local-for-local supply chains, and the associated advantage of being able to provide homogenous levels of service.
Product mix can help as well. We can cite our own example, but there are others with analogous experiences. The number of new motor vehicles being sold is not growing as quickly as in previous years, which seems as if it might depress semiconductor sales, but appearances can be deceiving. The number of sensors being incorporated in several vehicle subsystems is growing, independent of total vehicle sales. TDK-Micronas specialise in magnetic sensing technologies (tunnelling magnetoresistive [TMR] sensors, Hall sensors), and advanced embedded motor drivers, providing an additional buffer.
IC suppliers can also focus on increasing the value of their products. In our case, we are working to co-package sensors and driver ICs, which saves space (important in automotive) and reduces cost.
Conclusion
Every market has always had its ups and downs. Both the automotive or semiconductor industries are practiced at negotiating economic fluctuations and technology disruption. Geopolitics merely compounds the difficulty of doing business. The point is that even if supply chains are particularly unsettled, the automotive industry and its semiconductor suppliers understand the practices and strategies available to us to restore market balance.
About the author:
Karsten Köhler, Business Development Manager at TDK-Micronas
