Automakers’ Reliance on Taiwan Chips Sparks Discussion

German automakers have been dealing with a shortage of chips that facilitate numerous in-vehicle functions. Photo: VW

An unexpected surge in demand left car manufacturers in some major markets scrambling to make up for a shortage of automotive chips, which are produced mostly in Taiwan. Now governments are exploring how to reduce dependence on the island’s chipmakers.

Taiwan’s key foreign policy catchphrase “Taiwan can help” has become a lot more relevant lately, especially regarding the global automobile industry. Top officials and businesses from the U.S., Europe, and Japan have called on Taiwan’s government to aid with easing a shortage of semiconductors for motor vehicles. The chips facilitate a wide range of functions, including motor management and assisted driving.

This issue has raised concerns among leaders and businesses in these countries that the auto industry may have become overly reliant on Taiwanese chipmakers – especially the Taiwan Semiconductor Manufacturing Co. (TSMC). The notion gained particular attention in Germany when the country’s economics minister, Peter Altmaier, in late January made the unusual move of sending a letter to his Taiwanese counterpart, Wang Mei-hua. In the letter, Altmaier asked Wang  to push TSMC to ramp up semiconductor production to meet demand from German automakers.

The current crisis has been a long time coming. Decades of breakneck globalization have led to a situation in which automotive semiconductors are mainly developed by European companies such as NXP, STM, and Infineon and partly manufactured in Asia – mostly by TSMC. Meanwhile, Chinese foundries are increasingly being pushed out of the global supply chain as a result of the recently departed Trump administration’s moves to restrict China’s high-tech sector.

An additional, more recent factor in creating the current shortage is that automakers in the U.S., Europe, and Japan, anticipating lower consumer demand for cars last year, drastically reduced their orders for chips. In response, semiconductor manufacturers began work on fulfilling the high competing demand from makers of consumer electronics, as individuals, businesses, and governments across the world were forced to abruptly shift to remote work, schooling, and entertainment modes.

“After [Minister of Economic Affairs] Wang received Altmaier’s letter, she called a meeting of Taiwanese stakeholders, including TSMC, and the general feeling was one of perplexity,” says an industry professional who wishes to remain anonymous. “No one knew exactly what semiconductors were needed by which automakers, since TSMC’s business partners are not Volkswagen and Daimler but their suppliers, such as Bosch and Continental.”

The industry professional says that the situation became more complicated when, following a virtual meeting between American and Taiwanese semiconductor firms and government officials in early February, the U.S. side produced a statement thanking Taiwan’s chipmakers for agreeing to prioritize auto chips in order to address the shortage. That seemed to indicate that U.S. car companies would be given preference over those from Europe or Japan, he says.

Reflecting the urgency of the situation, U.S. President Joe Biden later that month signed an executive order to review U.S. supply chains in key industries, including semiconductors. Then in early March, American automaker General Motors announced that due to the chip shortage, it has decided to keep two of its U.S. assembly plants closed until at least mid-April, while several of its other factories in various locations will remain closed or run at reduced capacity over the next several months.

Meanwhile, Ford has said that a lack of chips could force it to cut production by up to 20% in the first quarter of this year.

According to Taiwan’s semi-official Market Intelligence & Consulting Institute (MIC), the current shortage mainly involves chips installed on the auxiliary driving systems or cockpit platforms of vehicles. These systems provide users with information on car and road conditions quickly, thereby improving driving safety. Except for systems-on-chips (SoC) that are used in advanced driver-assistance systems (ADAS), the chip categories in question do not require advanced manufacturing processes.

The current chip shortage mainly involves chips for systems that provide drivers with information on car and road conditions. These systems improve the car’s safety. Photo: VW

“This means that in addition to TSMC, UMC and Power Semiconductor Manufacturing Co. (PSMC) are also able to undertake foundry services for some automotive chips,” says Wen Liu, an industry analyst at MIC. “However, with the semiconductor production cycle normally being one to two months and with production at full capacity, even if Taiwanese foundries were to increase the supply of automotive chips, they would still only be able to partly meet the needs of automakers in the short term,” he says.

Market researcher IHS Markit has forecast that global automobile production will drop by one million cars this year as a result of the chip shortage. This issue has in part also prompted European carmakers Volkswagen and Daimler to begin furloughing employees at several plants. As a result, Europe’s political leadership has increasingly been discussing how to restore the European microchip sector to its former glory. Once a hub of semiconductor factories, the continent currently accounts for less than 10% of global chip production.

To kick things into gear, the European Commission has introduced plans to launch an alliance on microelectronics by the end of Q1 this year with an initial investment of as much as €30 billion. German economics minister Altmaier, for his part, said that this strategic endeavor could trigger additional investments of up to €50 billion.

In addition, the French finance ministry noted that the EU is considering building an advanced semiconductor factory in Europe with the possible involvement of TSMC and South Korea’s Samsung. The proposed initiative parallels an ongoing push by Chinese makers of electric vehicle batteries to set up large production facilities in Germany in order to better serve Europe’s expanding market for new energy vehicles.

However, TSMC representatives have since pointed out that the company would first have to consider several factors, including customer needs, and European industry observers expressed doubt that establishing a TSMC fab in Europe would be as straightforward as Chinese EV battery factories.

“Whether a company providing foundry services will decide to set up a plant here will depend on the contracts it has with its customers and to what extent the political support will lead to allocation of significant investment incentives,” says Wolfgang Weber, chairman of the German Electrical and Electronic Manufacurers’ Association ZVEI. “While it is certain that demand for auto chips will increase sharply in the coming years amid the advent of connected driving, the acute shortage of auto semiconductors will largely be overcome in the second quarter of this year,” he adds.

ZVEI Chairman Wolfgang Weber predicts that the chip shortage will be mostly resolved by Q2 2021. Photo: ZVEI

Weber explained that any Taiwanese-owned foundry in Germany would be faced with high electricity costs, an important factor in its decision, given that the air purifying systems used in foundry cleanrooms (facilities equipped with HEPA filters to keep them clear of dust and particulate matter) are major consumers of electricity.

Matt Kendall, Chief Telecoms Editor at the UK-based Economist Intelligence Unit, notes that semiconductor design and manufacturing is a very intricate and complicated process that requires huge investments in physical capital and highly skilled labor.

“Not only would the EU already be playing catch-up, but it also has to contend with the fact that the likes of the U.S., China, and Japan all have similar aspirations of self-sufficiency,” Kendall says. “The EU would need to out-manoeuvre countries that are already devoting huge amounts of resources to semiconductor manufacturing, so it would take years rather than months for the EU to build up the kind of capability it needs,” he says.

According to Jan-Peter Kleinhans, a semiconductor expert at the Berlin-based think tank Stiftung Neue Verantwortung, European tech industries’ heavy focus on microcontrollers, power electronics, and sensors for auto and industrial robotics translates into demand for chips of 40 nanometers or larger. TSMC’s cutting edge 7 and 5nm chips are mainly destined for consumer electronics, such as premium-brand smartphones.

Kleinhans adds that unlike in the U.S., where the presence of a major fabless chip-design sector for consumer electronics means there is a business case for the establishment of foundries, Europe lacks a comparable tech ecosystem.

The desire to break into the U.S. market is strong among the Asian semiconductor giants. Samsung Foundry in February filed for regulatory approval in the U.S. to set up a leading-edge semiconductor manufacturing facility in Texas. Taiwanese media reported in early March that TSMC was looking to set up six manufacturing plants inside its planned Arizona campus.

“It makes sense for TSMC and Samsung to expand their foundries in Arizona and Texas respectively,” says Kleinhans. “But the question as to what their business cases would be in Europe is still unanswered, given that auto chips account for only 3-5% of TSMC’s overall revenue.”

Kleinhans notes that the ongoing attempt by Taiwan’s silicon wafer manufacturer GlobalWafers to acquire Germany-based Siltronic also does not bode well for European politicians’ quest to reduce semiconductor reliance on Taiwan.

Siltronic in December agreed to GlobalWafers’ offer of €3.75 billion, and the deal is currently pending regulatory approval. The acquisition would make GlobalWafers the world’s second-largest wafer producer in a highly consolidated market. Currently, just five companies in this sector have a combined output of over 90%.

“Siltronic is the sole supplier of certain silicon wafers for some European chipmakers, so its acquisition by a Taiwanese competitor obviously has repercussions for Europe’s so-called technological sovereignty in semiconductors,” Kleinhans says.