Macquarie Research, Semiconductors: Supply chain disruption risk

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MacqTech Express
Semiconductors: Supply chain disruption risk
Event
 Our checks suggest that semiconductor supply chain shortage risks remain
pressing – notably in BT resin and wafers. Inventories will blunt the impact initially,
but by 2Q CY2011 the impact of shortages may become visible.
Impact
 BT resin: Macquarie’s George Chang visited Kinsus in Taiwan. Kinsus is the largest
supplier of FC-CSP substrates in Taiwan, supplying 50% of Qualcomm's needs.
Kinsus believes that 2Q sales may fall 10% QoQ. Kinsus had been guiding to 20%
sales growth in CY11 before the earthquake, but is now guiding to 15%. The firm
believes that the shortage in BT material will begin to surface towards the end of
April, with May likely the worst hit, followed by a June recovery; Kinsus estimates
that the total supply chain inventory at the time of earthquake was ~1.5 months.
Kinsus buys BT-based copper-clad laminate from Mitsubishi Gas Chemical. Kinsus
believes that MGC will be back to 50% utilisation by April. But due to the one month
window in supply cuts, they expect the supply chain to still see an impact. ~25% of
Kinsus’ sales are FC-CSP of which 70% is for baseband ICs and application
processors, selling mainly to Qualcomm (which accounts for ~25% of Kinsus' sales).
 Wafers: Ingot production at Shin-Etsu’s Shirakawa plant and SUMCO’s Yonezawa plant
remain halted, stalled by power shortages and after-shocks. For 300mm-diameter
ingots/wafers, the worldwide industry production run-rate is thus now 25% below the
February demand level of 3.6m units. We think inventories in the supply chain (including
those at the wafer producers) may only extend to May. The prospect may be of
shortages by May. ~30% of this gap may be made up by producers outside Japan, 30-
40% from spare capacity at SUMCO, and 10-15% by Shin-Etsu shifting production to
other plants. But this will take time; we see risk of a shortage of up to 10% in CY2Q,
persisting in CY3Q until Shin-Etsu and SUMCO’s capacity in the affected areas recover.
We expect wafer producers to seek price hikes to incentivise activation of dormant
capacity. Further on, power outages and planned blackouts in Japan will be a problem as
ingot production requires 5+ days with continuous power. Moreover, aftershocks can
induce yield losses in ingot-growing and prevent full production from being restored.
 Other areas to watch: The supply of CMP slurry from Hitachi Chemical is meant to
return this week, but has been delayed by unstable water supply. Hitachi Chemical has
~70% world market share of slurries for shallow trench isolation processes.
Outlook
 We believe investors should brace themselves for supply disruptions in the chip
sector in 2Q CY2011. Firms that rely on materials in short supply may continue to talk
down their CY2Q outlooks. For now, we assume the duration of disruption for most key
components is 2-3 months rather than 4-6 months. We assume that demand will be
delayed into CY3Q rather than disappear completely.
 Macquarie’s George Chang believes that BT resin shortages could push out
smartphone product launches from CY2Q into CY3Q. Meanwhile Damian Thong
believes that 300mm wafer shortages could result in insufficient DRAM and NAND
flash supply by CY3Q, driving sharp price hikes. We believe Elpida faces volume
risk due to their high dependence on Shin-Etsu for wafers. Inotera and Nanya
obtain most of their wafers (80-90%) from Formosa SUMCO, and this source
looks secure. Due to its size and strong grip on the supply chain, we believe
Samsung should be able to secure wafers, as would other dominant players.