The chip shortage & re-thinking joint ventures
May 6, 2021
Last year, the onset of COVID-19 forced automakers to shut down factories across the globe. Now, car companies are once again ramping down production—this time, because semiconductors are in short supply globally. And that’s bad news for automakers both big and small that are scrambling to ramp up to meet demand that’s exceeded their forecasts. It also raises the question of how semiconductor companies should respond to the shortage.
Three possible options for semiconductor companies
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Semi manufacturers could seize the moment to pursue more capital investments, like TSMC’s recent $100 billion announcement to expand existing fabs and build new ones. The problem is it can take years for chips tied to these investments to impact automakers due to long lead times and the rigorous quality standards and high reliability requirements.
A second option is to shift existing capacity to the hardest-hit industries, like automotive, where customers may be willing to pay a premium. Intel announced a $20 billion investment in new fabs to produce automotive chips. But for the same reasons, it may take months, if not years, for Intel to begin making a dent in the current shortage.
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A third option is M&A to acquire additional capacity, but this is not a short-term fix for the industry as it creates no new capacity. Additionally, with today’s lofty valuations, executives and boards will likely take a cautious approach to acquisitions, especially with the regulatory environment continuing to loom large.
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Add joint ventures to the list
There’s a fourth possible solution for semiconductor companies: joint ventures (JVs) and strategic alliances. The urgency of the current moment creates ripe conditions for forging partnerships that could yield mutual benefit for years to come.
The shared investment aspect of joint ventures should appeal broadly to the semiconductor industry, as semi companies must always exercise discipline in how they allocate capital. A co-investment or joint venture could be a win-win: guaranteeing supply for end customers while allowing semi manufacturers to reduce CAPEX and R&D spend or redeploy capital to win new business. While the current chip shortage has most acutely impacted the automotive industry, which is currently still reliant on older technology, the continued rise of smart and connected everything means demand for chips will continue to increase. This trend will likely accelerate due to the auto industry’s growing appetite for advanced chips, fueled by the seismic shift from internal combustion engines (ICE) to electric drivetrains. With this shift, automakers and electronics and semi companies have strong incentives to consider joint venture or partnership discussions to not only secure supply but also to have more direct involvement in developing the solutions for the next generation of electric and autonomous vehicles. There are early signs that this path is viable, seen in Toyota-Denso’s semiconductor joint venture and Rohm’s recent announcement of the opening of a joint lab with an auto supplier in China. And, at least one consumer electronics company, TCL, is actively courting a partner for its new semiconductor joint venture.
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Governments represent another potential partner for semis, with officials in the US and Europe publicly talking up efforts to support domestic semi production. Taking advantage of near-term tax incentives is certainly a prudent choice considering the figures those officials have discussed. But thinking beyond the financial incentives, semiconductor companies could also evaluate opportunities for public-private partnerships to secure longer-term government sponsorship. While calls for this type of public-private collaboration pre-date the current shortage, today’s crisis could provide the urgency needed to tip the scales from talk to action.
Beyond offering attractive financials, formalized partnerships such as joint ventures or strategic alliances also can significantly enhance innovation. The practical limit of Moore’s Law may have been reached, but don’t tell that to consumers, whose appetite for all things tech shows no signs of slowing. With trends like autonomy, artificial intelligence and 5G all still in early stages, we’ll continue to see the backward integration of big tech into the semi value chain. Just look at Apple and Amazon, which have brought more and more of their semi needs in house in the past several years. For some semi companies, this trend represents the two-fold challenge of eroding revenue streams and an existential threat. As other tech companies look to stay competitive, a venture or alliance could be mutually beneficial by accelerating new product development through better access to customer insight – creating a strategic advantage by including customer requirements earlier in the design cycle. Intel’s and IBM’s announcement of a research collaboration is one example of a legacy technology company and a semiconductor manufacturer recognizing the benefits of increased, formal collaboration.
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Like M&A, joint ventures and strategic alliances can easily fail to achieve their desired goals if not executed with rigor. But when done right, these strategies can prove to be a win for both companies and can even lower the risk of eventual merger or acquisition activity. In today’s current environment, with customers hungry for chips and semiconductor companies facing escalating costs, joint ventures and alliances could be a compelling way to meet the capacity and innovation requirements of the future.
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