The Challenge of Tight Silicon Wafer Supply – Impacts and Implications

By Sungho Yoon, Sr. Market Research Analyst, and Dan Tracy, Sr. Director, SEMI

Chip makers continue to struggle to secure more silicon wafers to meet market demand as production capacity has reportedly fallen short of their needs, particularly in the 300mm wafer segment – a trend that has led to record-low DOI⁽¹⁾ (Days of Inventory) levels since the second half of 2017.

The DOI level has shown no significant improvement since August 2017, as depicted in figure 1⁽²⁾. Unlike the inventory rebound in 2007, the current inventory trough shows no signs of significant recovery soon.

Source: Processed data extracted from data reported by METI (Ministry of Economy, Trade, and Industry) Japan.

                 Figure 1 – Silicon Wafers Days of Inventory

The boom-and-bust cycles typical of the semiconductor industry are driven by large capital spending increases, followed by cutbacks. The industry has seen a number of these cycles since 2000. However, before 2017, the particularly low level of wafer inventory we now see had never lasted longer than six months.

There are three major reasons for the persistently low levels.

First, on the silicon wafer demand side, fab equipment investments reached a record high in 2017, driven by large-scale memory fab investments by Samsung and SK Hynix in Korea that accounted for 32 percent of global total investments. Additionally, Korea’s year-over-year (YoY) equipment billing growth rate saw a sharp increase of 135 percent in 2017, as shown in figure 2.

Source: SEMI/SEAJ WWSEMS

Figure 2 – Equipment Billings in Korea

What’s more, the 12-month moving average of equipment billings in China has trended upward since the Made in China 2025 plan was released in 2015, a marked difference from past equipment investment trends in China that followed typical up-and-down industry cycles, as represented in figure 3.

Source: SEMI/SEAJ WWSEMS

Figure 3 – Equipment Billings in China

Korea’s soaring investments in memory and China’s massive, ongoing government investments to beef up fab production are key drivers of the stubbornly low wafer inventory levels throughout 2017 and, now, into 2018.

The second reason is the time lag between investments by silicon wafer manufacturers and chip makers. Spikes in wafer processing equipment spending have preceded tops in wafer manufacturing equipment investments since the 2008 financial crisis, as shown in figure 4. Prior to 2008, silicon wafer manufacturing investments preceded or tracked chip manufacturing investments, minimizing periods of tight wafer suppler.

Silicon wafer inventory surged during the financial crisis, triggering a steep drop in silicon wafer pricing.   The fallout is that wafer manufactures have been hesitant to expand manufacturing facilities without first securing chip makers’ commitments to new fab investments or capacity expansions of their existing fabs. Finally, wafer supply failed to keep pace with demand in 2017, and inventory levels continue to lag chip makers’ expectations.

Source: SEMI/SEAJ WWSEMS

Figure 4 – YoY growth rate of wafer manufacturing and wafer processing equipment

The third reason is technical: Memory demand is growing across all end applications, but rising technical challenges that reduce yield and output tend to restrict memory bit supply growth. The upshot is that, in the absence of technology breakthroughs, memory makers need more cleanroom space in order to fulfill market demand for memory bits.  The investments needed to build additional cleanroom space further accelerates wafer demand.

When will the industry wafer inventory conundrum improve? That depends on how fast memory device makers expand capacity despite tenaciously low wafer inventories and how, in turn, wafer manufacturers cope with the current acceleration of fab investments by device makers through expanding wafer manufacturing capacity.

Low wafer inventory levels could potentially hamper growth for semiconductor equipment market as it would be difficult for device makers to expand fab capacity without securing stable wafer supply chain in advance.

⁽¹⁾ Days in inventory is calculated as the number of days in the period divided by the inventory turnover

⁽²⁾ Value of estimated relative DOI was removed in the left axis and DOI data was calculated based on 3MMA (3-month moving average).

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