Tesla considers buying fabs to secure chip supply

According to the Financial Times, people familiar with the matter said Tesla will take the extraordinary step of pre-purchasing chips to secure supplies of its key materials. The report further pointed out that Tesla is working hard to try to acquire a factory to solve the global chip shortage it faces.

The U.S. electric car maker is discussing countermeasures to secure chip supplies with relevant suppliers in Taiwan, South Korea and the United States, people at semiconductor industry suppliers and consulting firms said.

They also stressed that Tesla’s interest in buying factories outright is still in its early stages. Such an acquisition would be difficult, they said, given the high fees involved. But Tesla needs the latest generation of mass-produced chips, which are mostly made in Taiwan and South Korea.

The Financial Times further noted that Tesla is interested in direct financial commitments to secure production capacity as industries from automobiles to telecom equipment makers such as Cisco are looking for new ways to address the global chip shortage.

Tight chip supplies have forced several automakers to idle or close factories. Ratings agency Fitch said the disruptions are expected to cost the industry 5% of estimated sales this year.

As you can see from reports, some contract chip makers have begun to allow large customers to pay upfront deposits to guarantee that certain orders will be sold at a fixed price. The practice is extremely rare for contract chipmakers, but it allows for the flexibility to allocate capacity to orders from different customers, who will always be the cornerstone of their profitability.

Tesla showed its willingness to move into components last year when it announced plans to make its own battery cells.

The company already has an in-house engineering team that designs high-end chips for autonomous driving.

“They’re going to buy capacity first, but they’re actively considering buying their own fabs,” said Ambrose Conroy, founder and CEO of Seraph Consulting, a Tesla supply chain consultancy.

But most observers believe that buying and operating chip factories is a bit of an overreaction for an automaker like Tesla.

Velu Sinha, a Shanghai-based partner at Bain & Company, said: “After they saw the cost of the factory, I believe they will go back and re-queue.”

A cutting-edge laboratory requires an investment of as much as $20 billion, and the complexities of running such a plant are notoriously difficult to grasp.

A senior executive at Samsung, which makes chips for Tesla, said partnering arrangements with customers will have to change as they seek increasingly specialized and customized semiconductors.

“Given the current capacity shortage, Samsung may dedicate capacity to companies like Tesla for their longer-lasting chips,” said Nomura analyst CW Chung.

Tesla did not answer questions on the subject. A person familiar with Samsung’s thinking on the matter said the company has opened some production lines for customers and is open to further discussions.

Other automakers have started contracting directly with fabs. A person who has advised European carmakers to adjust their chip supply chains said the auto group “will have more direct deals” with contract chipmakers. “That means they have to invest in in-house teams, which also means dedicated purchase agreements.”

Change isn’t just limited to the auto industry. Cisco said it had put the funds in escrow to reserve capacity with an unidentified contract chipmaker.

Last month, six semiconductor design firms struck a deal with Taiwan’s United Microelectronics Corporation (UMC) under which the world’s fourth-largest contract chipmaker will expand production capacity for mature technologies in exchange for a financial bond. .

This arrangement runs counter to traditional business models. “When you lock down a certain amount of capacity for one customer, flexibility goes away,” said one semiconductor executive familiar with the business.

For Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chip maker, with gross margins in excess of 50%, its profitability depends on the ability to compete among its many customers.

TSMC has consistently resisted requests to reserve dedicated capacity for any of its customers. It made an exception in 2014 to avoid the risk of Qualcomm leaving, after the U.S. chip designer frequently diverted orders to rival Samsung.

A U.S. official said it wants to work more closely with U.S. automakers in smaller fabs such as UMC or Taiwanese rival Powerchip, because TSMC, which has huge bargaining power, “has little interest in specific purchases.”

 

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