By The Edge Singapore

Lim Hui Jie Published on Fri, Jun 25, 2021

GlobalFoundries’ US$4 billion ($5.4 billion) planned expansion of its Singapore semiconductor chipmaking facilities marks its first here in over a decade. When ready in 1Q2023, the facility, based in Woodlands Wafer Fab Park and spanning 250,000 sq ft, can churn out 450,000 wafers a year.

According to GlobalFoundries, which makes semiconductor chips designed by customers themselves, the facility, to be the most advanced of its kind in Singapore, will be used to support fast-growing end markets in the automotive, 5G mobility and secure device segments, having signed long-term agreements with customers.

The last time GlobalFoundries hit the headlines was in 2009 when its owners — Advanced Technology Investment Company (ATIC) of Abu Dhabi, UAE — paid $2.5 billion to buy over Chartered Semiconductor Manufacturing, 62%-held by Temasek Holdings. At that time, Chartered was the third-largest foundry in the world after Taiwan Semiconductor Manufacturing Co (TSMC) and United Microelectronics Corporation (UMC).

The expansion, announced on June 22, comes amid an upswing in the global semiconductor industry due to strong demand.

In recent months, Samsung Electronics and SK Hynix have announced they are committing US$450 billion over a decade on chip research and expansion while TSMC, the market leader in the foundry business, has earmarked US$100 billion over the next three years. In March, Intel Corp, which designs and manufactures its own chips, announced the construction of two new plants for US$20 billion.

The shortage, accelerated by the Covid-19 pandemic as people shift online to work and play, has also been exacerbated by several trends. Among them was a faster than expected rebound of the car industry after manufacturers like General Motors Company and Ford Motor Company cut orders in anticipation of a market slowdown. Another was the surge in interest in cryptocurrencies that pushed up demand for high-powered graphics cards and computer chips as miners upgraded their equipment.

As such, GlobalFoundries’ CEO Thomas Caulfield said in a June 22 briefing that he expects the industry to be “chasing supply more than demand” for the next five to eight years. One of its key customers Advanced Micro Devices (AMD) has already committed to buying US$1.6 billion worth of chips between 2022 and 2024.

However, Caulfield, who holds a doctorate from Columbia University, isn’t about to try and compete head-on with market leaders like TSMC to make the latest single-digit nanometre (nm) chips such as the 7nm or 5nm chips produced for the likes of Apple Inc. Instead, it will focus on the older 45nm or 65nm chips — not at the cutting edge but still seeing significant demand for use in displays, radio communications and devices used to regulate power. “The industry has painted itself into a corner by focusing on single-digit nanometre,” says Caulfield, “Today, we have cars sitting in a parking lot missing chips made on 45nm or 65nm.”

Geopolitics, not just economics

Although semiconductor companies are riding on a boom and anticipating further growth, they are increasingly forced to sidestep persistent geopolitical skirmishes between the US and China.

To that end, GlobalFoundries is not simply concentrating in Singapore. It will also devote US$1 billion to expand its site in Dresden, Germany, as well as another $1 billion at its US site. According to Caulfield, the total funding of US$6 billion will come from its own war chest as well as government partnerships. The Singapore Economic Development Board, for one, is contributing an undisclosed amount to the Singapore expansion.

There is also a possibility that GlobalFoundries may raise funds from an IPO if certain media reports are to be believed.

Caulfield, however, declined to comment on this when queried on June 22. He explains that investing across the different sites in different continents is a “strategic” move. “In the early days, having a global footprint was viewed as maybe an OK to have … Today it’s an absolute feature, an absolute requirement.”

That’s because the industry is bearing too much concentration risk, warns Caulfield. “When you think that 70% of all foundry remanufacturing takes place in Taiwan, a couple of hundred miles from China, from one company, it puts a huge risk on the world economy,” he explains.

The silicon battleground

Due to its ubiquity in modern machines and equipment from smartphones to missiles, semiconductors are now seen as a new battleground between states like the US and China. The term used by Alex Capri, a research fellow of the Hinrich Foundation, is “techno-nationalism”.

For years, the semiconductor supply chain stretched across continents: mostly designed in the US and manufactured in Asia, specifically Taiwan, South Korea and Japan. But geopolitics have forced a decoupling and each sphere is making up for the deficiencies they suffer from.

“Both the US and China share the same objective: They want to localise semiconductor manufacturing. But each country faces entirely different challenges with very different degrees of difficulty. Beijing must continue to play a lopsided game of catch-up,” says Capri, adding that Washington’s task is arguably easier as nearly all its intended corporate partners are American or from countries with strong historic ties to the US.

On the other hand, Beijing faces barriers to entry that go beyond financial investments or gaps in expertise. “They involve the near-impossible task of leveraging decades of thought, trial and error, and incremental advances in hyper- niche technologies by market leaders such as Samsung, Intel and TSMC,” he adds.

The US, under the Trump administration, has curbed the sale of semiconductors to certain Chinese entities, which has the effect of goading China to build up its own capabilities and capacities. One such move — not limited to semiconductors but covering the electronics sector as a whole — is Made in China 2025, which Capri notes will invest US$300 billion over 10 years. He also notes that as of 2019, some US$29 billion of funding has been provided for the China National Integrated Circuit Industry Investment Fund, according to government figures.

Capri also highlights that export restrictions curbing sales to the likes of Huawei Technologies and other Chinese entities have inflicted collateral damage on US semiconductor companies such as BroadcomQualcomm, Intel and Nvidia while the ripple effects of these actions are being felt throughout extended global value chains.

To support this industry, US President Joe Biden recently laid out a US$52 billion plan to bolster domestic chip manufacturing, responding in part to China’s accelerating blueprint to place semiconductors at the heart of its development.

Even Japan, which for decades has had a technological edge, is feeling the heat. In an interview with Bloomberg, Tetsuro Higashi, chairman emeritus at Tokyo Electron and head of an expert panel advising the government, warns that the country must invest at least a JPY1 trillion ($12.1 billion) towards chip development this fiscal year and trillions more after that, if it is to have any hope of reviving its national industry and catch up with South Korea and Taiwan. “It will not be at all easy to stage a comeback. If we miss this opportunity now, there may not be another one,” he says.

Local related stocks to benefit

As the big boys jostle, Singapore companies that are plugged into the global semiconductor industry as suppliers or service providers are expected to catch the tailwind in different ways, say analysts.

“Waiting time for chips has risen to a record high, with no signs of abating,” says DBS Group Research in a June 22 report. DBS notes that the industry is ramping up capacity, with 5.7% growth seen this year and another 6.1% in 2022. However, global demand is projected to grow 12.5% and 4.1% in 2021 and 2022 respectively, and the supply constraint might be resolved in the second half of 2022 or 2023, says DBS.

In the meantime, semiconductor companies are the clear beneficiaries. The DBS analysts continue to like AEM HoldingsUMS HoldingsFrencken Group, Hong Kong-listed ASM Pacific Technology and KL-listed Inari Amertron.

AEM, whose largest customer is understood to be Intel, reported record revenue for FY2020 and its second-highest quarterly revenue for 1QFY2021 ended March 31. UMS, whose major client is Applied Materials, also posted record quarterly revenue in 1QFY2021 ended March 31, which saw a 42% jump from a year ago.

In a June 23 report, UOB Kay Hian analyst Clement Ho is maintaining his “buy” rating on Frencken and raising his target price to $2.13 from $1.72, saying that key clients of Frencken in the semiconductor and medical and analytical segments, including ASML HoldingThermo Fisher Scientific and Siemens Healthineers, have continued to see an increase in orders.

Ho forecasts Frencken’s revenue to continue growing at a rate of 7.4% to 13.8% over FY2021–FY2023, translating to a three-year earnings CAGR of 15.5% on the back of positive operating leverage. In addition, he sees “bright spots” emerging in industrial automation and higher global demand for hard disk drives from 2021–2025.