United Microelectronics Corporation (UMC), the world’s fourth largest contract chip maker, is expanding its capacity to produce mature technology chips in exchange for financial guarantees in response to the shortage gripping the global semiconductor supply chain.
UMC said it would add capacity to produce 20,000 wafers per month at 28 nm, one of the process technology hubs hardest hit by the global chip shortage, at an existing fabrication plant, or “fab,” in Tainan.
The investment will boost the company’s capital expenditures for this year by 53 percent to $2.3 billion, but it’s made under a deal that will require some of UMC’s largest customers to make prepayments and certain orders against to guarantee a fixed price.
The deal is highly unusual for contract chip makers. The flexibility to allocate capacity to orders from different customers has long been a cornerstone of their profitability.
But that model has come under fire as early automakers and now a growing number of other industries have been unable to obtain sufficient chips from foundries such as UMC and Taiwan Semiconductor Manufacturing Company (TSMC), the global market leader.
UMC said the deal was an “innovative, win-win” scheme. “This will strengthen our financial position to capitalize on the market opportunities,” Jason Wang, UMC president, told investors.
TSMC said this month it would invest $100 billion in new capacity over three years. Intel recently announced a $20 billion investment program that aims to challenge TSMC in providing contract services for making chips.
But the global chip shortage is expected to continue unabated. UMC said occupancy was 100 percent in the first quarter and would remain so for the time being. The company expects the average selling price of its chips to increase by 10 percent this year compared to 2020.
“There is an imbalance between supply and demand in mature nodes,” said Liu Chi-tung, Chief Financial Officer of UMC. “We’ve seen a lot of capacity expansions in advanced nodes, but companies haven’t addressed the mature nodes. There are a lot of critical components on those nodes.”
SK Hynix, the world’s second-largest memory chip maker, plans to advance some of its planned capital expenditures for next year to the second half of this year to meet rising chip demand.
The South Korean company said on Wednesday that demand was stronger than expected and predicted that the supply and demand imbalance will worsen in the coming quarters. It expects supply of D-Ram chips to remain tight throughout the year and forecasts a faster-than-expected recovery in demand and prices for Nand memory chips.
While the UMC deal is aimed at fighting the shortage, it is expected to take at least two years to take shape, highlighting the depth of restrictions on the semiconductor supply chain.
Although the plant intended for the capacity expansion already exists, mass production is not expected to start until the second quarter of 2023, as there is also a shortage of key tools. “We work together with our suppliers. There is a lead time for equipment,” Wang said.
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