Reported Earlier, "ON Semiconductor Looks To Bolster Supply Chain To Shield Against Rise Of Chinese Chip Makers; The Manufacturer Of Power Chips And Sensors Used In Electric Vehicles Recently Unveiled Plans For A New $2B Plant In The Czech Republic" - WSJ

Author: Benzinga Newsdesk | August 21, 2024 09:42am

https://www.wsj.com/articles/on-semiconductor-looks-to-bolster-supply-chain-to-shield-against-rise-of-chinese-chip-makers-f16fbdff?mod=latest_headlines

ON Semiconductor, the Phoenix-based maker of semiconductor components, is diversifying its supply chain in response to customers' concerns that China would promote use of its local chip suppliers.

The maker of power chips and sensors used in electric vehicles recently shared plans for a new $2 billion plant in the Czech Republic and is boosting its manufacturing capacity in South Korea, in part to improve the resilience of its supply chain.

The company's maneuver reflects the challenge to offset the potential risk of losing ground in a dependable Chinese market. It also illustrates the hurdle many chip makers face as the Chinese government pushes local automotive-parts makers to use chip suppliers based there instead of suppliers based abroad to create a self-sufficient chip industry. 

Although Chinese suppliers are the primary source of the minerals and components that power electric vehicles, becoming self reliant is expected to be particularly challenging as chip technology advances. 

Meanwhile, ON Semiconductor, best known as Onsemi, and other American chip makers are facing fast-growing global competition and political complexity. The U.S., Europe, South Korea, Japan and Taiwan have been ramping up investment in their own respective chip industries.

Onsemi is stepping up its capital spending to expand its existing manufacturing locations as part of its long-term financial plan. The company saves about 40% in capex and two years of development time when it expands a manufacturing location rather than setting up a new one, Chief Financial Officer Thad Trent said. 

All of Onsemi's customers, including Chinese manufacturers, are looking at supply-chain needs outside of China as they also want to sell outside of the country, Trent said. "The biggest threat would be China shutting off and China going to local suppliers," he said. "Obviously, we're investing and making sure we're engaged with our strategic customers outside of China." 

Grappling with building out supply chains in other countries can be vexing, as companies must search for new suppliers, vet reliable partners and become more familiar with international labor laws.

Onsemi in June said it would build a new chip-manufacturing plant in the Czech Republic for up to $2 billion to crank out silicon-carbide semiconductors, adding to its presence in the country. Three years ago, the company might have made that investment in Asia, Trent said. "If you go back a number of years, China would have been a logical spot for it," he said. 

In contrast with many of its U.S. rivals, Onsemi has leaned into silicon-carbide chips, which are more resistant and energy-efficient than standard silicon. 

"If the geopolitical situation continues to get heated, we're in a great spot to be able to support those customers," Trent said. 

Onsemi ships about 30% of its chips to China, with roughly half of that purchased by Chinese customers. The company makes about 65% of its chips in-house and outsources the rest. 

Onsemi has a particular advantage over Chinese chip makers in making silicon-carbide chips, which are a key growth driver as silicon carbide becomes more prevalent in electric vehicles and data centers. Local suppliers are "generations behind" Onsemi in this area, Trent said. 

But Onsemi's upper hand on silicon-carbide chips could fade in time, analysts said. "Longer term, we think about how they'll be able to navigate an increasingly competitive silicon-carbide market, maintain their leadership position there," said William Kerwin, equity analyst at Morningstar's equity research arm. "Fending off competition in China is one of the larger long-term threats." 

Chinese suppliers are more likely to catch up to Onsemi and European chip makers STMicroelectronics and Infineon Technologies in three to five years on silicon-carbide substrate, which is used to make a power converter in electric vehicles, than on making the so-called traction inverter itself, said John Vinh, senior research analyst at KeyBanc Capital Markets. 

"It's just a matter of time before the Chinese figure it out," Vinh said, referring to competing on performance and price. "They can manufacture a high-quality silicon-carbide substrate today, but they can't do it at high yields." 

Geopolitical challenges could deepen depending on the outcome of the U.S. presidential election in November. Onsemi is closely monitoring U.S. policy on tariffs and potential incentives around electric vehicles, Trent said. "We feel like our strategy is sound regardless of who's in the White House," he said. 

The company said it has received no funds from the Biden administration's Chips Act, which provides for $39 billion of direct grants to back expansion of a U.S. semiconductor supply chain, but is using the 2022 legislation's 25% tax credit for purchases of chip manufacturing equipment. 

"I think the U.S. has got to continue to invest in U.S. chip manufacturing, but that doesn't happen overnight," Trent said. 

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