Chip crunch helps Malaysian packaging companies to "give priority to customers": either place orders early or pay more.

A number of Malaysian electronics companies told the media that many big-name customers are anxiously waiting to sign long-term contracts with them. Some customers even offer to pay higher funds to get priority products. These big-name customers include world-renowned automakers, smartphone giants and household equipment manufacturers.

In the past, a large part of them cancelled chip orders because of expected poor demand for products, and now they regret the shortage of the market. Now they are eager to replenish stocks cut during the pandemic, hoping to keep up with demand for products as the economy recovers and try to reduce the impact of previous sharp production cuts.

Unisem, a semiconductor packaging supplier, says the momentum is leading car and electronics makers to sign big price increases, with some even requiring factories to buy as many chips as they can "regardless of cost."

Before the new crown pandemic, the global outsourced chip assembly and testing industry was valued at about $23 billion and will grow to $30 billion by 2022, according to market research firm Yole Development.

The demand for chips is very strong.

Malaysia's chip packaging industry, which accounts for 1/10 of the valuation of more than $20 billion, has warned that years of underinvestment in basic chip production has exacerbated the shortage of basic chips because of the popularity of high-end semiconductors. this will continue for at least two years.

Wong Siew Hai, president of the Semiconductor Industry Association of Malaysia, said that in order to ensure chips, some customers have ordered more than the annual output of domestic companies, and long-term contracts of one to three years have now become a new industry norm.

John Chia, chairman of Unisem, said: "the chip shortage is real. The CEO (of our clients) want to dock with me directly, indicating that this is a serious problem. They want to talk to me directly. " Chia declined to say which customers.

Unisem provides semiconductor packaging and testing services for large companies such as Infineon and Italy and France, with about 12 per cent of its revenue coming from the automotive industry, 28 per cent from the communications industry and 30 per cent from the consumer industry. Although Unisem makes low-end chips, everything from Tesla to Toyota needs its products to make cars.

Toyota suspended production at 14 of its factories in August because its chip suppliers in Southeast Asia were hit by virus variants and blockades, the Financial Associated Press reported in September. "our customers are panicking because we are an important part of their supply chain," Chia said at the time.

Chia told the media that the demand for chips is so strong that Yuxin, a branch in Chengdu, China, is fully booked for the whole of next year. Not only that, the company also needs several months to clear the backlog of orders for some auto parts.

Novel coronavirus means reducing production.

Companies like Unisem also want to increase production at full capacity, but the company, with a market capitalization of about $1.6 billion, can only operate 80 per cent of its capacity. Unisem must reduce the risk of large-scale infection in the factory floor, as a slight carelessness may lead to a shutdown of the entire plant. Although 98 per cent of Unisem's employees have been fully vaccinated, the company has been forced to temporarily close its Ipoh plant in north-west Malaysia twice since June.

Several carmakers and semiconductor companies say Malaysia's anti-epidemic policy has hit the supply chain. Mary Barra, chairman and chief executive of GM, said, "We have been hit much harder by Malaysia's special policies than other companies."

The plant of Dongyi Electronics (Globetronics Technology), which makes optical sensors, light-emitting diodes and integrated circuits for companies such as Apple, Samsung Electronics and German carmakers, runs only 90 per cent of capacity, and costs carry upside risks.

Heng Charng Yee, vice president of business and operations of Dongyi Electronics, told the media: "We must adapt to the Malaysian government's novel coronavirus blockade policy." They will require frequent testing and limit the number of employees, which adds to the cost pressure. At the same time, we should also pay attention to the welfare of workers in order to maintain their enthusiasm and high productivity. "

Discourse right

Analysts say the shortage is also the result of underinvestment in the technology of older-generation chips. Heavyweights such as Samsung and TSMC have spent billions of dollars developing more powerful high-end chips, but these lower-end chips, which are widely used in the automotive industry, may cost less than $1.

With this demand, Unisem is pushing ahead with the expansion of its plants in Malaysia and China, which will not be operational until 12-15 months later.

"We are very cautious this time. Do you still remember the Internet age? We were beaten black and blue. " Chia added, "We are now telling them [customers] that they have to sign orders for 70 per cent of the quantity with us. Otherwise they will have to pay more money. "

"We always think of these low-end semiconductors as low-margin businesses," said Patrick Chang, chief investment officer for ASEAN equities at Principal Asset Management Bhd. Until one day, they suddenly found that they had an extra 5-10% pricing power. "