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Taiwan chip company warns of rebound from rush to expand capacity

Chang Wah chairman also predicts separate supply chains for China and US

Canon Huang, chairman and CEO of Chang Wah Electromaterials and Chang Wah Technology, says tech companies must expand production capacity prudently. (Photo courtesy of Chang Wah)

TAIPEI -- Tech suppliers rushing to expand production amid an unprecedented global chip shortage risk being stung once supply catches up with demand, according to the chairman of one of Taiwan's leading chip material makers.

Canon Huang, chairman and CEO of Chang Wah Electromaterials and Chang Wah Technology, told Nikkei Asia that a market correction is inevitable given how many chipmakers are ramping up output to tackle supply shortages that have hit a swath of industries from cars to consumer electronics. Intel and TSMC -- the world's two leading chipmakers -- have announced aggressive expansion plans, while smaller chipmakers such as Nanya Tech and United Microelectronics plan to build more plants as well.

"It could be dangerous if you do not expand capacity like your peers, because you would lose market share and growth opportunities," Huang said. "But it could also be a concern if you expand capacity, as there will surely be a correction at some point in the future."

A good company, he said, "has to have risk-management plans to fully prepare for any recession or correction ahead to avoid getting hurt badly."

Three chip industry executives called Huang during his interview with Nikkei Asia. All of them, he said, were asking for more lead frame supplies, even if it meant paying a higher price. Lead frames are a type of metal carrier used in chip packaging, the crucial final step in the chipmaking process. Chang Wah Technology, the key Chang Wah Group affiliate, is the world's No. 2 maker of leadframes and supplies such chipmakers as Texas Instruments, Infineon and NXP, as well as virtually all providers of chip packaging and testing services, including ASE Technology Holding and Powertech, according to analysts and industry sources.

While customers are clamoring for more supplies, however, Huang said his company must weigh each request carefully.

"We really can't commit allocation too early, and if we agree to give to one customer more, I may need to give another customer less," Huang said. "It's very interesting -- in normal times, it's cheaper per unit when you buy more, but during a shortage, it's more expensive if you want to buy more."

Whether a client company has a fair and professional procurement team has also become more important amid the chip shortage, the industry veteran said. "If you used to abuse the power of being a big customer and always force your suppliers to slash prices, you may suffer more during a shortage. You could receive less support from suppliers and it may be hard to secure all you need as everyone is rushing to have more."

The shortage is not limited to one part of the supply chain, Huang added, saying it extends from chip manufacturing and packaging to basic materials, including molding compound -- a kind of protective material used in chip packaging and high-end copper and copper alloy.

The component shortage has also hit makers of chipmaking tools, creating a vicious circle that makes the underlying shortage harder to resolve, as Nikkei first reported.

Huang also talked about geopolitical tensions, and said the tech industry must adapt to a world with two supply chains -- one that serves the U.S. and another serving China.

"It's very obvious that the world ahead will be divided into two segments as the geopolitical tension is not going away anytime soon," Huang said. "It's challenging for suppliers to choose sides, but all of us have to pay attention to geopolitical risks and formulate plans that could serve both worlds, rather than betting on who will win and who will lose."

The U.S. is stepping up efforts to boost local production of chips, which are needed not only for consumer electronics but also for supercomputers and fighter jets. China, meanwhile, is continuing to support its domestic semiconductor sector because the government views chips as being directly linked to national security.

Huang said his company will continue expanding in China, including by setting up a joint venture with companies there, and also increase its investments in Taiwan and Malaysia to serve non-Chinese clients. The company is building a $100 million plant in the southern Taiwanese city of Kaohsiung that is set to start production late next year. It is also considering adding capacity in Malaysia.

Chang Wah, based in the southern Taiwanese city of Kaohsiung, saw its revenue rise 6.2% from a year ago to 16.42 billion New Taiwan dollars ($590 million) for 2020. In the first five months of 2021, Chang Wah generated 18% more revenue than a year ago. The Taiwanese company is also a key distributor of molding compounds for Sumitomo Bakelite, the leading global maker of the critical chip packing material.

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