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Insight - How a global foundry is losing money in a chip boom


In the red: A 300 millimetre silicon wafer at the GlobalFoundries Inc semiconductor plant in Dresden, Germany. The New York-based company is the world’s third-largest contract chipmaker and has just filed for a Nasdaq listing. — Bloomberg

THE current state of the global semiconductor market has been alternatively labelled by auto makers, politicians and executives as a shortage, a crisis, and even a squeeze.

For the companies at the centre of it all, the only word to describe what we’re seeing is a chip boom. It’s inexplicable, then, that any company which ought to be bathing in profits could still be losing money.

Enter GlobalFoundries Inc. The New York-based company is the world’s third-largest contract chipmaker and has just filed for a Nasdaq listing.

With shares of leader Taiwan Semiconductor Manufacturing Co (TSMC) up more than doubling since the darkest days of the Covid-19 pandemic, and nearest rival United Microelectronics Corp rising almost five fold, investors ought to be clamouring over GlobalFoundries’ US$1bil (RM4.18bil) offering.

Like its rivals, GlobalFoundries manufactures chips based on the designs of clients, most of which don’t have their own factories.

Rather than land the most-advanced orders for components like smartphone processors and graphics chips, the company in 2018 reoriented its strategy toward chasing down older product types – which it euphemistically calls “feature rich” – that include parts that convert sound and images to digital signals.

Supplying older semiconductor products doesn’t attract the high prices commanded by TSMC, but they are much cheaper and easier to make. With modern cars lacking much-needed sensors, and even Apple Inc noting the impact on iPad and iPhone sales, this ought to be a golden era for GlobalFoundries.

But even with manufacturing lead times blowing out to a record 21 weeks and prices being pushed upward – clear signs that demand outstrips supply - the company still can’t manage to make a profit. Revenue fell 17% last year, a second consecutive decline, and operating loss margins deteriorated.

From a potential market of around US$54bil (RM225bil) in 2020, it captured just US$4.9bil (RM20.4bil).

Although the bulk of the pandemic-inspired chip boom and shortage has transpired through 2021, the truth remains that this company shrank last year while the foundry sector climbed 23%.

What’s of greater concern is that peaks and troughs are a natural aspect of this industry. New product categories such as PCs, notebook computers, and smartphones all drove past expansions, with declines following when that growth period ended. This time we’re seeing a super cycle spurred by faster telecommunications networks, cloud computing and streaming content, and electronically equipped cars.

That helped GlobalFoundries increase revenue 13% in the first half (TSMC grew 18%.) But even then, it still posted a US$198mil (RM827mil) loss.


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