'China, non-China' supply chains inevitable: chipmaker Diodes CEO

Key Apple and Samsung supplier expects decade of strong growth in auto business

Lu Keh-Shew, chairman, president and CEO of U.S.-listed chipmaker Diodes, says having a secure semiconductor supply is now seen as a national security issue. (Photo by Cheng Ting-Fang)

CHENG TING-FANG, Nikkei Asia chief tech correspondentJanuary 25, 2023 12:20 JST

 

TAIPEI -- Companies must prepare for a future of "China and non-China" supply chains due to persistent tensions between Washington and Beijing, chip industry veteran Lu Keh-Shew has warned.

Lu, chairman, president and CEO of U.S.-listed chipmaker Diodes, said chip companies must also accept that commercial considerations are increasingly taking a back seat to political concerns when it comes to decisions such as where to invest.

"The whole world has recognized that a secure semiconductor supply is a national security issue, so the previous, commercial way of thinking about the chip industry and the pursuit of low costs doesn't always work," Lu told Nikkei Asia.

"If chips security equals national security, every country wants to take full control, no matter how hard it is, if they are capable of doing that," he added. "Looking forward, those key economies from the U.S. and Japan to Germany and China will only want to accelerate the move to onshore chip production."

Taiwan, which boasts the world's second-largest semiconductor industry by revenue, must also maintain its technological edge to ensure its own supply chain security, Lu said.

He described the future he sees awaiting chipmakers: "If [your] production is in China, it will be for serving China's local market, while production in non-China locations will be for the rest of the world market. ... The split may not be happening overnight, but companies need to be capable of doing that in order to operate in the new environment."

The tensions between U.S. and China that are fueling this change will not go away, he added. "The geopolitical tension between the two superpowers is here to stay, for sure."

Most of Diodes' chips, including those outsourced to contract chipmakers, are made outside of China, though the company's in-house chip assembly and test facilities are still mainly in China, the chairman said. "We have to think about alternative production bases for our own chip packaging, assembly, and testing too," he added.

Diodes is a provider of discrete, logic, analog and mixed-signal chips for Apple, Samsung and Sony, as well as many global automakers.

Taiwan-born Lu, who was educated in Taiwan and the U.S., has been in the chip industry since 1973 and held senior executive roles with Texas Instruments before becoming chairman and CEO of Diodes in 2005. The company's revenue rose from $214.8 million in 2005 to $1.8 billion in 2021.

Lu said the most important growth driver for the next decade or more will come from the electrification of automobiles, of which electric vehicles will be only one part.

He said he first noticed the increasing amount of electronic features in cars in 2013. Since then, the company's automotive business has grown from 3% of revenue to 15% in 2022, and Lu expects it to continue to expand rapidly.

"I don't see this trend slowing down. I think it will be a long-lasting trend for more than 10 years," he said. "Previously, chips and electronics for cars only accounted for a small portion of the overall semiconductor market, but looking forward, it will become a key part and none of the players can neglect this market if they want to grow their business."

"Making components for cars has higher entry barriers, and needs three key elements: quality, durability, and longevity," Lu said. "But the returns and gross margin are definitely more rewarding than providing chips for consumer electronics."

While the industry consensus is that the chip market will decline in 2023, Lu said he never manages his company according to short-term ups and downs.

"I've been through chip cycles so many times, and I know how to play the semiconductor cycle, instead of being played by the cycle," he said. "When the market and demand are not good, it is a good chance to buy equipment, and even other people's redundant facilities. And when the market starts to improve, you can add production capacity immediately, thus growing your market share."

Lu said he believes the global economy will likely to start to pick up from the April to June quarter. "The most terrible and darkest moment has passed, and we do think market demand is likely to gradually pick up in the coming months," he said.

Diodes, like others in the industry, is diversifying its production. It has manufacturing facilities in the U.K., the U.S., Germany and Taiwan, and chip packaging and testing facilities in China and Germany. It bought a chip facility from Texas Instruments in Scotland in 2019 and acquired a plant from On Semiconductor in Maine in 2022. It outsourced about 50% of its capacity to contract chipmakers such as Vanguard International Semiconductor, an affiliate of Taiwan Semiconductor Manufacturing Co., and to Powerchip Semiconductor Manufacturing.

https://asia.nikkei.com/Business/Tech/Semiconductors/China-non-China-supply-chains-inevitable-chipmaker-Diodes-CEO