What are the latest semiconductor trends and what do they say about our future? That’s the one trillion-dollar question. Risto Puhakka, president of VLSIresearch, helps us decipher current trends and provides us with invaluable insights on the innerworkings of the complex semiconductor industry.
KEITH SCHAUB: I'm Keith Schaub, Vice President of Strategy and Technology at Advantest and you are listening to Advantest Talks Semi. Those in the semiconductor field may have read recently that VLSIresearch, the industry's foremost provider of market research and economic analysis covering the semiconductor supply chain, was acquired by Tech Insights. A Canada based provider of advanced technology analysis and IP services. There seems to be great synergy between the two groups and we are happy to know that VLSIresearch will continue to provide the same invaluable business intelligence and insights that they have for the past 45 years. Full disclosure Advantest subscribes to VLSI incorporated research reports. To talk more about this and learn about the latest semiconductor industry trends I'm pleased to welcome Risto Puhakka to our podcast. Risto is president of VLSIresearch and leads the company's commercial operations and market research activities. Risto, welcome to Advantest Talks Semi.
RISTO PUHAKKA: Thank you Keith. It's a really big pleasure for me to be here today.
KEITH SCHAUB: Pleasure's all ours. So Risto, first what can you tell us about the acquisition of VLSIresearch by Tech Insights.
RISTO PUHAKKA: Yes, it's quite exciting news. Obviously changing the ownership and on a personal note for me it's been like letting a kid first time into candy store you know there's so many different things you can do and marvel and everything else has been really actually interest from a personal professional level. But the basics are that basically VLSIresearch continues to operate as a subsidiary of Tech Insights and more importantly all of our key people stay so all of our key analysts are staying with the company and continues as they are as well as our products. All of the products are complementary to Tech Insights as Tech Insights in the reverse engineering and IP analysis side and we are in the market statistics and economic side and really the broad issue there is that how can we emerge the reverse engineering analysis with the economic analysis and start to bring more technology type of forecasts into the picture. And that's really the big picture why this acquisition took place and we are actually all excited to really make it successful going forward.
KEITH SCHAUB: Yeah thanks for that big picture overview and think you and I talked before, I've used those tech insights breakdowns quite a bit in the past so I'm looking forward to how they can be used with convergence with VLSI. All right so then let's talk about the latest trends. We live in an increasingly connected world in which an explosive demand for semiconductors is leading to a growing addressable market and we'll see some of that market growth here in a minute. But there's this thirst for intelligence in the forms of reverse engineering data and informed analysis as you just described. And there are all these drivers such as 5G, machine learning, really smart everything including automobiles and all of that's feeding this frenzy. In Advantest July 2021 briefing, we indicated that the S. O. C. Tester market has increased from around 3 billion to 3.8 so that's an 800 million increase. And the memory test increased from 1.2 billion to 1.4. So another 200 million and aggregate about one billion. So Risto, tell us what is going on.
RISTO PUHAKKA: Really what's going on, we really have the situation where the Covid related economic impact has created a fantastic conditions for the electronics demand, semiconductor demand and then obviously or unfortunately it's been magnified also especially this year through the sorted season supply chain constraints which we've just added another layer of growth on all of this. You look at the look at the general numbers it's just from the numbers perspective we are looking into electronics growing 15 16% this year. We look at the IC’s growing 26% this year and we have also semiconductor equipment growing in about 40% range. Tests likely to see 30% growth rates. So all of that is aligned exactly what you described on Advantest numbers and really this is this is one of the fantastically great years from their top line business perspective but it's a tough year from the supply chain perspective to able to deliver everything that the customers need. So that's kind of the thing is there, if you look at a little bit going forward, like (20)22 (20)23 (20)24 time frame ourselves, we're a little bit concerned that this, the industry getting ahead of itself, we kind of see the pending exceed what the fundamentals are in a long term basis. So basically, it's basically mean, we are well above the, mean, what we would expect from the, from the average growth rate perspective that relates that, you know, our forecast scenarios, forecast racers are kind of off the charts. Then the question is how those, those will be correcting themselves going forward and right now there is also, we see the external funding started to flow into an interesting in terms of governments getting into supporting, establishing local manufacturing. So there is a lot, huge number of really positive drivers in place and then there is our own internal concerns related to managing the forecast.
KEITH SCHAUB: I think we have a similar concern how much of that speculation is due to the inventory build up. One of the things we don't have good visibility into is sort of this double buying or ordering due to the supply chain restrictions, so does VLSI account for any of those in the numbers,
RISTO PUHAKKA: We account for it and we actually do track the general inventory levels and they are not alarming and that there's a couple of things there, let's go first. Yes, total inventory number is definitely growing. There's no question about that. However, when you look at the inventory to billings ratio, it remains the inventories are actually in a reasonable level, you know, it's basically across the industry, we are below 1.5 months. Typically that's the trigger point when we start to think inventories are getting too high but then just answering again this this question, there is definitely double ordering, there is definitely triple ordering, but since there is so much supply constraints, it tends to limit that inventory growth on the other side also, the electronics is growing at a very nice rate and that's really helping on the again there is the consumption at the same time. So we have all of those things and we don't see inventories as a huge issue at this moment in time. However, if this business slows, let's say rapidly, then of course the inventories would become an issue pretty quickly, but at the current state we don't see the inventory is really, really being a hugely concerning issue.
KEITH SCHAUB: Okay, good, that's good to hear. So then let's move on to some forecast. Recently, Yoshiaki Yoshida CEO of Advantest, he was interviewed on Nikkei CNBC's asked the top and he said “I think there is no doubt that semiconductors have become part of our social infrastructure.” This got my attention, I liked that observation and I feel like this “semiconductors as social infrastructure” is one of the big key underlining factors driving a lot of the growth trends and plays into some of the long term forecast. We see of course many new applications driving the semi demand and it feels like semiconductors are becoming increasingly integrated into nearly every facet. We just need some help partitioning what that means in terms of traditional versus new and how that pertains to the long-term forecasts. Can you help us out there?
RISTO PUHAKKA: Yeah, first of all, if we really start to go and talk to the long-term forecast, I mean I want to mention this that we still have the Moore's law playing a role because the industry can lower the cost per transistor on a very predictable rate at about 20% rate per year. From that perspective, basically the computing power, the increase of computing power is becoming ongoingly more affordable, so you get more computing power and its price remains essentially the same. So, then you start to look into how this, this kind of breaks down into various areas. First of all, we see really the breath of applications and opportunities, we really haven't seen over the last 20 years. Historically we had a mobile era, there was the cell phone era, there was the smartphone era so there was one specific driver, those drivers are still strong, you know, we still see that is what I would call traditional drivers mobile data center and PC, they're very much in place
KEITH SCHAUB: So, interesting by traditional do you mean era three in the VLSI’s long-term forecast that goes out to 2030 I've seen that and I've actually utilized that slide, very useful. You have broken it into four distinct eras which is a great way to describe it, especially with this new era four “AI and convergence”. So what is meant by era four?
RISTO PUHAKKA: Okay, and that's actually one of one of our slides where we look at these different kind of eras or generations and where we go is you kind of look at this, this convergence of how the data integrates the society, so to speak. So it has the corner is of course is the AI of artificial intelligence and it requires extremely powerful chips as we know. Then we can go through CV’s, you know, they can be integrated that network, we have basically almost electrification of everything or networking of everything, you know. We kind of look at that as a really fundamental key drivers, like something like the mobile was 5, 10 years ago. So that's really one of the areas we look. Then the second thing which is really starting to emerge and we kind of start to believe that there is, there is actually a lot there in terms of silicon and semiconductors is this electrification of everything as an environmental driver and this is really moving to green energy. Green energy sourcing is really something that we start to think that there is actually quite a bit of opportunities. It may not be the classic, so powerful processor that is key on that. But there is a lot of power devices, there's let's say more simpler devices but they're going to be maybe in a higher power range and those are the are semiconductors they need equipment, they need testing, they need facts and all of that drivers and it's quite easy to start to see that long term forecasts that you know, the industry will reach one trillion in sales in 2030’s. The current forecast estimates 2031. The year is not actually important on that. The important thing is that the semiconductor sales doubles in the foreseeable future and the issue there is how we as an industry to look at that. What would the supply chain look kind of role Advantest will play in the industry, which is in $1 trillion. What is the role for TSMC? What is the role for Intel? Of course everybody has their roles and then it's how we can work together as an industry to really actually support $1 trillion dollar business.
KEITH SCHAUB: Who would have ever thought we would see one trillion and it's coming quicker than we think. Okay, so let's move on to supply chain challenges. It seems like every day we hear a new news piece that talks about supply chain challenges and it's affecting our entire ecosystem. What's the status and is it getting better anytime soon?
RISTO PUHAKKA: Let's go first. Supply chain is different parts of the supply chain and the semiconductor manufacturers have received their beating really, they're beating over the last nine months of not able to supply at the rates that the end users have asked for and there is a number of reasons we can look at those, but the fundamental issue is that the man has succeeded to supply. The industry has reacted very strongly on it and 40% growth rate for equipment cells or 30% on testers is really the reaction to it. So, with that level of growth there is actually a substantial amount of capacity going in place in all parts of semiconductor supply chain. And we actually start to believe in some of our analysis shows that this, semiconductor supply issues should start to abate on the fourth quarter, we've been saying that for a while now and we still, every time we look at we come to the same conclusion. Now, that doesn't mean that the whole supply chain is recovering and be able to deliver the way the end users like. For example, you may have situations with the module makers that they have to shut down because of Covid-19 and you have supply of semiconductors but you don't have the modules to ship to the assembled the final products. So, there is actually the whole supply chain is kind of on its way to healing but having these disruptions ongoingly that impacts on how the end users experience the marketplace. So that's kind of the first level of that. And then I always want to say that every component, every part of the supply chain is critical. So, testers are critical part of the supply chain, nothing ships unless the IC is shipped, and testers need integrated circuits and they are challenged with that integrated circuit supply as well. So it's very understandable for from that perspective. Then if you look at a little bit from the broader view the supply chain, how it's changing around. We see basically regional diversity increasing. So essentially with Singapore, Malaysia, Vietnam, as part of the supply chain, more into the module side and assemblies side increasing and then we see actually new companies started to emerge also in these locations. So again, the market so called free market reacts to these changes and pressures what's going on. And then finally we actually even see new semiconductor companies emerging in the marketplace, especially enough trailing its components and they typically come from china. So, it's quite interesting and what we believe it's healing quite quickly here from that very high demand environment.
KEITH SCHAUB: So I want to touch on or dive a little bit deeper on one of those topics. So the submodules, the subsystems what I heard is it sounds like those are going to persist a little bit longer with the shortages is that because those, that part of the supply chain is more manual where you just have more people that need to be involved and Covid prevents that from happening?
RISTO PUHAKKA: Yes Keith, that’s exactly the case. The issues have been at the original source was hey, there is no chips available at the rate that's required. Now that the chips start to be available, you start to see that hey, the bottleneck is moving to the module and subcomponent level or subsystem level in one area that is that it is more manual assembly needs more people. You have had Covid related shutdowns, you know, in various countries, then suddenly you have the supply chain disruption coming from that area. So, so that's kind of the gist of it, that it's the recovery of the supply chain kind of moves from one area to the next until it gets all the way to the to decline a customer.
KEITH SCHAUB: Okay, good. So speaking of people and potentially people shortages moving to our next topic. Do you see manufacturing returning to the US and EU. Sort of set that up the way I see it the combination of robotics and AI is potentially a manufacturing game changer. So for example, we see Boston Dynamics, robot dog spot. It's a perfect example. Elon Musk recently unveiled Tesla Bot last week, which he says is going to be available in 2022 to me that seems impossible but he's become quite famous at doing the impossible. And then of course we have Amazon that has already over 200,000 plus robots automated their warehouses and I believe just a few years ago that was only 100,000, so that I think that's doubled. I guess the question is what happens or what could happen if the robotics and AI convergence meet cost parity with these outsource tasks, especially in light of the increased security tensions and concerns.
RISTO PUHAKKA: Yeah, I mean first of all the these are actually great automation examples, they're just fantastic technologies. The interesting part is that these technologies are available to everyone, it's not that it's confined to United States or Europe or Asia exclusively. All regions have access to these technologies and then the question is how they're going to implement it. In general, there is now very clear pressure that we would start to get, let's call it onshoring. So certain manufacturing functions would be kind of coming to United States or Europe and they are driven by again supply chain diversity perspective or they are driven by countries or regions security perspective. In this case, I'm referring to United States. Governments, countries start to have incentives in place, programs in place that would economically encourage moving manufacturing to these regions, primarily United States and Europe. Now when you look at that situation, the first thing you have to kind of admit, which is basically a data point that about 85% of semiconductor manufacturing is in Asia Pacific region. And the second one is that North America, United States and Europe does have a cost disadvantage. So, then the question is, what can you do with these, these things. And of course the cost disadvantage can be alleviated with the government programs and you can move that parody in place. Other factor is that the Asia Pacific region, it's not going to give up their market share freely. They will, they are tough competitors and they will innovate as well as the United States will innovate as well as Europeans will innovate, everybody will innovate. Then it's, it's basically becomes this kind of competition of where it's manufactured and who is the best manufacturer. So, in our expectation, there has been this trend that the United States and Europe has been losing share over the decades. And the trend lines are clear and the charts are out there. Our expectation is that this trend line is, promotes, likely leveling off there, maybe one, maybe 2% gains back to the United States, but we don't really expect a huge reversal of that trend in the long term basis, but we would expect that trend would kind of level off in the long term basis. So that's kind of the manufacturing returning to US and Europe. There are great programs right now in place, you know, we know Arizona has a lot of investments going in in the phoenix area, there are others in upstate New York and other programs in place so things are definitely moving that direction. But all the Asia Pacific countries are tough competitors.
KEITH SCHAUB: Yeah, I think your comment about them not giving up the market share easily is the most poignant. Just anecdotally, there was a robotics manufacturer that went into a large manufacturer in Asia and could show that they could do it more efficient and less costly and the manufacturer basically just lowered the labor cost and so we're keeping it here so they still have plenty of margin. So Risto, I think we're about run out of time but I want to say you're invaluable insights have given us a lot to think about. One thing is clear, the semiconductor industry future is looking pretty bright, I've never seen it look this good and seeing the outlook be this long, but I'd like to once again thank you and VLSIresearch for coming on Advantest Talks Semi and would like to invite you back soon with some other more interesting updates.
RISTO PUHAKKA: It's been very nice to be here and a lot of fun, thank you Keith.
KEITH SCHAUB: Thanks Risto. To round out this episode, Hira is here with some Advantest Updates. Hira.
HIRA HASSAN: Thanks Keith. We will soon be kicking off the planning for the 2022 Advantest VOICE Developer Conference which will take place May 17-18, in Scottsdale, Arizona. As usual, the VOICE call for papers will open in October. If you would like to submit an abstract, please watch for the announcement of next year's technology tracks, process and deadlines. Details will be posted on the voice website at voice.advantest.com. You can subscribe for VOICE email updates via the website as well. Also, our listeners in Europe can catch up with Advantest at SEMICON Europa, which will take place November 16 to 19. And as always, be sure to connect with Advantest on Twitter, Facebook and Linkedin for all the news and much more. Keith, that's the latest back to you.
KEITH SCHAUB: Great, thanks Hira. Well that does it for this episode. Hope you enjoyed it and see you next time on Advantest Talks Semi.