“Keeping chips in stock on the shelves, that just isn’t possible,” explains Jean Schreurs of NXP.
But why not?
Reports are emerging almost daily about the massive chip shortage the world is plagued by. Companies, including various automobile manufacturers, can no longer supply vehicles because they no longer have the right chips. Even at NXP, the largest chip manufacturer in the Netherlands with a factory in Nijmegen, the demand for chips is exceeding the actual production capacity.
And so consumers have to wait for a large number of products, including cars, phones, computers, and medical devices. After all, without chips, they will not work. When the malaise in the automotive sector hit last year during the corona pandemic, the demand for chips for the automotive industry evaporated. For NXP, that resulted in a poor second quarter and a US$209 million loss in 2020.
Recovery came quickly
From customers outside the automotive sector, such as buyers of chips for telephones and computers, demand actually grew substantially as a result of the corona crisis. The automotive sector also began to recover in the second half of last year. Schreurs: “But at that time we did not have enough capacity available to be able to meet that demand either.”
Made to order
Was this not a miscalculation and would NXP not have been better off just continuing to manufacture chips because the demand for cars would eventually recover? “Impossible,” says Schreurs. “You could possibly do that with a standard product. But we make specific chips for each customer, in total up to 100,000 different types of chips. Which means you can’t just manufacture those and keep them in stock on the shelves in the hope that they will be bought. We only make chips to order.”
Scaling up manufacturing
Meanwhile, NXP is trying to scale up its manufacturing where possible. But whatever is ordered today will not roll out of the machine tomorrow. In Nijmegen, NXP produces some 15 billion chips a year, which are then shipped to Asia to finish off the production process. NXP also has its own factories in America and Singapore. Making a chip is a complicated process that can take from 4 to sometimes 9 months. As there are waiting times (even at the suppliers to NXP), it can sometimes take more than a year before chips are delivered after an order has been placed. And that means that consumers have to wait a little longer for their cars or phones to arrive.
NXP is experiencing a substantial rebound this year. In the second quarter, NXP’s sales increased 43 percent to US$2.6 billion compared to the same period last year. A net profit of US$406 million was also booked. NXP manufactures about half of its chips in its own factories. The company buys the remaining chips from other manufacturers. Nevertheless, it is still not enough to meet the huge demand.
A new factory?
Setting up a new factory is not what NXP is aspiring to do. That would take too long and be far too expensive. Schreurs: “We are mainly looking to increase productivity within our factories and to purchase chips from other parties. And we are succeeding, but this also takes time.” Over 2,000 people work for NXP in the Netherlands. This figure has been fairly stable in recent years. Approximately 29,000 people work for NXP worldwide. This number has not changed much in the past few years either. A higher demand for chips does not directly translate into a growth in the number of employees. Chip manufacture is highly automated.
NXP is also trying to anticipate future customer demand as best as it can. “We ask them: ‘What kind of chips do you think you will need in two or three years’ time?’ Then we can adapt our production accordingly,” says Schreurs.
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