In response to the global chip shortage, Tesla or prepaid funds to lock the production capacity of the foundry

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Beijing time on the morning of May 27th, according to people familiar with the matter, Tesla is about to take measures to deal with the global shortage of chip supply, including prepaying funds to ensure chip supply and considering the acquisition of a chip factory.

Sources from semiconductor industry suppliers, chipmakers and consulting firms said Tesla is discussing options with industry companies in Taiwan, South Korea and the United States to secure chip supplies. Talks about Tesla’s outright acquisition of a chip factory are in the early stages, they said. And given the high cost of acquisitions, such acquisitions are not easy. Currently, Tesla needs the latest generation of mass-produced chips, which are mostly made in Taiwan and South Korea.

Industries ranging from automotive to telecom equipment manufacturing are looking for new ways to address the global chip shortage. The current crisis has forced several automakers to shut down or close factories. Rating agency Fitch said the issues are expected to cost the industry 5% of sales.

Some chip foundries have supported large customers to make deposits to lock in the price of certain orders. For chip foundries, this practice used to be very rare. Flexible allocation of capacity for orders from different customers has long been one of the foundations of their business model.

Last year, Tesla announced that it would produce its own battery cells. It also shows that the company is interested in expanding its business into auto parts. Tesla has built an internal engineering team to design high-end chips for autonomous driving.

“They will initially buy capacity, but they are also actively considering acquiring chip foundries,” said Ambrose Conroy, CEO of Seraph Consulting, a Tesla supply chain consultancy.

But most observers believe that buying and running a chip factory may be going too far for an automaker like Tesla. “If they see the price of the factory, they will go back and line up,” said Velu Sinha, a Shanghai-based partner at Bain. A state-of-the-art laboratory requires up to $20 billion in investment while the factories operate Also very complicated.

Samsung Electronics is making chips for Tesla. As customers seek increasingly specialized, customized chips, contract arrangements have had to adjust, a company executive said. Nomura analyst CW Chung said: “Considering the current shortage of production capacity, Samsung may allocate dedicated production capacity to customers like Tesla, whose chips have a longer life cycle.”

Tesla did not respond to this request. Sources close to Samsung said the company has already made some production lines available to dedicated customers and is open to further discussions.

Other automakers have also started signing contracts directly with chip foundries. The auto group “will do more direct deals with chip foundries,” said a source who advises a European automaker on its supply chain. “That means they have to invest in in-house expertise, as well as enter into dedicated purchasing agreements.”

Such changes are not only affecting the auto industry. Cisco also said it had prepaid funds to lock in the capacity of a chip foundry in advance. Last month, six chip design companies reached an agreement with UMC to prepay funds to ensure the world’s fourth-largest chip foundry could expand production capacity for mature technologies for them.

Such an arrangement is completely different from the traditional business model of the industry. “Once you lock in a certain amount of capacity for a customer, flexibility doesn’t exist,” said a chip industry executive familiar with such operations.

At present, TSMC, the world’s largest chip foundry, has a gross profit margin of more than 50%. The company’s profitability depends on its ability to balance capacity among its many customers. TSMC has long refused to provide dedicated capacity to any customer. But TSMC made an exception in 2014 to control risks after U.S. chip designer Qualcomm frequently transferred orders to rival Samsung.

With TSMC’s strong bargaining power and “little interest in special purchase agreements,” U.S. automakers are expected to collaborate more with smaller contract manufacturers such as UMC or Powerchip, a U.S. official said.

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