camila September 16, 2021

TAIPEI (BLOOMBERG) – Nan Ya Printed Circuit Board is hardly a household name in the technology industry. But the obscure Taiwanese company makes an essential component for chipmaking that has become the latest bottleneck for automakers and electronics companies suffering from semiconductor shortages.

The component goes by the unwieldy name of Ajinomoto build-up film (ABF) substrate and it is one of the least glamorous niches in the chips industry. It is part of the packaging that protects the handful of chips needed to power your computer or car and allows communication among them.

Many of the world’s most advanced semiconductors cannot run without the substrates. So, while giants like Intel and Taiwan Semiconductor Manufacturing Co spend hundreds of billions trying to alleviate chip shortages, the lack of that single component could hinder production for years. Supplies are likely to remain constrained until at least 2025 due to limited capacity, according to sources familiar with the matter.

Top executives from Intel, Nvidia and Advanced Micro Devices have all warned about shortages in recent months. Broadcom recently told customers the lead time for its main router chips is going up from 63 weeks to 70 weeks due to a lack of substrates, according to one source.

The crunch shows how vulnerable global supply chains remain to disruptions almost two years into the Covid-19 pandemic. Companies and investors have almost no visibility into where the next shock could come from.

“This crisis caught a number players off guard,” said Bain & Co partner Peter Hanbury. “As demand for personal computers, gaming cards and cloud services increased with Covid-19 and working from home, this critical component suddenly became a real bottleneck for many players such as AMD and Nvidia.”

The squeeze is turning low-profile companies like Nan Ya into stock market stars. Its shares have soared 1,219 per cent in the past three years through Wednesday, and analysts project more to come. ABF substrate makers such as Unimicron Technology, Kinsus Interconnect Technology and Ibiden have all seen their stocks climb too.

Research Institute analyst Hideki Yasuda said: “Profits at these companies are expected to keep soaring for years to come as shipment quantities skyrocket.”

Nan Ya rose as much as 3.2 per cent on Thursday, while Unimicron gained 3.9 per cent and Kinsus added 2.7 per cent.

ABF substrate is a relatively new component, pioneered by Intel in the late 1990s as it developed more powerful microprocessors. It takes its name from Ajinomoto, a Japanese company that produces the substrate’s film-like insulation. The material was first adopted as the preferred packaging technology for central processing units in personal computers and servers because it facilitates speedy computations by high-end chips.

Major semiconductors companies like Intel, AMD and Nvidia now all depend on ABF substrates to produce the most powerful chips in the world. But substrate makers have been reluctant to invest aggressively in capacity because of money-losing slumps in the past. Supply is expected to rise at a compound annual growth rate of 16 per cent through 2024, while demand is estimated to climb 18 per cent to 19 per cent, Citigroup analysts Grant Chi and Takayuki Naito forecast in early July.

President Capital Management analyst Owen Cheng wrote in a note this month that the gap between demand and supply will rise as much as 33 per cent next year compared with this year because of growth in technologies like high-performance computing and artificial intelligence. That will probably benefit the likes of Nan Ya and Unimicron.

“Nan Ya could raise its ABF substrates price by 35 per cent in 2022,” Mr Cheng wrote.

The ABF situation adds to a series of bottlenecks in the chip industry that have hampered the global recovery from Covid-19, hitting even giants like Toyota Motor and Apple. Companies around the world are struggling to produce enough to meet demand.

Some customers are taking matters into their own hands. AMD chief executive Lisa Su told analysts in April that the chipmaker would put its own money into increasing capacity at suppliers.

“On the substrate side, in particular, I think there has been under-investment in the industry,” she said. “And so we’ve taken the opportunity to invest in some substrate capacity dedicated to AMD, and that will be something that we continue to do going forward.”

Auto chip suppliers will use more ABF substrates as vehicles grow increasingly electrified and digitised. They are, however, struggling to get top priority among substrate makers because they lack the bargaining power of major semiconductor companies like Intel, sources familiar with the situation said. That could mean more direct investment in substrate producers or the entry of new ABF substrate players.

Nan Ya is stepping up investment. The company is spending at least NT$8 billion (S$387.5 million) in capital expenditure this year and even more next year. The company will boost ABF substrate production capacity 40 per cent from its 2020 level by 2023, according to company spokesman Jack Lu. Even that will not be enough for customers.

“Demand will continue to outpace supply until 2023,” Mr Lu said.

Unimicron said in July that most of the company’s ABF substrate capacity has been allocated to various customers up until 2025.

The tightness is pushing up profits throughout the industry. Nan Ya is projected to see operating profit almost triple this year as revenue rises 33 per cent, according to analyst estimates compiled by Bloomberg. Citigroup analysts Chi and Naito raised their price targets for all the major ABF substrate makers, including Unimicron, Nan Ya, Kinsus and Ibiden.

Cheng of President Capital Management recently bumped his price target for Nan Ya to NT$570. That is 27 per cent higher than its current price.