Infineon, the world’s largest supplier of semiconductors to the automotive industry, reported on Wednesday that the cost of outsourcing its production to chip foundries is set to climb steeply.

Unhappy about sinking money into fresh capacity for outdated processors, these specialized high-volume chip manufacturers want their investment costs covered in exchange for churning out more semiconductors. 

“For this fiscal year [to end of September], we have secured somewhat more foundry capacity, but it’s for sure not anywhere close to what we need,” said operations chief Jochen Hanebeck. 

As a result, the company will remain dependent on what supply the foundries decide to allocate for Infineon customers, as these chip-manufacturers-for-hire would prefer instead to use their limited capacity to assemble the most lucrative chipsets—those found in the latest smartphones. 

For now, Infineon is living from hand to mouth, prioritizing shipments to those customers where the demand is greatest. 

The majority of its job, according to marketing chief Helmut Gassel, is taking the chips they can get from the foundries and assigning them based on the greatest economic benefit to their customers: “that which is needed most at a given moment—the ‘golden screw’ so to speak, without which the rest of a product cannot be built.”

Intel foundry not an immediate option

Part of the reason for the problem is a general concern in the chip industry—Infineon included—not to chase too much demand and overinvest. The fear of building up excess capacity that in the coming years will erode profits remains part of the collective memory of Infineon from the DRAM glut during the 2000s.

Yet that solves only part of the problem. 

Infineon would ideally prefer to invest in its own production of specialized semiconductors like inverters for power electronics, a product segment where foundries are absent. Yet the bottlenecks have gotten so bad that Infineon sees no other alternative than to invest in its own capacity in Dresden to produce certain outdated microcontrollers, something it is typically loath to do for commodity chips. 

Tasking Intel’s new Foundry Services arm isn’t an option either, according to CEO Reinhard Ploss.

“It’s conceivable down the line when we need advanced automotive microprocessors for artificial intelligence, Intel might be an option—but that would be next-generation technology,” he explained.

In order to reimburse foundries such as Taiwan Semiconductor Manufacturing for their investments, the German company anticipates added costs in the hundreds of millions of euros for the new fiscal year.

To offset this added pressure on its margins, Infineon plans to pass on similar-size price hikes of its own in its long-term supply contracts, knowing the auto industry has little choice but to pay them as long as the shortage continues.

“Naturally we want to restore demand and supply to a balance as soon as possible, but it’s too early to say at this point whether that will fully be the case in 2023,” Hanebeck said. 

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