Smartphone makers face chip resin shortage

A few months from now some of the newest smartphones could be in short supply as a relatively minor coating of plastic inside the handsets falls prey to disruptions caused by the Japan earthquake.

The rise of Taiwanese and South Korean technology companies has created a healthy alternative supply of certain components, but a handful of upstream parts and materials remain concentrated in the hands of very few Japanese companies.

One of these is Mitsubishi Gas Chemical, the world’s largest producer of bismaleimide-triazine (BT) resin, a material used to make substrates that connect chips used in handsets to printed circuit boards.

The company halted production at its two plants on Friday and could not say when work would resume: its Fukushima factory was damaged by the tsunami that hit Japan’s north-east coast following the earthquake.

As MGC accounts for about half of the world’s BT resin supply, the closure is likely to cause delays to handset chip production and smartphone assembly – a vivid example of the nature of Japan’s role in the global electronics manufacturing chain.

That resin is shipped from MGC’s factory to companies such as Taiwan’s Kinsus and Unimicron who use the chemical to produce a thin supporting material, known as the IC (integrated circuit) substrate.

Chip packaging firms, such as Taiwan’s ASE or SPIL, then take semiconductors supplied by chipmakers, including Taiwan Semiconductor Manufacturing (TSMC), and attach them on to the substrate, which are then attached to a printed circuit board.

That component is then incorporated into the final product – a smartphone or tablet PC – by a contract manufacturer, such as China’s Foxconn.

“If we assume that once the substrate vendors exhaust their existing 1-1½ month inventory [of BT], and if MGC is not able to ship for two to three months, then we estimate that this would impact nearly 40-50 per cent of shipments of global communication ICs for smartphones, tablet PCs, feature phones and networking devices,” says Andrew Lu, an analyst at Barclays Capital.

Two other Japanese manufacturers, Hitachi and Sumitomo, account for another 40 per cent of the global BT resin production. While both companies’ production remains unaffected by the earthquake, switching suppliers is likely to create long delays.

“No BT resin is exactly the same, so changing suppliers will force the customers to redesign the way the substrate is attached to the chip,” said Mr Lu.

The differences between MGC and Hitachi resins could mean that substituting one resin for the other, without changing the product’s design could make the substrate crack when exposed to the heat generated by the chip. Analysts estimate that such a switch could take up to two months.

Most chip design houses that sell semiconductors used in mobile devices would be affected.

“At ASE and SPIL, client exposure to the BT shortage includes Xilinx, Altera and Qualcomm,” says Redtech, an independent technology advisory firm.

Qualcomm said it was closely monitoring the supply situation for BT resin but believed that disruptions would be mitigated by the use of “buffer stock” and adjustments to “near-term material mix”.

“Switching suppliers is a real problem for new products. One that could be affected is Qualcomm’s new family of Snapdragon chipsets,” Mr Lu said. The new chip set family is designed to power next-generation mobile and gaming devices expected to be launched from early next year.

It is still unclear which devices will use the new Snapdragon chip, which was only announced in February. Previous versions of Snapdragon was used in a wide range of products ranging from Asus’s EeePC netbooks to Google’s Nexus One phone and a range of HTC smartphones.

Additional reporting by Robin Kwong in Taipei, Mitsuko Matsutani in Tokyo and Paul Taylor in New York

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