Angelo Zino, Vice President & Senior Industry Analyst at CFRA research, discusses Russia and Ukraine's role in semiconductor manufacturing and the factors impacting the global production on chips. 

Opening Bell

Russia's Attack on Ukraine Halts Half of World's Neon Output for Chips

here to discuss is Angelo Zino Vp and senior industry analyst for C. F. R. A research and we're glad to have you back. Um can you just highlight for us how important Russia and Ukraine are to the global semiconductor supply chain and what risks do you see for neon and palladium production because of this ongoing conflict? Yeah, no, listen, you know, I didn't think I'd ever have to talk about neon gas um to be honest with you, when you kind of look at the, you know, the entire semiconductor industry here, there's no kind of key semiconductor company actually located in Ukraine or Russia, but I mean to the point that you had referenced about half of kind of the neon needed within the semiconductor industry comes from Ukraine. And you know, if you actually think about what neon gas is utilized for its kind of that step in the chip making process that actually makes the, those tiny, tiny patterns on the actual silicon wafers. So it's it's not a company like an NVIDIA um or an AMG that actually needs, you know, these type of materials, it's the actual manufacturers out there, whether it be a Taiwan semi a Samsung as well as, you know, an intel, for instance, and, you know, clearly given the situation we have at hand right now, these companies are likely kind of accelerating orders and kind of trying to hold up as much of a neon gas as they possibly can. Um you know, when you kind of think about kind of some of the other companies that utilize um you know, neon gas in terms of the manufacturing process? It's more of these trailing edge manufacturers, like a texas, instruments and NXB semiconductors and on semi, which kind of do a lot of that stuff in house. Those are the companies that may have a little bit more issue kind of getting their hands on the neon gas that they kind of need um, in terms of manufacturing the chips to kind of get out the door. So it's your context there. And even to your point about companies kind of stockpiling right now, could we see neon prices spiking kind of like they did in 2014 when Russia invaded Crimea. Yeah. No, listen, I think it all depends on how long kind of the, the attacks kind of go on here. If we all of a sudden kind of get a cease fire agreement over the next week, I think, hey, listen, um, you know, all this kind of worry about neon gas and some of these other rising prices, um, probably come back to earth and, and isn't as big of a concern as maybe it's made out to be, but kind of, you know, the longer this thing kind of continues to go on. Um, the bigger the issue, if you kind of think about those two companies that you alluded to out in Ukraine manufacturing these neon, you know, that the neon commodity, listen, it's their idled at the moment. And the other issue is once they kind of come back online, to what extent is some of that equipment damaged um, from the attacks that we're seeing today. So there's still a lot of unknowns out there, but the quicker the resolution to kind of the attacks out there, um, you know, the less we have to worry about given the uncertainty around the timeline of how long these attacks could go on. How long do you think or and anticipate that chip companies can hold out before seeing, you know, further constraint on supply. So, you know, the unfortunate thing is we actually started seeing an improving supply situation kind of before this, these attacks started. So you kind of look at, you know, the companies like an apple, you know, just, you know, when they reported back in late april, they kind of alluded to some of the improving, uh, you know, situation that was going on out there and there were others across the supply chain of course alluding to that as well. As far as kind of the neon situation here and even some of the other components out there. Um listen, I think we're, we're perfectly fine as we kind of look out here over the next 6 to 8 weeks. Um, I think it's all, it also helps that we're kind of in a seasonally slow period in terms of and demand. If this was taking place, let's call it, you know, late in the third quarter and the fourth quarter, as we kind of approach the holiday selling season, we have a much bigger issue at hand. So, um, as far as kind of, some of the stockpiles out there, I think we're okay for a couple of weeks and even potentially for the next two months or so, then it becomes a problem. I think again, the longer the strikes out, you know, from the situation in Ukraine Russia's invasion there, the impact it's having on commodity prices and certainly the impact that it could have on, you know, supply chains, you know, rippling globally. You think of the situation that now in china, right? Apple supplier Foxconn has suspended operations and factories in Shenzhen after the city announced kind of lockdowns to battle this new surgeon of covid cases there around the omicron variant. Can you just help us understand how are these lockdowns adding just another layer of complexity in manufacturing chips? Listen, I, I think, you know, every time you see a headline like this and of course kind of raises concerns amid the kind of the supply chain out there. And I think, you know, especially when we start talking about a region like china, which is so sensitive on a number of fronts. But as far as this situation is concerned, as, you know, as far as we kind of see it from the Foxconn as it relates, let's call it just solely to Apple, um, I don't actually think this is a huge issue at hand at the moment. I mean we're talking about a shutdown, let's call it at the moment in time, maybe a week, maybe even drags on a little bit longer than that. But again, I think we're very fortunate given what the time period we're talking about seasonally, Apple is kind of at its slowest point in kind of the march to june the june time frame. So we're kind of at that point now where demand definitely slowing down for them before they have to ramp up orders. Again, in terms of june july for the second half of the year, the next kind of june product launches not to mention Fox does have some other kind of plants out there where they can prioritize kind of apples orders. Um, so, you know, as far as Apple is concerned, not a big issue. But again, I mean, listen, if this evolves into some bigger issue at hand in terms of Covid, again, something definitely that we're gonna have to be mindful as of as far as the, the broader semiconductor industry is concerned. So I hear you the situation and the Covid related lockdown in china obviously at this point only expected to last about a week may not have a major impact on Apple, but I think in this broader context, right? You look at last quarter, for example, Apple said the chip shortage cost the company about $6 billion. You know, the last quarter of 2021 then this bigger picture that we're seeing here with the continued pressure on, you know, chip manufacturers and then that rippling, you know, to companies who are chip reliant, do you see profitability being hampered this year, maybe similarly to what we saw last year? Because of the continuation of last year and then new layers being added to the equation, there's definitely more layers of concern for the broader semiconductor industry in the supply chain this year. I mean, you know, clearly um you know, the volume concerns in terms of some of the disruptions that we're seeing out there, whether it be neon gas or something else um pricing side of things, definitely a concern, I mean we could potentially see higher prices again um and we will see higher prices and potentially need to get past through, starting from the foundry side of things from the likes of Taiwan semi and you know, and then these chipmakers like NVIDIA are going to have to push these these higher prices into the final customer out there. And it becomes problematic to the extent that listen as far as Ukraine and Russia is concerned, it's likely going to have negative repercussions for um you know, europe in terms of and demand and you know, the consumer outlook there via rising oil prices or any other increasing commodity prices. So if we have a weaker consumer as well in certain pockets of the world that makes it harder to pass on some of those higher prices as well. So there are a number of issues we're going to have to worry about definitely mounting kind of risks. I'm for the semiconductor industry and the broader supply chain. Given some of the issues that we see at hand right now, Angelo, I know we're going to have you on again because this chip issue is not going anywhere. Unfortunately. While many of us were hoping that, you know, so many companies to kind of get around it, you know, at some point this year looks like it is in fact going to linger. So thank you for your insight today. And again, I'm sure we'll have you back on soon. Angelo Zino VP and senior industry analyst for C f R. A Research.