Long-term supply agreements are nothing new in the semiconductor industry. Both fabless chip designers and contract makers of chips prefer stable supply and demand, respectively. But in a world with severely constrained supply, chip developers are willing to pay for their integrated circuits well in advance, which is a boon for foundries.
Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest foundry, disclosed in a filing that it received temporary receipts of around $3.825 billion (NT$106,33 billion) from customers as of September 30, 2021. Temporary receipts from TSMC's customers are payments received to retain its capacity. To put the number into context, TSMC earned some $14.926 billion (NT$414.67 billion) in Q3 2021, so $3.825 billion is a sizeable sum for the company.
These advance payments are made under agreements with specific terms and conditions. As a result, TSMC does not immediately recognize these payments as revenue, whereas its clientele does not recognize them as current inventory. Meanwhile, "when the terms and conditions set forth in the agreements are subsequently satisfied, the treatment of temporary receipts will be determined by mutual consent."
TSMC did not disclose its customers willing to pay in advance, but big companies like AMD and Nvidia are likely suspects.
"We have placed non-cancellable inventory orders for certain products in advance of our normal lead times, paid premiums and provided deposits to secure normal and incremental future supply and capacity and may need to continue to do so in the future," a statement by Nvidia reads.
As of August 1, 2021, Nvidia had $195 million in prepaid expenses, up from $142 million on January 31, 2021. Nvidia does not disclose whether it made advance payments to TSMC or Samsung Foundry, but all contract makers of semiconductors are likely accepting such payments these days.
AMD also made substantial prepayments in its long-term supply agreements. As of September 25, 2021, its prepayments totaled $355 million, up from $299 million a year before. AMD has supply agreements with TSMC and GlobalFoundries.
Qualcomm does not disclose how much it pays for chips in advance. Yet, the company recently confirmed that it "entered into several" and expected "to enter into additional, multi-year capacity purchase commitments with certain suppliers of our [ICs]" in a bid to "secure commitments for future supply."
Without a doubt, the semiconductor industry is now in a very challenging position, with chip designers desperate to pay in advance for capacity. Likewise, foundries are willing to pay in advance for manufacturing tools. In this situation, it is not surprising why chips are getting more expensive.