Chip shortage could impact sectors beyond the auto industry: Micron’s Manish Bhatia

Manish Bhatia, Micron executive vice president of global operations, joins Yahoo Finance to discuss chip shortage impacts, the company’s upbeat second quarter earnings and outlook.

Video transcript

BRIAN SOZZI: Micron shares have been on a tear this year, up 25% as the semiconductor shortage has pushed up prices on chips. But with the shortage likely to continue for years, some in the chip space could be sitting on a profit boom. Micron's Executive Vice President of Global Operations, Manish Bhatia joins us now. Manish, always good to speak with you here. So your earnings out last week saw good sales, good earnings, in large part because of that shortage pushing up prices for chips. What's your outlook for chip price inflation this year because of that shortage?

MANISH BHATIA: Thanks, Brian, great to be back. And you're right that the demand has really been strong across the semiconductor sector, and particularly for our DRAM business. Virtually every sector, every end market, whether it's PC, smartphones, data center, automotive, intelligent edge devices, all of those are very, very strong for us right now. And it has led to strong performance in our last financial quarter and good guidance for the future.

What we're seeing is very strong demand going through calendar year '21 and into calendar year '22. In particular for DRAM, we expect DRAM shortage to continue and only get even more short. We're very lean on inventory right now and expect to just be very tight all the way through this year and well into next year.

On the NAND flash side, we are seeing stabilization in pricing and we do expect also continued demand trends to be strong there. On the supply side, though, on the NAND side, we are still seeing across the industry still some pockets of inventory. So remains to be seen how the NAND part of our demand will play out through the rest of this year. But overall, our financial outlook is very healthy for the rest of this year and we're excited about our prospects.

BRIAN SOZZI: Manish, the shortage so far has just appeared to impact a lot of the automakers, are now taking production offline. Is the next shoe to drop here that we just won't be able to buy some consumer products in coming months because of the shortage?

MANISH BHATIA: Well, I think that what you're seeing is that the demand trends have really accelerated across multiple different sectors. And whether that's in consumer sector, whether that's in the data center, whether that's in automotive, and when you look back nine to 12 months to the very early days of the pandemic, there was a lot of uncertainty in demand. And the telecom industry, the lead time for us to be able to react to the demand with new supply, new factories and new equipment, is very, very long.

For us to build a new factory from the time we put steel in the ground until we're actually able to see output, can take multiple years. And even when we have existing cleanroom space in our factories, from the time we order equipment from our suppliers to be able to implement that on the floor and then see output from that, can take nine to 12 months. So we do expect that this shortfall will continue. And it could start to impact certain areas beyond just the automotive sector.

JULIE HYMAN: Manish, it's Julie here. I want to talk about deal making a little bit, because we have seen a lot of it in semiconductors driven by some of these trends that we've been talking about. And there has been reporting that you guys were in talks possibly to acquire the Japanese semiconductor maker Kioxia, excuse me if I'm not saying that correctly. I don't know if you can comment on the deal for us. If you can, that would be great. And if not, if you can talk to us more broadly about how you guys are thinking about acquiring more capacity. If it's not that company, just in general.

MANISH BHATIA: So I'm not going to comment on industry rumor and speculation. But what we are focused on, is our industry-leading position in NAND flash technology. Last fall we introduced the world's most advanced NAND flash technology, our 176 layer 3D NAND. And it's ramping now in our fabs and yielding well and being qualified across multiple different product lines for us in smartphones, and in solid state drives, for computing applications, and being qualified by multiple different customers.

And what we're focused on right now is being able to bring the benefits of that technology in terms of high performance and reliability to all of our customers. And we're excited about what that industry-leading technology is going to afford us and strengthen the fundamentals of our NAND flash business.

MYLES UDLAND: Manish, there's a lot of industry-specific things that have been stressing, whether it's supply or ramping up the demand side of your business, but globally as you see it, what is the state of the supply chain as we get through COVID stress? I mean, if we had had this conversation a week ago, all we would be talking about as the ship that's stuck in the Suez Canal. I think everybody had a lot of fun with that. But also realize that supply chains right now are really operating at probably more than 100% capacity as we try to get things back online. How does that look kind of from your vantage point?

MANISH BHATIA: So COVID and the pandemic about a year ago, really started all of us in the operations space to have to be thinking proactively about our supply chains. And at Micron what we started doing a year ago, was building supply chain resiliency in a diversified, across a diversified manufacturing network. And being able to build the same products in different locations, so whatever happened with the pandemic, we were able to have business continuity for our customers.

And then in terms of the materials and other supplies that we need to keep our factories running, we increased, we diversified our sourcing and we increased our ability to monitor our suppliers and their suppliers, and also enhanced our logistics redundancy to be able to make sure that whatever changes there might be in the logistics base, we were able to maintain continuity of materials to our factories to keep them running. And so far, throughout the last year, we've done an excellent job of being able to keep all of our factories around the world at full production levels and maintain that continuity to our customers.

And I think broadly for the industry, what the recent disruptions just highlight how important it is to have that resiliency, to have, to be able to think proactively about what might happen and have inventories in place and have multiple suppliers qualified so that you can maintain continuity. And then to have advanced analytics to be able to monitor for those supply chain disruptions and react quickly. And I think that's what all supply chain professionals are aiming to do today.

BRIAN SOZZI: Manish, we've talked to you consistently throughout the year plus of the pandemic, but this year is shaping up to be different year over year for so many different reasons. What's your biggest challenge over the next six to 12 months?

MANISH BHATIA: So we're, as I mentioned, our inventories are very lean, and we are working hard to try and maximize our opportunity. We are ramping two industry-leading technologies right now. I mentioned our 176 layer NAND, which we introduced last fall. And then towards the end of last year, we introduced 1-alpha DRAM, which is also the industry's most cost effective architecture, industry-leading architecture. That's also ramping in production today and being qualified by our customers.

So we're very focused on qualifying goes two advanced technologies, being able to manage our manufacturing sites and our supply chain to be able to meet our strong customer demand, and then be able to continue healthy profitability throughout the rest of the year.

BRIAN SOZZI: Before we let you go, Manish, I think you did, Micro did catch some analysts by surprise coming off the earnings call with your Capex outlook. So $9 billion Capex guidance for 2021. That suggests a 40% decline in Capex in the second half of the year versus what you spent in the first half of the year, which was about $5.8 billion. If we are seeing that shortage and we are, why not ramp up Capex?

MANISH BHATIA: Well, our Capex at $9 billion is record level for the company for fiscal year, for our fiscal year '21. And the timing of the Capex is really dependent on the timing of the investments we make. When we invest in new cleanroom space, obviously, those investments can be well ahead of when we equip the factories. And then the investments for the equipment themselves come in gradually as we are able to get the supply of that equipment from our vendors and be able to install that equipment and make it productive.

So I know I would look at is the total year $9 billion Capex number is a record level for the company. And it reflects our outlook for the long-term demand trends of both DRAM and NAND that we think are healthy. And we're going to continue to grow our bit supply for both DRAM and NAND in line with the industry demand that we see. And we think that that's the best way to optimize the return on investment for those large capital investments.

BRIAN SOZZI: Micron Executive Vice President of Global Operations, Manish Bhatia, always good to see you. Stay safe.