Canada's 5N Plus takes on the global microchip shortage

Steven Ladurantaye
FILE - In this May 23, 2014 file photo, an employee of the Christie's auction house poses for photographs with a 1958 prototype integrated circuit mounted on glass designed by Nobel Prize Physics winner Jack Kilby at Texas Instruments, at premises of the auction house in London, Friday, May 23, 2014.  The prototype microchip, a historical contribution to the modern computing era, is estimated to fetch between $1,000,000 and $2,000,0000 at a June 19 sale in New York.  (AP Photo/Matt Dunham, File)
The global chip shortage is enough of a problem that U.S.-president Joe Biden recently signed an executive order to spend $37-billion to increase chip manufacturing capabilities in the country.

Stomach medicine, cellphone cameras, solar panels, and yellow paint aren't tightly associated with Montreal, but 5N Plus has been quietly providing the rare ingredients needed to manufacture each of them over the last decade.

Thanks to a $118-million cash-and-stock deal to acquire Germany's Azur Space, the company will be a significant supplier in the satellite industry as it gathers materials and manufactures the chips needed for satellites' construction and operation. The deal adds another 240-employees to its 600-person workforce and adds a facility that's already cranking out components used by the European Space Agency.

"Semiconductors are an essential component of most of the electric devices we use every day," said Arjang Roshan, chief executive officer of 5N Plus. "[The deal] allows us to enhance our position in the specialty semiconductor industry and enter critical markets such as high-power electronics, electric vehicles, wireless charging, and security applications."

It's part of the 21-year-old company's plan to solve some of the problems plaguing the world's semiconductor industry, struggling to keep up with demand. The thin chips – used in everything from cellphones to high-end to automobiles that run on sophisticated technology – are in short supply because of unprecedented demand. The shortage is expected to wreak economic havoc for some of the world's largest companies and raise prices for everyday electronics.

Global challenges for chip industry

Trade restrictions levied against China, and a fire at a Japanese chip-making factory, Renesas Electronics Corp., haven't helped either.

Reuters said the Renesas Electronics Corp. facility accounts for 30 per cent of the global market for microcontrollers used in cars. Meanwhile, other manufacturers saw their Texas facilities shut down as the state found itself in a deadly cold snap.

It's enough of a problem that U.S.-president Joe Biden recently signed an executive order to spend $37-billion to increase chip manufacturing capabilities in that country. U.S. semiconductor companies make up 47 per cent of global chip sales, Reuters reported, but only 12 per cent of global manufacturing is done in the country (including at 5N Plus' Utah facility).

"This is about making sure the United States can meet every challenge we faced in this new era of pandemics, but also in defense cybersecurity, climate change, and so much more," Biden said at a press conference. "The best way to do that is by protecting and sharpen[ing] America's competitive edge by investing here at home."

5N Plus's stock has increased by 48 per cent over the last year to $4.71. Five analysts follow the company, each with a "buy" rating. The company turned a $2.2-million profit in its last quarter.

Semiconductors and the global supply chain

Still, the future isn't without risk. It buys chemicals from suppliers worldwide, and international trade disputes hang heavy over any manufacturer. In its last annual report 5N Plus warned it was particularly concerned about unpredictable Chinese government regulations, and the potential of the United Kingdom's split from the European Union to disrupt manufacturing around the world.

And while it says it's one of the only companies in the world that can control production from the earliest stages to a final product, there's nothing to stop some of the world's largest companies from transforming their operations to source and produce more of their chips.

Regardless, analyst Janardan Menon of Liberum Capital Ltd. told Bloomberg News that the companies which produce chips worldwide should benefit from in the next couple of quarters.

"This is all great news for the semiconductor vendors," he said. "This kind of tightness — of capacity utilization, rising prices, very, very strong demand — invariably means that their results are very, very strong."

Some of the world's largest companies agree. Cisco chief executive officer Chuck Robbins told Yahoo Finance the supply shortages aren't going to disappear anytime soon, something 5N Plus is counting on.

"I think that it will take a couple of years simply because the demand is continuing to increase," Robbins told Yahoo Finance Live in an exclusive interview. "I think we see a few quarters of real stress in the supply chain, and we think that it will be more predictable. It may not be where we want it to be, but it will be more predictable. We just got to fight our way through it."