As the artificial intelligence boom accelerates, a little-known step in chipmaking is emerging as a critical choke point: advanced packaging. Even the most cutting-edge semiconductors manufactured in the U.S. are still being shipped to Asia-primarily Taiwan-for final assembly, exposing a fragile supply chain just as demand from Nvidia Corp. (NASDAQ: NVDA), Intel Corp. (NASDAQ: INTC), and Tesla Inc. (NASDAQ: TSLA) surges.
Bottleneck Emerges In Advanced Packaging
Advanced packaging - the step that connects chips into usable systems - is tightening as demand surges and capacity remains concentrated in Asia.
John VerWey of Georgetown University's Center for Security and Emerging Technology told CNBC on Wednesday, "It can emerge as a bottleneck very quickly if people are not making the CapEx investments proactively to account for the surge in fab output that's going to be coming in the next couple of years."
At the same time, Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM) is seeing rapid demand growth. Its North America packaging solutions head, Paul Rousseau, told CNBC that volumes "are growing very substantially," with its Chip on Wafer on Substrate (CoWoS) technology expanding at an 80% compound annual growth rate.
Nvidia Locks Capacity
Nvidia has already secured most of Taiwan Semiconductor's most advanced packaging capacity, tightening supply further and forcing Taiwan Semiconductor to outsource parts of the process to firms like ASE Technology Holding Co., Ltd. and Amkor Technology Inc. (NASDAQ: AMKR).
To ease constraints, Taiwan Semiconductor is ramping up new facilities in Taiwan and Arizona. However, it still sends all chips - including those made in the U.S. - back to Taiwan for packaging.
TechSearch International's Jan Vardaman told CNBC that bringing packaging closer to U.S. fabs would be a major improvement, as it would cut shipping time and complexity.
Intel Positions Itself As A Strategic Alternative
Intel is using packaging as a strategic entry point to win customers, even as it struggles to secure major chip manufacturing clients.
The company already counts Amazon.com Inc. (NASDAQ: AMZN) and Cisco Systems, Inc. (NASDAQ: CSCO) among its packaging customers, and chip analyst Patrick Moorhead told CNBC that the broader industry dynamic: "Chip companies want to show the U.S. administration that they will do business with Intel, and the lower risk path with Intel is to do packaging."
Intel's Mark Gardner added that packaging could open doors to deeper relationships.
That strategy is already playing out, with Elon Musk tapping Intel to package chips for Tesla Inc. (NASDAQ: TSLA), SpaceX, and xAI.
Bloomberg Intelligence projects the advanced packaging market will grow eightfold to $80.5 billion by 2033, expanding at a 26% CAGR-far outpacing the broader semiconductor industry's 10% growth.
Taiwan Semiconductor could retain over 40% market share by leveraging its integrated approach to chip fabrication and packaging, as per the report.
Firms like ASE Technology and Amkor Technology are set to expand their share, with contract assemblers projected to grow from 8% in 2024 to over 15% by 2033.
Their cost-efficient solutions and global manufacturing footprint position them well as demand spreads from data centers into consumer electronics and automotive applications.
Price Action
Nvidia shares fell 0.83% to $180.57, while Tesla gained 0.19% to $343.89. Intel declined 1.76% to $57.91, and Taiwan Semiconductor Manufacturing Company slipped 0.92% to $362.53 in Thursday premarket trading, according to Benzinga Pro data.