allocation

Allocation is the process of **distributing limited semiconductor supply among customers** when demand exceeds available capacity. It's the rationing mechanism foundries and distributors use during shortages. **How Allocation Works** When a foundry or chip supplier cannot fulfill all customer orders, they allocate available supply based on **contractual commitments**, **customer priority** (strategic accounts get more), **historical purchase volumes** (you get a share proportional to past buying), and **payment terms** (customers willing to pay premiums may get priority). **Allocation Methods** • **Pro-rata**: Each customer receives a percentage of their order proportional to available supply (e.g., 70% of orders filled for all customers) • **Priority-based**: Strategic customers and long-term agreement (LTA) holders get filled first. Remaining supply distributed to others • **Contractual**: Customers with take-or-pay agreements or capacity reservation fees get guaranteed allocation **The Allocation Game** During shortages, customers tend to **over-order** (double or triple booking) to secure more allocation, knowing they'll only receive a fraction. This **inflates apparent demand**, making the shortage look worse than it actually is. When supply catches up, these phantom orders evaporate, leading to an **inventory correction** and potential oversupply. **Foundry Allocation Strategies** **TSMC** uses a combination of long-term agreements, capacity reservation deposits, and strategic customer priority. During the 2021-2022 shortage, TSMC required customers to commit to **multi-year wafer purchase agreements** and pay **capacity deposits** to secure future allocation. This shift gave TSMC more demand visibility and revenue predictability. **Post-Shortage** When supply normalizes, allocation ends, lead times shorten, and any excess inventory accumulated during the shortage is worked down—often triggering an **inventory correction cycle**.