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.