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Understanding the semiconductor shortage

The story of the semiconductor shortage starts as many have over the last 3 years; with challenges brought on by COVID-19. When demand in automotive plummeted in the first half of 2020, semiconductor orders came to an abrupt stop. Due to the short-notice nature of contracts, semiconductor companies in turn stopped production. In short: no demand, no manufacturing.

Then came the flip. The second half of the year saw a spike in demand that went far beyond the needs of the automotive industry alone. With the increase in remote work, electronics were in high demand to set up new working conditions.
The semiconductor industry was not prepared for the sudden rise, and, because of the pause in production, was now facing a shortage, and ultimately a crisis. 

Here's why. Historically, semiconductors operated with the just-in-time production mentality to minimize waste and increase efficiency. But as the industry quickly learned, this was fickle and not a long-term and sustainable operating solution. As stock dropped, companies around the world started stockpiling to ensure they would have access to the semiconductors they needed, elevating the intensity of the shortage.

The challenges in semiconductor production today

Looking at profits, the last three years were profitable for the semiconductor manufacturing business. Annual revenue increased by 9 percent in 2020 and 23 percent in 2021, reaching a total of $556 billion in sales in 2021, an increase of 26.2 percent year-over-year. Despite this, the global semiconductor market is forecasted to shrink by 4 percent in 2023 for the first time since 2019, projecting $557 billion – just barely exceeding 2021 results.

Over the last 20 years, the production increase (of nearly 180 percent) has resulted in total burnout and exhaustion in the industry. Prior to the shortage, semiconductor production utilisation was already above 90%, far higher than is optimal and making little to no room for new capacity. And to make matters worse, there is a talent shortage for the specialist jobs needed to make the chips.

Currently, semiconductor companies are struggling to meet the increased complexity of the design. As a result, many companies are looking to bring the design in-house to avoid further challenges but create new dynamics in the way the market operates. Altogether, these factors are creating a seemingly perfect storm, making it increasingly difficult to meet demand today.

5 strategies for combating the semiconductor shortages

The electronics value chain is complex. It is made up of, starts with, and heavily relies on the semiconductor value chain. Several players take part in the process, everything from procurement and design to back-end manufacturing. This adds a layer of risk. If one partner faces a delay, a massive kink is created in the chain, sending everything to an immediate halt in the production of electronics.

While there may be a slow period of relief, with consumer electronics shipments decreasing by up to 30%, the slow in demand is not expected to last. The industry needs more resilience in its semiconductor inventory management to be able to withstand the turbulence ahead. To overcome this, the industry should secure long-term contracts, prioritize regionalisation, maintain higher stock levels, be cautious with drastic changes, and increase communication.
Secure long-term contracts
In the automotive industry, semiconductor contracts, historically, are short, providing only a few weeks' notice of orders. As mentioned earlier, this creates a fragility in production; when demand drops, production drops.

Since the crisis, semiconductor producers have been prioritising long-term contracts to create a more stable demand that is much easier to forecast. Making this shift in the contract approach could be in the difference in securing the semiconductors needed for production.
Avoid drastic supply chain changes
While the shortage is creating frustrations for companies around the world, the answer is not to make drastic changes. This could set things back even further and will only create new challenges.

Currently, the average lead time for semiconductor production is about 4 months. Making a manufacturer switch could take more than a year due to the lead times, product complexity, and design. And in an industry that requires unique specifications, requirements, and licensing, a year is likely a conservative estimate. In this case, being patient through the wait times could be the quicker option.
Prioritise regional sourcing
While globalization has opened new doors for production in so many ways over the last decade, recent supply chain disruptions have proved many vulnerabilities in the efficiency of this approach. Regional semiconductor production and material sourcing will alleviate many of the challenges the industry is facing, resulting in an increase of availability, a decrease in delays, and a more agile market.

This is not only a more feasible long-term solution, but it also supports the chemical industry's move towards sustainability. But this will not be easy. The journey to make this switch completely will take time, especially considering the time it will take for new production sites to be fully up and running.
Higher stock levels
Managing stock levels is a balancing act; one doesn’t want too much or too little of any product on hand. Traditionally, with semiconductors, the automotive market has operated by the just-in-time methodology. But the last years have proved that this is not a feasible long-term strategy.

Moving away from just-in-time practices and having higher stocks could help combat fluctuations in product availability and navigate a more and more complex supply chain.
Increased communication
Companies around the globe are establishing dedicated war rooms to open the doors of communication and support navigating the trials and tribulations of the semiconductor shortage. This not only allows teams to closely monitor the fluctuations in supply and demand, but they can use this insight as intelligence for future business decisions. Additionally, the increased communication creates the transparency needed to more clearly navigate the turbulent times the semiconductor industry is facing.

What we can expect next

To avoid the risks posed by geopolitical issues and build a more resilient market that is not as susceptible to supply chain chaos, countries around the world are looking to expand semiconductor manufacturing. But will it be enough? Let’s explore.

Today, Taiwan accounts for more than 60 percent of the world’s global foundry revenue. TSMC, the world’s largest semiconductor manufacturer, will soon invest $44 billion in new manufacturing facilities in Taiwan to increase their production capacities. Although this investment seems substantial, it will only represent about 1 percent of their global capacity.

Currently, experts are forecasting a 7.5 percent decline in APAC in 2023. And while TCMS, and other companies in Asia, are considering expanding their plant operations into other regions, the shortage will continue to be a challenge in the region as the need for chips rises to meet the demands of 5G, automotive and industrial applications.

The US Chips Act was signed in the summer of 2022, allocating $52 million toward strengthening the domestic manufacturing, design and research of semiconductors. Although this appears to be a huge win for the U.S. and for the region, there are some challenges with the legislation that give pause to quickly applauding its venture.

Out of the $39 billion in subsidies for semiconductor manufacturing, just $2 billion (or 5 percent) has been secured for legacy chip production. Because of this, delays are expected, and it is not believed that the act will alleviate shortages in the automotive and industrial markets before 2025, extending the challenges of today’s crisis for at least 2 more years.
Much like the U.S. Chips Act, the European Chips Act seems to be falling short of what the industry needs. Currently, it does not have the appropriate funding to grow semiconductor production at the rate required to meet the demand of the market in the region.

With the goal to be 30 percent of the global market share by 2030, starting from 9 percent today, the region needs to invest in production facilities, increase capacity, find and train talent, and navigate complex sustainability regulations in the region. Without an immediate shift, the region will face the same challenges they, and the other regions, do today; limited supply and long lead times for far longer than they hope.

Expert Q&A

Across the globe, efforts are being made to mitigate the shortage, but are falling short of the immediate needs. Despite this, our expert, Sophie Pozzi, Product & Market Manager for IMCD Industrial Solutions, remains optimistic about the future.
What are the primary materials your customers are searching for?
Most of the time, my customers are searching for silicon, germanium, gallium arsenide, or silicon carbide. Of course, they also need resins and adhesives, and last year's supply chain challenges and product shortages have not made getting these products easy. Additionally, it has been difficult for us to maintain the right level of stock for our customers because their customers don’t have the forecasts needed to predict the need.
What should be the priority for the industry today to overcome its many challenges?
The priority needs to be in regional sourcing. This is highly discussed today, and countries around the world are working towards building the right production facilities for this to happen. But we still have a journey ahead of us to be in the right position to heavily rely on regional product sourcing.
Sophie Pozzi

Product & Market Manager,
Material Technologies
Industrial Solutions
That said, I’ve already started to see success in this approach. By relying on regional sources, not only were we able to avoid many of the supply chain challenges we face normally with this customer, but we also were able to avoid product shortages that were more prominent overseas.
What industry are you watching to be the next for a high demand of chips?
Today, the automotive industry accounts for about 40 percent of the semiconductor market demand. But with the advancing technology, we will soon experience a massive need for chips in other industries as well. In my opinion, the 5G rollout will create a major disruption, because it will require massive amounts of small chips that will all need to be created at one time for a successful rollout. If the 5G industry can get them, this will create a scarcity of chips and put a strain on other industries that rely on them as well.
How do you work through these challenging times with your customers?
It is well known and must be acknowledged here that the last years of electronics production have been very difficult. We have relied on our ability to communicate openly and transparently about the market and the challenges we face so that our customers do not face them alone. As a distributor, we are uniquely positioned between both sides of the production chain and able to be the trusted advisors that our customers need to navigate today’s storms.

success story

Uncover how our customer used regional sourcing to meet their unique specifications