Understanding the semiconductor shortage
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
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 shortagesThe 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 contractsIn 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 changesWhile 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 sourcingWhile 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 levelsManaging 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 communicationCompanies 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 nextTo 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.
AMERICASThe 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.
EMEAMuch 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.