The Fragile Semiconductor Supply Chain

“We’re not talking about quarters. We’re talking about years.”

Brandon Kulik, head of Deloitte’s semiconductor industry practice Tweet

A Few (More) Words about the Semiconductor Crisis

The most extreme semiconductor supply chain crisis the world has faced began about a year ago.

The crisis results from a supply chain “perfect storm” created by trade wars, climate change causing droughts and frequent natural disasters hitting manufacturing facilities, shortages in raw materials, the vast implications of COVID-19 on production and transportation continuity, and rapidly growing demand.

There are two main reasons why this perfect storm is forecasted to last for several years. The first is the time and resources required by semiconductors manufacturing fabs to increase production capacity. The second is their reluctance to invest heavily due to the unclear nature and trajectory of the booming demand, which is suspected to be attributable to manufacturers panicking and overstuffing their inventories, just in case.

Inherent Supply Chain Weaknesses

The crisis amplifies the volatile, unexpected nature of the industry, causing frequent delivery delays and rapid changes to product costs, damaging financial performance and reputation across every vertical that relies on electronics.

Looking back at history, we can confidently assume that we can start looking ahead to the next shock in the semiconductors supply chain as soon as this crisis is over.

These crises tend to reoccur every 5-6 years for reasons that range from recessions, through natural disasters, to introducing new generations of chips technology.

As these repeated crises illustrate, the semiconductors supply chain structure is vulnerable in essence.

No single nation can self-sustain the end-to-end chip manufacturing process, with the US dominating in EDA software, fabless chip manufacturers, and production equipment, Japan in wafer production, Taiwan in wafer fabrication, and so forth.

Different nations also dominate different verticals; for instance, Europe controls automotive, South Korea controls smartphones, and the US controls desktops and servers. That results in a tight dependency on effective global trading, disconnecting the supply chain whenever one of those links is broken, or the flow of goods stops for any reason.

Semiconductors at the Core of the New Cold War

The strategic significance of semiconductors to nations’ economic, technological, and military superiority, combined with the magnitude of the current crisis, has led the US, the European Union, and China to invest tens of billions of dollars in attempts to achieve semiconductors production sovereignty.

The US has disrupted China’s efforts using export bans, denying them access to electronics design automation software and sophisticated equipment required to fabricate advanced chips. That has left Chinese manufacturing capabilities several generations behind the US, South Korea, Taiwan, and even Europe.

Those restrictions stand at the heart of the cold war between China and the US, and in that respect, the US still has the upper hand.

Some observers are even forecasting a Chinese invasion of Taiwan to take possession of the global leading foundry TSMC’s activity to bypass American export controls. The next few years might mark a turning point in the semiconductors industry as it shifts from global to local or regional value chains.

With a clear trend of reshoring or nearshoring the supply chain in almost every industry, the semiconductors industry is no different.

It would be fascinating to see the industry reshaping in its new form and intriguing to see whether the proximity of the supply network accelerates the pace of innovation or whether the reduction of international collaboration decreases it.

The Electronics Manufacturing Perspective

Semiconductors manufacturers are enjoying every bit of the demand explosion, with order pipelines long enough to last several years. However, companies in the electronics manufacturing industry are seeing large portions of that increased demand go to waste. Their problems include having no chips to mount, cost structure deterioration due to price increases, and reputational risks as the market becomes flooded by counterfeit components that are causing quality issues.

Data is the king when the entire industry fights over the same components and chip manufacturers stop product lines to free capacity for others.

The pace of changes requires companies to adopt new processes and tools to stay informed and responsive and fulfill orders faster and at a better cost.

Making the right decisions is half of the story in the current atmosphere, and moving first is just as important.

The low visibility of up-to-date market indications and decision-supporting information drives the selection of sub-optimal components during the design process, late and ineffective mitigation actions in response to emerging supply chain disruptions, and inadequate sourcing and procurement processes.

We live in the era of real-time. Data is valid the moment it is created and becomes obsolete moments later.

To flourish in this new business environment, companies must harness data to gain a competitive advantage by looking up and down their supply chain to understand their customers’ and suppliers’ needs and capabilities and be the first to act upon this information.