John Denslinger investigates why supply constraints of the tiniest components can have significant consequences for even the biggest industries.
A WSJ article published in mid-February spoke to the impact of electronic components on the automotive supply chain. What prompted me to read the piece was the title: ‘How car makers collided with a global chip shortage’. Curiosity set in. Could a massive market segment like automotive really miss the warning signals?
The warning signs were there and chief among them was scale. Automotive is a 100M vehicles per year market with EV accounting for less than three per cent of output. Despite the rapid digitalization of performance, safety and entertainment functions, automotive semiconductor consumption still pales in comparison to smartphone output which is already at a billion devices per year. 5G is just launching and likely driving mobile phone demand even higher. For chip and wafer manufacturers the reality is pecking order and priority when supplies are constrained.
Evidence suggests profit margins on high volume consumer electronics supersede that of automotive. Perhaps that is why the largest wafer fab company, TSMC’s 2020 financials indicate only three per cent of capacity is assigned to automotive. Obviously, the procurement task of securing adequate automotive capacity now shifts to wafer fab, traditionally viewed as upstream in the supply chain.
The other big factor was insufficient investment in wafer capacity, specifically 200mm. Let’s be honest, the pandemic didn’t help. Governments everywhere shutdown businesses, shuttered most services, restricted movement of goods and personnel, and flip-flopped along the way. Economic uncertainty isn’t a recipe for deep-pocket investment. Now that all market segments have bounced back strongly, demand understandably exceeds supply.
For more details and commentary on the chip shortage dilemma, I recommend the Executive Analysis prepared by ECIA’s chief analyst, Dale Ford. His February summary covers a number of additional constraints on the semiconductor shortage worth reviewing.
Small, but big impact. Semiconductors are that and more, but let’s not forget to include passive components as well. The purchasing community knows every bill-of-material has lots of resistors and capacitors. It’s the lowest purchase value but largest part count on the bill. These are often called the ‘after-thought’ components: totally necessary but not fun to source.
In the case of resistors and capacitors, the constraint is a little different than chips. Since early 2020 when Covid first hit, lead times have pushed out an additional three weeks in resistors and five to six weeks more in capacitors. While that is manageable, a prolonged demand surge is just awakening. Fortunately for customers, major passive companies in Asia planned and built new capacity with most coming on-board during 2021, but this expanded capacity was intended to serve new demand from 5G, automotive and battery electronics, IoT, cloud enterprise, and global infrastructure buildouts. If these segments take-off and demand soars as predicted, capacity will remain constrained and lead times will stay extended through much of the year.
The electronics industry is about to benefit big time from several, concurrent technology deployments in 2021. More capacity across every component area is sorely needed. Maybe the car makers’ collision with the chip shortage is the canary in the coal mine. On a macro-economic level, shortages in chip supply and persistent long lead times in passives will curtail industrial growth. That impact will ripple badly in our industry. That’s big for such a small component.