Forward-looking strategies mitigate semiconductor crisis

PreScouter’s technical director, Sofiane Boukhalfa and researcher Hakan Basargan, highlight supply chain issues and offer strategies for mitigating the challenges

Increased demand from IoT devices, chipsets for electric vehicles and smartphones, among others, led to an all-time semiconductor sales record in 2021. Still, companies are hampered by issues with raw materials provisioning and supply chain bottlenecks, exacerbated by the pandemic. These problems include: localization issues between manufacturers, their suppliers and customers; increased demand for specific products coming from customers in high-growth industries; and manufacturing challenges driven by the pandemic. 

PreScouter’s researcher, Hakan Basargan

Major growth drivers 

Semiconductor use has increased radically in recent years because of demand for advanced memory chips that process data faster. The main reason for this rise in demand for advanced memory chips is the proliferation of wireless IoT-connected devices. According to Fortune Business Insights, the semiconductor market is expected to grow from $452.25b in 2021 to $803.15b in 2028 at a CAGR of 8.6 per cent.  

In addition to the explosion of IoT-connected devices, chipmakers are also driving semiconductor market growth, with Samsung Electronics representing almost 50 per cent of the market revenue. Taiwan’s TSMC is the top producer of chips up to 10nm, while Intel dominates in the manufacture of laptop and desktop CPUs. Top US chip designers include AMD, Qualcomm, Broadcom and Nvidia, though the majority of the world’s wafers are manufactured in Asia. 

The Semiconductor Industry Association reports that between 1996 and 2021, revenue increased from $12b to $50b and sales of global semiconductors increased by 23.5 per cent from November 2020 to November 2021, powered by demand for next-gen DRAM in the smartphone market along with the growing selection of SiC chipsets for automotive applications such as electric and hybrid vehicles. 

Pinpointing semiconductor manufacturing challenges 

In late 2019 and early 2020, logistical challenges and supply issues with raw materials began straining the complex supply chain dynamics. The global semiconductor shortage was further exacerbated by the pandemic, radically affecting the automotive, consumer electronics and similar industries. The automotive industry has been particularly hard hit. Many automakers cut output and reduced or canceled orders for parts, including large quantities of computer chips, at the start of the lockdowns because of the effects of supply chain issues on semiconductor production. The sharp drop in passenger vehicle sales amid the crisis resulted in a fall from 2019 to 2020 of six, 15 and 24 per cent in China, the United States and the European Union, respectively. 

The ongoing pandemic has brought unique challenges for chip manufacturers, with supply chain problems disrupting every aspect of production from resource procurement to delivery schedules. Also, the market became more competitive, leading producers to alter their manufacturing strategies. Additionally, there have been internal problems such as shortages of workers due to illness and quarantine procedures and hampered production capacity due to hygiene processes. 

PreScouter’s technical Director, Sofiane Boukhalfa

Strategies for building resilience 

In the short term, costs of supplies from certain areas are likely to continue rising due to overtime and expedited freight charges, plus premiums paid to purchase supplies and maintain capacity. 

Thus, alternative sourcing tactics are being considered by businesses. Identifying alternate supply scenarios and evaluating what they represent for operations will be crucial moving forward. 

Other precautions to help supply chain flexibility include transporting available inventory to locations outside quarantine zones and securing Tier 2 and Tier 3 supplier capacity and delivery status. Companies may also consider: purchasing raw materials that will be in limited supply in affected areas in advance; securing future air transportation to avoid delays with ocean freight or road transportation; informing customers about delays; and offering a discount on available inventory. 

Companies can begin to address the more significant consequences to their supply networks as manufacturing facilities in affected countries gradually reopen and knowledge gaps close. This will involve such measures as analyzing the pandemic’s potential impacts on supply chain and market performance, undertaking risk assessments on key business functions and conducting scenario planning exercises to better understand the repercussions of various actions. 

Finally, capacity for production needs to be increased radically to meet demand—a step that companies started in 2020.