In this article, A2 Global Electronics’ CEO, Frank Cavallaro, explains how the rollout of emerging technology will impact the global defense and aerospace chip market.
The defense and aerospace (D/A) supply chain is under unprecedented strain due to heightened geopolitical tensions, leading to increased military manufacturing globally. In 2022, global military spending hit a record $2.24 trillion, with Europe seeing the sharpest increase fueled by the Ukraine-Russia conflict. This trend continued in 2023 and is expected to persist.
The increased demand for defense infrastructure has surged the global need for semiconductors essential to the D/A ecosystem. Concurrently, the recent boom in AI and high-end cloud computing has created a ‘squeezing out’ effect in the electronics supply chain. Legacy components crucial for high-reliability industries like D/A are losing semiconductor fabrication plant space to newer, more advanced and more expensive devices.
New fabs are increasingly focused on supporting emerging technology markets requiring smaller components (<11nm node size) like AI, machine learning, cloud applications
and IoT devices. This node size category is the fastest growing in terms of supply and demand. Manufacturers are investing in new fabs and ramping up production of smaller node components, seeing the highest profit potential in the cutting-edge space. Consequently, the market for legacy products, which the D/A industry relies on, is projected to experience the highest supply shortages in the coming years.
Legacy components have become less available from manufacturers and traditional distribution networks. Some legacy parts can only be replaced by re-fabrication, while others have been phased out entirely. This poses critical challenges for industries dependent on these components.
High-reliability industries such as industrial, D/A and legacy automotive may continue to use legacy components for many years. These components often require specialized manufacturing processes no longer available, making them more expensive and harder to source. Additionally, replacing equipment or infrastructure using legacy parts is often not feasible. In the D/A sector, the military relies on systems proven effective over many years of deployment, making sourcing and manufacturing replacement parts difficult.
Demand for semiconductors in the defense and aerospace market will only grow in the coming decade, predicted to more than double between 2021 and 2031. Driving this demand are advancements in wearable devices and electronic warfare. New semiconductor technologies enable more functional wearable devices for various military applications, including real-time health monitoring and advanced communication systems. Consequently, the military is expected to increase its demand for semiconductors, specifically in the 20-64nm and ≥65nm node sizes, putting additional strain on the market.
D/A OEMs can implement three key data-driven tactics to assert a better market position and build a robust long-term plan:
Demand forecasting: Leverage qualitative and quantitative demand forecasting to understand historical trends and current market insights.
Strategic inventory purchasing planning: Combine historical purchasing data and forecasted components to respond to market needs, mitigate future disruptions and manage component lifecycle stages.
Building a supplier network: Establish relationships with both global and local suppliers to have options when shortages arise.