Microchip industry and the international shortage:A challenge to global supply chains

The pandemic has aggravated the shortage of semiconductor equipment. Manufacturers are working to address the issue, but the situation won't be resolved soon. Despite the challenges, the industry is still profitable.

Supply and Demand during the Shortage:

Aside from the usual issues related to the semiconductor industry, such as the lack of capacity at the facilities where the products are made, the outbreak of COVID-19 also brought new challenges. For instance, during the early 2020s, the automobile industry cut its orders for chips due to the lackluster sales. After the demand for these products recovered during the second half of 2020, the industry shifted its production lines to meet the demand for other applications. after the various challenges that the industry faced during the early 2020s, it is expected that the revenue growth of the semiconductor industry will continue to be around 9% in 2021. The government's efforts to improve the supply chain and the increasing number of companies investing in semiconductor technology are also expected to contribute to the industry's growth.

In the face of the various factors that have contributed to the shortage, it is still not likely to be resolved in the next few years. The lead times for certain products can exceed several months, and moving to a new facility can add another six months to the process. Another issue that affected the industry is the length of time it takes to switch to a new manufacturer. This usually occurs due to the design changes that the new partner makes to match the manufacturing processes of the old one. Some chips also contain intellectual property that is owned by the new manufacturer.

The Value at Stake Worldwide:

Due to the shortage, many companies are already considering their supply chain strategies. They are shifting their buying habits from a just-in-time model to one that allows them to order semiconductors a few months in advance. Some also are planning on implementing new strategies to improve their efficiency. The decisions made by semiconductor companies have huge economic consequences. They can affect the entire economy, as well as the decisions that they make. During the early 2000s, the profit margins of semiconductor companies were low. After the downfall, the profitability of semiconductor companies still improved during the past decade. The rapid emergence and growth of the technology sector, as well as the consolidation in various sub-segments, contributed to the industry's profitability. Although the exact impact of various factors on the profitability of a company can vary, it is generally believed that the memory segment has been the most profitable during the past decade. Other sub-markets such as the outsourced manufacturing segment have also been performing well. In 2015, North America was the largest region in the global semiconductor value pool. It was followed by Europe and Asia. Europe's 4% economic profit mainly went to the capital-equipment companies, while Asia's 36% was allocated for the contract chip manufacturing segment.

According to the SIA, global sales of semiconductor products reached a record $556 billion in 2021. Due to the over-ordering by companies, the prices of some of the products have increased. This has also squeezed the capacity of the companies.

Due to the shortage, many companies have started requiring their customers to place long-term orders. Even though some of them have already fully booked their orders, the rest of the vendors are still facing a challenge. After the high demand for chips, many companies are shifting their facilities into higher gear to meet the demand. Most of them are running at around 80% of their capacity, which means they have to temporarily close some of their facilities to carry out upgrades and maintenance. But despite the high demand, the industry is still able to maintain its capacity at a high rate. it is believed that chip firms are investing heavily in their facilities and developing new technologies. Even with the current shortage, it is still not feasible to expand the production capacity of a semiconductor facility in the short term. It can take a couple of years to establish, test, and qualify equipment.

The automotive industry has been hit harder by the shortage than other sectors. It learned that it can't fix the issue by simply switching to a different supplier. This was because the complexity of the process involved in making chips made by different companies was not familiar with. According to industry executives, the shortage will likely not end until the second half of 2022. Some products will still be delayed due to the lack of supplies in 2023. Despite the current shortage, the demand for semiconductors is expected to remain strong throughout the second half of the year. This could help ease the pressure on the industry's supply.

Although the chip shortages are mainly caused by the shortage of certain types of chips, the pain is being felt by other companies as well. For instance, they are trying to find solutions for their applications that require long-lasting legacy nodes. The industry is warning that the shortage will not be resolved soon. For instance, GlobalFoundries, a major contract chip maker, said that its capacity for older nodes will be sold out by 2023 even as it plans to increase its production by 50%. Varying availability of components can also help various industries overcome the shortage. For instance, some companies in one industry may not be able to access the same components at the same rate as other companies.

The strong performance of the semiconductor industry has been rewarded by the capital markets. From 2015 to 2019, the companies in this sector were able to deliver an average annual return of 25% to their shareholders. In 2019, the industry's performance was even better, with the average annual return at 50%. The increase in the demand for digital equipment was also partly caused by the outbreak of COVID-19. Even the positive returns that the semiconductor industry has experienced, it is still not sure if it can continue its impressive performance.

The Bullwhip Effect:

Due to the global shortage of semiconductors, the outlook for the industry is still uncertain. This is because of the various factors that affect the supply chain. For instance, the shortage of cars is expected to reduce the global auto industry's production by about five million vehicles this year. It's also expected to cause the cost of a big SUV to increase by around 20%. In addition, the shortage is expected to affect the sales of Apple's products, as it has to make fewer Mac and iPad models due to the lack of supply.

The bullwhip effect can be attributed to various factors, such as the lack of demand forecasting and the price volatility. The semiconductor market started experiencing issues last year after the outbreak of the pandemic, which caused a surge in the demand for portable devices. The demand for cars, on the other hand, started to recover after the number of cars that use chips increased. Other factors that have contributed to the shortage include the drought in China and Taiwan, which is a major producer of semiconductors. In Texas, abnormally cold temperatures forced the plant closures. Concerns have also been raised about the concentration of chip manufacturing in certain countries. According to estimates, around 75% of the global semiconductor industry's capacity is located in Asia. When it comes to the most advanced chips, only two facilities can be utilized.

Conclusion:

The uncertainty surrounding the supply chain and the demand patterns continue to affect the industry's performance. Aside from increasing production capacity, the companies in the industry can also improve their efficiency to meet the increasing demand. With the right combination of acquisitions and partnerships, the companies in the semiconductor industry can expand their customer base and improve their profitability. In addition to increasing their production capacity, the companies in the semiconductor industry can also improve their efficiency to meet the increasing demand. They can also expand their R&D efforts to develop new technologies that can be used in the future. Regardless of the strategies that the companies implement, the decisions that they make will have a huge impact on other industries, such as automotive, consumer goods, and high-tech.

Pic Courtsey-Hillary Black at unsplash.com

(The views expressed are those of the author and do not represent views of CESCUBE.)