The modern world, which relies on silicon chips for almost everything, has been hit by a massive shortage of semiconductor chips. This is attributed to excessive demand in the market and supply chain challenges. The situation has birthed concerns over the supply chain and the need to diversify it, scale-up production, and maintain a good buffer.
Even though the automotive industry makes up five to seven per cent of the total semiconductor industry, the shortage has caused automotive giants to slow down production and shut down their plants. Consumer electronics and power industries are some of the other major players hit by the shortage. The nature of these industries is interwoven with designers, chip makers, contract manufacturers and fab makers for semiconductor plants.
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The supply chain architecture integrates a lengthy value chain consisting of chip design, software, fabrication, equipment, chemicals, wafer and assembly. All the processes need to be efficiently working for the industry to work smoothly and meet the demands.
But, this chain is undergoing a recurring challenge given its diamond-shaped structure. As a result, the industry manufacturers are at the mercy of Tier 1 component integrators supplied at a limited rate by the semiconductor manufacturers.
Leading to the Shortage
The semiconductor chip industry is quite cyclical, and the increase in demand is not a new phenomenon. The chip industry has faced the long-term challenge of having a tightly balanced supply-demand ratio given the dynamic changes in demand. In comparison, building a semiconductor chip factory takes a couple of years, making it harder to meet the demands. But, this challenge just got exacerbated due to a combination of reasons. The waiting time for chip delivery gap has astronomically increased for Auto OEMs. This, to the extent that fresh capacity commissioning and allocation is still about a year away.
During the pandemic, there was a huge increase in demand for electronic devices that the industry couldn’t meet. Automotive manufacturers did not consider the few months it takes to reinstate orders that had been cancelled during the pandemic, leading to a larger delay in orders.
Geopolitical factors have also played a huge role, specifically the trade war between the US and China. The US and China are the largest semiconductor markets, each accounting for 25% of global consumption. The Trump administration’s tight regulation of semiconductor sales to Chinese firms led to stockpiling chips essential to 5G smartphones and other products. In return, the American firms were being cut off from China’s Semiconductor Manufacturing International Corporation chips. While Biden views the semiconductor shortage as a “top and immediate priority” in the US, India doesn’t have any operational wafer fabrication plants and depends heavily on semiconductor imports.
This was only accompanied by local disruptions to the supply chain, such as the high rejection rates in Italy, winter storms in Texas, fire at the semiconductor plants in Japan, draught in Vietnam and the Covid Delta Variant in the Indonesia STM plant.
Recovery Plan
This semiconductor shortage isn’t likely to resolve in the short term, given that chip capacity can’t catch up with demand immediately. But practices such as capacity allocation and management can help manufacturers meet the short product life cycles and customer demands in the shorter run. Automakers and tier-one suppliers have also begun to collect sophisticated intelligence on the chip value chain and manufacturing locations to …….