SEMICONDUCTORS A closer look at the current semiconductor supply chain

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Supply chain disruptions have had a major impact on the semiconductor industry in recent years. While 2023 has finally seen the chip shortage subside, future demand for highly specialized semiconductors is set to skyrocket. Will the chip industry giants be able to keep up or will there be a catastrophic semiconductor shortage caused by continued supply chain failures?

Semiconductors are critical components in the technology that powers our modern world. Virtually every electronic device that we use to run our businesses and streamline our lives contains semiconductors. It’s no exaggeration to say that these tiny chips are one of the world’s most valuable resources.

The early years of the 2020s were turbulent for the semiconductor industry. The COVID-19 pandemic, a trade war between China and the US, and the conflict in Ukraine all contributed to massive disruptions to the semiconductor supply chain. While demand from consumers soared, the chip industry struggled to produce and ship its products. A worldwide semiconductor shortage ensued, the impact of which is still being felt today.

The semiconductor shortage has somewhat abated in 2023 just, it seems, in the nick of time. Analysts predict that the worldwide demand for specialized semiconductors is going to boom. Technological advancements in artificial intelligence (AI), 5G, autonomous vehicles, and industrial IoT devices are all set to drive the demand for the new generation of semiconductors to unprecedented levels.

Will the behemoths of the chip industry be able to keep pace with the projected demand? Can the industry accurately predict and effectively resolve issues with semiconductor supply chains? Despite the global importance of maintaining a steady supply of semiconductors, there are still serious concerns about the reliability of the semiconductor supply chain.

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Why is the semiconductor supply chain So vulnerable?

Although it did experience a slowdown in production during 2022, the semiconductor industry still achieved worldwide sales of US$580.13 billion in 2022 with a growth of 4.4 percent. Analysts predict that 2023 will see a total of US$515.10 billion in worldwide semiconductor sales.

While this figure shows a decrease from the previous year, the same analysts estimate semiconductor global sales will reach US$576.0 billion in 2024, an unprecedented amount. To put these figures in a historical perspective, the total worldwide semiconductor sales were US$305.58 billion in 2013, US$166 billion in 2003, and US$77 billion in 1993.

Despite the gargantuan size and global geopolitical importance of the semiconductor market, it is uniquely vulnerable to supply chain disruptions.

There are four main aspects to the semiconductor supply chain: design and development, fabrication, testing and manufacturing, and distribution. Each one of these stages is dependent on highly specialized services from a relatively small number of companies situated in numerous countries across the globe. It is precisely this global nature of the semiconductor supply chain that places it at a heightened risk of disruption.

To illustrate this, consider how the semiconductor supply chain works in practice. We can take an example given in a recent interview in Forbes with the economic historian Professor Chris Miller:

The design for a semiconductor chip is produced by a Japanese company based in California. The company employs a team of international engineers who use software developed in the US. Once completed, the chip design is then sent to a fabrication factory in Taiwan. To fabricate semiconductors, the Taiwanese facility must purchase ultra-pure silicon wafers and gases from a company in Japan. The Taiwanese facility also requires specialized, incredibly precise machinery produced by only five companies in the world.

Once the chip has been fabricated, it is sent to Southeast Asia for testing before being shipped to China for assembly into a product such as a cell phone or a computer. From China, the product containing the semiconductor can be transported to its final marketplace.

It’s easy to see that any kind of disruption at any given one of these points can result in bottlenecks - or even cut off supply completely. As Professor Miller stated “No other facet of the global economy is so dependent on so few firms… Unlike oil, which can be bought from many countries, our production of computing power depends fundamentally on a series of choke points.”

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Supply chain issues facing the semiconductor industry

Are supply chain imbalances going to cause further instability in the semiconductor industry? It seems likely, if not inevitable. Since the dawn of the digital age, the semiconductor industry has been cyclical and highly susceptible to supply chain issues.

Demand and supply can be impacted by various environmental and political factors that are impossible to predict or control. No matter how fast industries react, the time-consuming process of adapting logistical processes or changing capacity and production lines will always result in supply lagging behind demand.

The many vulnerabilities of the semiconductor supply chain were recently made clear. The onset of COVID-19 in 2020 resulted in worldwide lockdowns that caused factories to lose workers and run out of raw materials. At the same time, remote working became the norm in industrialized countries, spiking demand for electronic devices.

And it wasn’t just the COVID-19 pandemic that was throttling semiconductor supply.

Taiwan had a severe drought in 2021 which reduced its ability to produce the ultra-pure water required to fabricate semiconductors.

Since 2018, the US and China have been in the midst of a trade war. The Biden administration ramped up sanctions against China in 2021 to further hamper China’s ability to import or manufacture semiconductors.

At the start of 2022, Russia invaded Ukraine cutting off the supply of crucial raw materials for semiconductor fabrication, such as palladium and neon.

As a result of this combination of factors, the worldwide supply of semiconductors was drastically reduced causing a shortage that lasted from 2020 right through to the start of 2023.

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Although the shortage of semiconductors has eased, industry analysts are still concerned about disruption to supply lines now and in the near future. The fallout from COVID-19, the ongoing war in Ukraine, and continuing trade hostilities between China and the US continue to impact the semiconductor supply chain. Tensions between China and Taiwan are also an ongoing concern.

Innovation and continuing demand pose major problems for the semiconductor industry. Semiconductors are now almost ubiquitous in products and machinery of every description. In the coming years, the global need for semiconductors will rise with the development of new technologies such as AI and 5G. This increased demand will put stress on the already delicate supply chain.

The industry is continuously developing new generations of semiconductors, according to Moore’s Law. However, demand for older nodes has not lessened. The high demand for outdated nodes is set to cause severe bottlenecks in the supply of some types of chips.

Climate change is a major threat to the semiconductor supply chain. Extreme weather conditions will greatly reduce the availability of raw materials. Increased environmental protection regulations are predicted to slow semiconductor production rates as companies adapt to the new rules.

Unfortunately, supply chain issues for the semiconductor industry aren’t going to go away any time soon.

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What can be done to prevent semiconductor supply chain failures?

The semiconductor industry has failed dismally in its attempts to overcome supply chain issues both historically and in recent times. For example, there was a dramatic shortage in chip supply in 1997 due to an unexpected surge in consumer demand for electronic toys. In 2011, the Fukushima earthquake resulted in a severe shortage of semiconductors used in the automotive industry.

It’s clear that the semiconductor industry as a whole must prepare itself to deal with future supply chain issues.

In the aftermath of Covid-19, some slow progress is being made to guard against supply chain disruption. Companies that rely on semiconductors are being advised to increase lead times, more closely monitor inventory levels, and stockpile chips as a buffer against future supply disruptions. Analysts also recommend that companies implement better ways of sharing information both internally and externally to avoid shortfalls.

Diversification of the industry is perhaps the most important safeguard against supply chain disruptions. By diversifying the production of semiconductors many supply chain issues can be mitigated or eliminated.

The US, South Korea, Europe, and China are now rapidly developing their own fabrication plants in order to become self-sufficient and break the almost total monopoly of Taiwan. Diversification is being adopted by corporations as well as countries. Intel, for example, is now expanding into the development of automotive chips.

Semiconductors stand alone as a product that is crucial for the production of goods and the development of new technologies. Equally, no other resource has such a fragile supply chain. Indeed, future semiconductor supply chain disruptions are practically a certainty. Governments and corporations must work to further diversify the supply chain and develop strategies to cope with the inevitable semiconductor supply issues. The advancement of the modern era itself depends on it.

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