The semiconductor shortage is currently one of the major challenges faced by the technology industry. With the increasing demand for electronic devices, the supply chain disruption has caused a significant impact on the production and supply of electronics used in a variety of markets. Three years into the crisis many are still asking what caused the shortage so let’s explore how we got here, where we’re at, and if there’s an end in sight. Hint: It isn’t as simple as just adding additional suppliers.
The Perfect Storm
The initial cause of the semiconductor supply chain issue can be traced back to three key impacts: the COVID-19 pandemic, an under capacitated supply, and a quick increase in demand.
In early 2020, governments around the world began to put restrictions in place due to COVID-19 and industries globally began to feel the effects almost immediately. Production output was reduced to meet the quick drop in demand with some eventually closing factories as the pandemic spread. The pandemic not only caused production shutdowns and shipping delays, but also led to a shortage of raw materials and components needed further slowing and impacting the production process. The combination of these factors has created a ripple effect throughout the entire semiconductor supply chain, causing delays in production, increased lead times, and rising prices.
Exacerbating the issue, the wafer manufacturer TSMC (Taiwan Semiconductor Manufacturing Company) maintains an 80-90% market share for electronic chips used in automotive and mobile equipment markets, creating a single source for semiconductors. The reason for such dominance is due to the high cost of establishing and maintaining a wafer factory. Costs can range from $5-$15 billion, severely limiting competition and requiring near capacity operations to be profitable. Adding multiple supplier options to your sourcing efforts is great, but if they’re all getting their supply from a single source, then we’re looking at the potential for major supply chain issues.
Prior to 2020, companies like TSMC operated at near 100% capacity for the automotive market but adjusted during COVID-19 to focus investments into the wafer designs used by consumer and other higher priced products leaving the automotive market subject to capacity constraints. Concurrently, demand in the automotive market for semiconductors began to surge as the adoption of electrification, more advanced infotainment and safety systems became more prevalent and standard on vehicle systems. These two forces combined with the pandemic resulted in a devastating break in the semiconductor supply chain. The pressure has been further escalated due to geopolitical tensions, natural disasters, and unplanned factory shutdowns.
The Long Road to Recovery
The question we all continue to ask is why is it taking so long for the semiconductor supply chain to recover? While most industries would expect to build a factory and expand operations quickly, the process to start a semiconductor factory takes 4 to 6 years and $2 to $5 billion before they produce the first part.
The United States has approved a $52 billion bill to boost domestic production of semiconductors as well as research and development of new technologies related to semiconductors. TSMC has planned a massive investment of $100 billion over the next 3 years to expand its capacity in Taiwan and the United States. Intel will invest $20 billion in two new U.S. factories, Samsung will invest $17 billion in Korea and the U.S., and GlobalFoundries has announced a $1.4 billion investment to expand production facilities.
These heavy investments in new facilities and technologies will help add capacity and keep up with demand, especially as we move into 2024 and 2025. We have also seen improvement in 2023 compared to 2021 and 2022, but the situation remains dynamic with rolling outages still plaguing the industry.
The Future of Semiconductor Supply Chain
While many actions have been taken to address the semiconductor supply chain issues the road remains bumpy. The investments in new production and new chips are heavily focused on larger wafer sizes and higher end products. Many of the semiconductors that we use today in the automotive and off-highway markets will need to be redesigned to use larger wafer sizes. U.S. production will assist with increasing capacity, but it will come at a greater cost and likely means automotive components will continue to primarily be produced overseas. The geopolitical environment between China and Taiwan could absolutely devastate the industry should China choose to invade Taiwan.
2024 will start the process of bringing new wafer facilities online. This process is expected to face early challenges as processes, labor and supply chains in new regions work through the growing pains. Time should provide improvements in the semiconductor supply chain and with it many lessons learned.
The good news for now is that the number of parts experiencing shortages has decreased. OEMs are beginning to see parts removed from allocations, decreases in the cost of allocations, a slowing of semiconductor price increases, and committed lead-times on some parts across suppliers.
As the supply chain issue is tied to a common shortage and constraint, dual sourcing strategies will fail to deliver a protected supply chain. A near-term strategy of building inventory as you can through absorbing additional build capacity or through affordable broker materials is going to be your best short-term solution. Longer-term strategy should focus on partnering with your suppliers to understand more about what they’re doing to help you work through the continuing supply chain issues. We will focus more on that in a future article.
Meet The Author
Matt Via is the VP of Sales and Marketing at HED, Inc. where he works closely with the sales, marketing and product management teams to implement innovative controls and telematics systems for HED customers. Matt has extensive expertise in electronic controls, internet of things (IOT), mobile hydraulics, motion control and automation, operator controls, sensors and wireless technologies across multiple end markets. Matt holds an AAS in Fluid Power Technology, a BS in Marketing & Management, and a Business Marketing Strategy Certificate from Northwestern Kellogg School of Management.