06 May Semiconductor Supply Chain Challenges
Semiconductor supply chain challenges are generating a proliferation of news headlines and for good reason.
Semiconductors are essential technology components found in a burgeoning number of goods and many modern electronic products require lots of chips. The shortage is forcing some of the world’s largest technology and automotive companies to cut their near-term and future production targets. Notably, an article from CNBC shared views from the leaders from Daimler, Volvo, Apple, and Nokia as they expressed discouraging news about how the chip shortage is hampering business growth opportunities. 1
Hopes are fading fast that the supply chain crisis will be short lived. Intel CEO, Pat Gelsinger, recently provided his own guidance saying, “we believe the shortage will last into 2024.” 2
AUTOMOTIVE INDUSTRY HIT HARD BY SEMICONDUCTOR SHORTAGE
Perhaps no one is getting hit harder than the automotive industry. In a recent interview with CNN Business, Scott Keogh, the CEO and President of Volkswagen Group of America provides valuable insights on why the automotive sector will be feeling the pinch for the foreseeable future: “There are structural changes that need to be made in terms of increasing production of semiconductors and it will take years and years and years before we have an adequate supply. Cars that used to have hundreds of chips now have more than 5,000 semiconductors in them because of the added consumer electronics. I don’t see this shortage being fixed quickly, and that’s assuming the world is going to stay normal, or just semi-chaotic.” 3
SEMICONDUCTOR SUPPLY CHAIN CHALLENGES IMPACT A MULTITUDE OF COMPANIES
In recent years, electronic products ranging from home appliances to communications gear, networking equipment, medical equipment, industrial drives, computers, and high-end servers (to name just a few) have boosted global chip demand. 4
In addition, the Internet of Things (IoT) cannot function without sensors and integrated circuits. Since all IoT devices require semiconductors, the surging demand for smart devices by a myriad of businesses across multiple industries is further disrupting the semiconductor industry. 5
Again Intel’s Pat Gelsinger provides context by saying, “Every aspect of human existence is going online, and every aspect of that is running on semiconductors,” It is unlikely the CEO is exaggerating when he says, “people are begging us for more.” 6
Covid-related lockdowns in China are providing further headwinds for companies and retailers that sell electronics. A majority of the world’s semiconductors are produced in Taiwan. Many of those chips are shipped to factories in mainland China for the production of electronic goods.
According to a recent article in The Washington Post, “continuing lockdowns in Shanghai — a major hub for America’s semiconductor and electronics supply chains — has set up automakers, electronics companies and consumer goods firms for months of delays and higher costs.” 7
CHIP MAKERS HAVE THEIR OWN SUPPLY CHAIN CHALLENGES
As the world hungers for more chips, semiconductor manufacturers are facing massive supply chain headaches of their own. The Wall Street Journal recently reported that more than 90 semiconductor factories around the world are expected to start production between 2020 and 2024. Global semiconductor manufacturing equipment sales are expected to exceed $100 billion this year, a monumental leap from just a few years ago. Unfortunately, the demand for chip-producing equipment far exceeds what suppliers can promptly deliver.
Ironically, a lack of chips that are needed to produce the chip-making equipment is pushing lead-times out. Because other supply chain issues are also in play, some machinery that was delivered in just months pre-pandemic are now expected to be delivered 2 to 3 years from the date of order. CEO Peter Wennink of ASML Holdings, a Dutch company that produces leading-edge chip-making equipment, shared that it may be 2025 before the company can produce more tools to meet demand. 8
The war in Ukraine presents another challenge. About half of the world’s semiconductor-grade neon, which is critical for the lasers used to make chips, comes from two Ukrainian companies, Ingas and Cryoin. Remarkably, last year alone, the global demand for this specialized neon exceeded 500 metric tons. Since both companies had to halt production due to the Russian invasion, valid concerns exist regarding the industry’s ability to ramp up semiconductor production to meet demand. 9
In summary, because of a plethora of supply chain disruptions, hopes of the chip shortage ending soon are evaporating. Tom Caulfield, the CEO of GlobalFoundries Inc., a contract chip manufacturer, says, “There’s this wishful thinking that by the end of 2022, supply will be balanced with demand, “I just don’t see it.” 10
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1. Sam Shead, “Chip supply issues are still giving some of the world’s biggest companies a major headache”. May 2, 2022, as published by CNBC.
2. Asa Fitch, “Intel CEO Sees Chip Shortage Lasting Into 2024”, April 28, 2022, as published by The Wall Street Journal.
3. Nicole Goodkind, “Volkswagen is coming for Tesla. Here’s how it plans to dominate the US market”. April 19, 2022, as published by CNN Business.
4. Don Clark, ‘It’s a Roller-Coaster Ride’: Global Chip Shortage Is Making Industries Sweat”. April 15, 2022, as published by The New York Times.
5. Source: IEEE website on the topic of Semiconductors and IoT, as posted by IEEE.
6. Fitch, see footnote 2.
7. Abha Bhattarai, “’Everything is halted’: Shanghai shutdowns are worsening shortages”. April 26, 2022, as published by The Washington Post.
8. Asa Fitch, “Global Chip Shortage’s Latest Worry: Too Few Chips for Chip-Making”, May 3, 2022, as published by The Wall Street Journal.
9. Foley & Lardner, LLP, “Grab Your Popcorn – The Chip Shortage and Other Disruptions Are Expected to Continue into the Near and Medium Term”. April 19, 2022, as published by The National Law Review.
10. Fitch, see footnote 8.