When the chips are down: the semiconductor shortage
It’s hard to imagine life without semiconductor chips. The average American adult, for example, spends more than 12 hours a day interacting directly with electronic devices – none of which could function without semiconductors. Tiny tech, huge impact.
The pivotal role of semiconductors in the global economy has been on full display in recent years, with pandemic-driven sourcing, production, and supply chain disruptions upending this critical industry and affecting many others. The semiconductor shortage also exposed vulnerabilities across many different supply chains.
The semiconductor industry has responded with an unprecedented ramp-up of production capacities, which comes with its own set of logistics challenges. For example, the scarcity of raw materials is a phenomenon that tomorrow’s successful businesses would do well to plan for. So it comes as no surprise that business leaders worldwide are making resilience a top priority.
But how did we get here? And how can companies resolve these semiconductor supply chain issues to get ahead of the next chip shortage? Read on to find out.
Why is there a semiconductor shortage – and when will it end?
To begin with, the pre-pandemic preference for just-in-time manufacturing and optimized inventory and storage strategies meant that when supply chains unexpectedly ground to a halt, many industries were left without enough safety stock to keep production lines moving. Meanwhile, demand for semiconductors surged as our personal, professional, and academic lives moved online and into the cloud. The shortage that emerged in the second half of 2020 had serious real-world ripple effects, driving revenue misses of over $500 billion worldwide by the end of 2021.
The demand for semiconductor components remains high, with roughly 1.9 billion units sold in 2022. And the appetite for these processors, memory chips, wireless communication devices, and sensors is poised to surge even further, driving global revenues from $600 billion today to a projected $1 trillion in 2030.
The automotive sector is expected to be the largest source of growth for the semiconductor industry. The average car today is already packed with 1,000 to 3,500 chips, and that number could see an eight-fold increase as manufacturers shift to electric powertrains and add advanced self-driving features. This could bump the industry’s share of overall semiconductor demand from 8% now to as much as 15% in 2030.
So when will the semiconductor shortage end? Unfortunately, that’s tough to predict, and the signals for 2023 are still mixed, with sharp variances by sector. Nevertheless, let’s take a quick look at the semiconductor value chain before turning to four strategies for mitigating future crises.
Nearly invisible, never overlooked
Projected global semiconductor revenue in 2030
Steps to assemble a single semiconductor chip
1,000 to 3,500
Chips in a single car today – with the potential to grow 8x in the years ahead
Parts in high-end chip production equipment – enough to fill three Boeing 747 cargo aircraft
The global semiconductor value chain
The semiconductor supply chain is complex, capital intensive, and highly globalized: Chips might undergo 1,000 steps and experience 70 border crossings during their manufacturing process. That’s plenty of opportunity for supply chain issues to arise. This complexity has narrowed the field of manufacturers capable of producing top-end chips from a dozen in the 1990s to just three today. And these three companies have consolidated much of their production in a few key regions. For example, the most advanced sub-10-nm chips are manufactured in Taiwan (92%) and South Korea (8%) – a vulnerability that should not be overlooked in today’s age of disruption.
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The future is fab
Chipmakers have since responded to the global semiconductor shortage by investing over $99 billion in new fabrication plants (“fabs”) in 2022, nearly double the pre-pandemic level. The most advanced fabs involve construction costs of $20 billion over a timeline of 24+ months. This building spree will eventually mitigate the supply problem, but it poses its own unique logistical challenges.
Logistics to the rescue
Transporting chip-making equipment from factory to fab is a considerable challenge. The most advanced system involves some 100,000 parts filling a jaw-dropping 40 shipping containers or three Boeing 747 cargo aircraft plus 20 trucks for last-mile transport. Even after all this has been delivered, the assembly, test, and setup phases can take several months. This is followed by even more steps for tooling, production optimization, and quality control. During these critical early phases, the equipment and tooling suppliers work closely with the fab and require access to a comprehensive local supply of spare parts and equipment.
Once the fab is up and running, strict service level agreements often measure response times in minutes or hours, not days. This requires hyper-local inventory storage and high-performing spare parts logistics.
Logistics companies are performing a crucial role here beyond traditional transportation services, stepping in to take on project management, operational support, warehouse management, stakeholder coordination, and more. The logistical complexity of all this has grown even greater as the industry runs multiple fab construction projects concurrently.
Global semiconductor value chain
- A UK firm licenses the IP on application process architecture
- A US-based fabless firm designs the chip
- Highly advanced manufacturing equipment is developed by companies in the US, Europe, or Japan
- Silicon dioxide is mined and refined in the US and sent to Japan to be melted down and grown into a giant single crystal called an ingot
- That ingot might then be sliced into wafers in South Korea
- The wafers may be shipped to fabs in Taiwan and turned into integrated circuits
- Individual chips are separated and packaged by an Assembly & Testing in Malaysia
- The chip is shipped to the smartphone OEM's assembly partner in China, to be incorporated into a circuit board inside the phone
- The smartphone is sold to a customer in the US.
Source: Strengthening the Global Semiconductor Supply Chain in an Uncertain Era (SIA and BCG)
Four key strategies for semiconductor supply chains
To help businesses get ahead of semiconductor supply chain issues and prepare for the next shortage, we’ve developed a four-fold approach:
- Accelerate digitalization: Supply chain visibility was a nice-to-have in 2019. Today, it’s a must-have. Control tower solutions offer a holistic view to help you keep tabs on shipments, transport assets, and inventories and share this data with all stakeholders and systems in real time. State-of-the-art data analytics can spot problems early and trigger appropriate responses, predict product demand, define suitable inventory levels, and optimize transportation networks to reduce costs and emissions.
- Build stronger partnerships: Partnerships up and down the supply chain boost efficiency and help alleviate the effects of constrained capacities and capital equipment availability. Centralized management and globally integrated networks build resilience.
- Develop resilient product and inventory strategy: As companies respond to the semiconductor shortage by boosting safety stock, building more flexible fulfillment networks, and streamlining semiconductor supply chains, logistics providers can step in with added warehouse capacity, new forward stocking locations, inventory data analytics, and more.
- Reduce environmental impact: Consumers are demanding a significantly lighter environmental impact. As businesses strive to comply without compromising on resilience, logistics providers can do their part by furnishing emissions data, optimizing loads and routes, and investing in greener fleets.
Shore up your supply chain and be prepared for the next semiconductor chip shortage
No one knows when the current semiconductor shortage will end. But in the meantime, we can learn from the supply chain issues seen so far. Our conversations with business leaders in many sectors, from automotive to consumer electronics to semiconductors, have yielded profound insights and lessons learned from the Covid-19 pandemic. Each industry may have its own pain points, but we believe that all semiconductor players will benefit from this four-fold approach.
For a more in-depth look at the semiconductor chip shortage and our strategies for future-proofing your semiconductor supply chain, be sure to download our discussion paper entitled Resilience of the Semiconductor Supply Chain.
Published: March 2023