In Blogs 1 and 2 of this series, I discussed the causes of the semiconductor crisis and its impact on various industries.
In the final blog of the series, I will share insights on the road ahead and how are companies and governments across the world tackling this situation and taking corrective action.
We all know that the world is facing a shortage of semiconductor chips or integrated circuits (ICs). This shortage is so critical and its impact so widespread, that it has affected as many as 169 industries, and is expected to lead to huge losses across the board. It is estimated that the total inventory at the world's nine leading chipmakers hit a record high of USD 64.7 bn, as of the end of June 2021.
The global semiconductor market is expected to exceed USD 500 bn by 2024 in revenues, with a majority of the consumption coming from computing, data storage, and wireless communications sectors.
The chip shortage is expected to continue till atleast the second to the third quarter of the next calendar year or even till 2023, a prediction that is increasingly worrisome for many industries, given the demand surge across these sectors. This shortage was further enhanced due to the stockpiling by Huawei Tech, in anticipation of its blacklisting by the US.
We already discussed the effects of this shortage in the previous blog. We will analyze the implications of this shortage on various industries.
Automotive – With the closing of their manufacturing plants during the pandemic, to the faster-than-anticipated revival of the demand post the second wave, automotive OEMs are scrambling to get hold of the semiconductor chips, due to their just-in-time strategies and incorrectly forecasting lower demand for the rest of the year. As shared in the previous blog, there is expected to be a shortage of 6.3-7.1 million vehicles across the globe, according to IHS Markit predictions. Many OEMs have already decided to decrease their production levels.
In addition, given the push towards electric vehicles by many countries including India, and increasing sales of xEVs across the countries, the auto industry will further feel the pinch. Semiconductors are needed in batteries and power trains in an electric vehicle. Electric vehicle sales have continued to increase year after year as they continue to become more accessible to purchase.
An increase in other technologically advanced vehicles such as autonomous vehicles and advanced driver assistance systems will further drive up the demand for IC chips, which are necessary for these technologies.
The reason the auto industry is facing extra pressure is that 5G rollout requires the same node-sized semiconductor chips as is required by the auto OEMs. Hence the expansive 5G rollout means that automakers might continue to face this shortage. Semiconductor chips are primarily used in key components such as car infotainment systems, touchscreens, power windows, music systems and even remote key modules. These are primarily features of higher models for automotive OEMs.
Increasing capacity in existing semiconductor plants or auto OEMs moving to different chip manufacturers is expected to add to the lead times for the OEM and vast amount of investments.
Auto OEMs are taking many steps to mitigate their losses. Selling the car with extra features is definitely profitable for the auto OEMs, however, given the IC shortage, many OEMs are expected to manufacture their vehicles without these additional features. Some OEMs are even going as far as launching their top-end models with simpler infotainment systems and are providing customers with only one remote key at the time of purchase. Many are also focusing more on petrol variants than diesel variants as the latter requires more semiconductor chips.
Many companies are moving away from the just-in-time strategy and are holding spare inventory to weather supply chain disruptions such as this one. Auto OEMs like Honda, for instance, are considering changing their strategy regarding inventory and are expected to cultivate more chip suppliers in their value chain. Many OEMs are also using data analytics to predict future demand and match the demand and supply so that a transparent view of the future demand is available to the OEMs, suppliers, chip makers as well as customers. Companies such as Tesla has revised their own software to support alternative chips to maintain their production levels.
Consumer electronics – Share prices of Samsung Electronics have fallen as investors expect a correction in the semiconductor chip market. The company has also increased prices on a range of products. Consumer home appliance maker Midea Group from China expects prices of chips used for home appliances to increase, which is expected to be passed on to the consumers as well. For Whirlpool China, the chip supplies fell short by 10% of its demand in March. Xiaomi has increased the prices of its TV models, and it has also had an effect on its share price.
Apple and Samsung had stockpiled chips early on due to their increased bargaining power, which insulated them against the shortage for some time. However, the chip shortage is expected to delay iPhone production and has already been impacting sales of iPads and Macs. Samsung is even considering canceling the launch of its new Galaxy Note. Xboxes and PlayStations are also in short supply. The availability of personal computing devices has been affected. In India, the supply of laptops, for example, is expected to be affected by 5-10%. Companies like Xiaomi are already increasing the prices of their devices and passing the increased input costs to the customers, while there are companies like Lenovo that have better control over component shortages due to their in-house manufacturing operation.
In sectors such as Consumer goods and LED and lighting fixtures, the companies are mulling over increasing prices of the appliances, which are expected to be passed on to the consumers.
In addition to the action taken by the companies in these industries, governments of various countries are also taking action to boost their IC chip making capacities and are committed to capital investments and create local supply chains to tackle this issue.
India is considering offering USD 1 bn in cash to each semiconductor company that sets up manufacturing units in the country, as it seeks to build on its smartphone assembly industry and strengthen its electronics supply chain. This is in addition to the allocation of USD 111 mn in incentive schemes such as the Modified Special Incentive Package Scheme (M-SIPS) and the Electronic Development Fund (EDF) to boost the semiconductor as well as the electronics manufacturing industry in 2017-18. The govt. also approved an incentive of up to USD 1.4 bn for investors by amending the Modified Special Incentive Package Scheme (M-SIPS), to further encourage investment in the electronics sector, generate employment and reduce dependence on imports.
China has made self-sufficiency in chips a national goal and unveiled a large set of policies, including tax breaks, preferential treatment for chip manufacturers, encouraging them to list themselves on stock exchanges, etc., to deal with this shortage. Under the “Made in China 2025” industrial plan, the country aims to produce 70% of the chips it consumes by 2025 and plans to achieve 100% self-sufficiency in semiconductors by 2030. It has earmarked approximately USD 86 bn towards capital expenditure till 2024.
South Korea – The country announced an investment of USD 451 bn until 2030, which includes corporate investments. It has also increased tax benefits to make its chipmakers more competitive.
USA – The US Senate voted through USD 52 bn for semiconductor research, design, and manufacturing and in subsidies for chip plants or ‘fabs’, including USD 12 bn as R&D budget with particular focus on 5G and advanced assembly and USD 10 bn through federal match programs that match state and other incentives offered to a company for building a semi-conductor foundry with advanced manufacturing capabilities. Tax breaks like 40% refundable investment tax credit for qualified semiconductor equipment through 2024 are also being provided.
European Union – EU is seeking to double its share of global chip-manufacturing capacity to 20% of the market by 2030 with an investment of Euro 20-30 bn.
In addition, specific semiconductor companies are also taking various steps to combat this crisis.
Taiwan Semiconductor Manufacturing Co., the world’s largest chipmaker had optimized production lines in January-June, and expanded production of automotive chips during the period by 30% from a year earlier, to meet the growing demand. It also is planning to invest USD 2.87 bn to expand capacity in its fab in Nanjing, China, a part of the USD 100 bn investment plan over the next 3 years. The additional capacity is expected to begin volume production in the second half of 2022.
Inventories across other top chipmakers such as Intel, Samsung Electronics, Micron Technology, SK Hynix, Western Digital, Texas Instruments, Infineon Technologies, and STMicroelectronics etc. are at an all time high as chipmakers expand their stockpile of raw materials to increase production. The share of raw materials in total inventory has been increasing since March 2019 at these seven companies and topped 24% as of the end of March.
Meanwhile, finished chips have already been selling fast. The turnover rate during April-June quarter had been 7.8, the highest in 18 months, as sales continues to be growing faster than the inventory.
Intel has also announced of its plans of a USD 20 bn plant in Arizona, USA. The company plans to allocate some of its capacity to cars. Additionally, it is also expected to invest USD 3.5 bn to expand its wafer fab in the US state of New Mexico, on top of its investments at its Arizona, Oregon, Ireland and Israel facilities.
Others such as NXP and Nvidia are working with their customers to predict the future demand and bring transparency of orders to avoid double-booking. Nvidia has also addressed the shortfall in GPUs by bringing back older versions, which are based on older process nodes, and which won’t compete for leading edge capacity at the foundries. Electronic equipment maker Fujitsu General had also increased its inventory of chips and other components and materials by about 20% in three months as of June end.
Given the current demand, order book for many semiconductor chip manufacturers is of approximately 2 years of revenue. Hence a lot is riding on the strategies of the manufacturers and other industries as well.
Indian companies like the Tata Group are considering entering into the semiconductor manufacturing business in response to the shortage in the country.
In addition to the steps taken by these governments and companies, it is worth noting that though steps are being taken to boost capacities, however, this may face many challenges.
- Building new capacities take time. Even if most expansions in capacities in a fab takes place now, it is expected to take atleast 2.5-3 years to build the increased capacity, all the while the demand is expected to continuously grow across various sectors.
- Many industries facing this shortage are passing it on to their customers in the form of increased prices. In automotive, Maruti Suzuki has already increased prices across its models to mitigate the increasing input costs from September 2021.
- These kinds of cyclical fluctuations have been witnessed in the past as well. Once the demand normalizes, chip manufacturers might be burdened with excess capacity, which was built up during periods of high demand.
- Many companies are already stockpiling, but this might leave the smaller companies with nothing, thereby completely affecting their entire businesses.
However, there are many strategies and processes that the governments, semiconductor manufacturers, companies across the affected industries, and even consumers can follow.
- With the governments getting involved and helping level the playing field, this can alleviate some of the supply pressures as only a handful of companies globally dominate the supply chain. By providing subsidies and breaks, smaller companies are also now joining the manufacturing value chain and hence easing the pressures on the big companies.
- Moving forward, companies and governments need an improved collaboration across their business networks, integrated business planning processes, robust supply chain, better inventory planning, transparent policies and transparent communication with vendors and suppliers and sound economic and trade policies with diplomatic ties intact.
- Companies need to not only rethink their supply chain networks in the form of multi-sourcing strategies, but also ponder over insourcing and outsourcing strategies. Other co-location strategies must also be explored for supply assurances during such shortages and crises. Automakers especially need to aggressively re-think their just-in-time strategies. While it may be efficient for them to keep a lean inventory, however, it creates havoc whenever such a crisis emerges.
- Governments need to continue to invest in building domestic capacity and research into newer technologies
- Manufacturers also need to inculcate the mindset of recycling more aggressively. Expansion of circular economy to all stakeholders – manufacturers, suppliers, and even consumers need to happen.
This shortage is expected to last atleast until next year, and we are expected to experience supply shortages given the growing demands. The current shortage has offered a lot of valuable lessons to many companies and governments. Many are already taking steps to lessen the impact of this crisis and mitigate their losses. While there is no sure-shot solution to come out of this crisis, however, the lessons learned and the steps taken will go a long way in preventing the next catastrophe.
To read part 1 and 2 of the series, please follow the links below –
Blog 1 – https://community.nasscom.in/communities/engineering-research-design/global-semiconductor-crisis-series
Blog 2 - https://community.nasscom.in/communities/engineering-research-design/impact-semiconductor-shortage-various-industries
