01 Feb Semiconductor Supply Chain Update
This semiconductor supply chain update will provide you with a fresh overview of the current state of the semiconductor supply chain. You’ll also learn how geopolitics, national security concerns, and government incentives are impacting the market in new ways.
The majority of SSI’s high-tech customers require semiconductors in the products they sell. So, for our own customers and everyone else who relies on an ample supply of memory chips, microprocessors, standard chips, or complex systems-on-a-chips (SoCs), we will share insights from industry resources on how you can enhance your own semiconductor supply chain resilience.
In May 2022, SSI published a blog post entitled, Semiconductor Supply Chain Challenges. At that time the automotive industry was hit hard by a shortage of semiconductors. The impact on carmakers (and car buyers), dominated news headlines in the US and globally.
But the automakers were not alone, of course. The semiconductor companies themselves have complex global supply chains and they were experiencing their own challenges. How bad was it? Remarkably, even the companies that produce chip-making equipment were having difficulties obtaining all the chips necessary to build and deliver the high-precision equipment that the semiconductor fabricators needed to expand production. What a mess!
Of course, most every industry was negatively impacted in some way by the recent semiconductor shortage. According to Mark Baxa, the President & CEO of the Council of Supply Chain Management Professionals (CSCMP), “anything digital, directly or indirectly touching your supply chain begins and ends with the semiconductor…no matter the business you are in. Digitally connected consumers, the whole of society including the assurance of our very safety and security depend on the semiconductor.” 1
Before we dive into this semiconductor supply chain update, we want you to know that SSI can help you achieve substantial savings with global multimodal freight audits, convenient international freight payments and robust data analytics tools that provide actionable data insights for informed decision making. If you are not yet an SSI customer, let’s talk.
THE SEMICONDUCTOR SUPPLY CHAIN IS MORE COMPLEX THAN YOU THINK
Few people realize that thousands of companies around the world contribute the raw materials and components needed to produce a single semiconductor.
According to a recent article in Supply Chain Dive, “chips cross international borders more than 70 times before reaching consumers… this global crisscross of a supply chain includes every stage from design to raw material procurement, component production, chip assembly, and distribution.” 2
Yet, the semiconductor industry is also concentrated. TSMC, a company that makes roughly 90 percent of the world’s advanced chips, is headquartered in Taiwan. The vast majority of their production occurs there as well. So, it is difficult to overstate how highly reliant global supply chains are on stability in Taiwan. 3
TSMC is one of three dominant foundries that operate fabrication plants and produce semiconductors designed by their customers (GlobalFoundries and Samsung are the others). Of note, Intel is in the process of growing their own foundry business to produce semiconductors designed by their customers.
Of course, Intel and Samsung are well known for their integrated design and manufacturing businesses (IDMs). This simply means they design and manufacture their own semiconductor products.
When it comes to semiconductor memory products, there are three dominant providers: Micron, SK Hynix and Samsung. 4
Of note, the majority of all these semiconductors are currently produced in East Asia. Further, this is an abbreviated list. There are dozens of other semiconductor companies of vital importance. You know many of them by name. For the sake of simplicity, we followed the lead of a recent State of the Global Semiconductor Supply Chain Report published by CSCMP, which focused on the most dominant providers.
GEOPOLITICS ARE INFLUENCING THE CHIP INDUSTRY IN A BIG WAY
In 2020, according to the Semiconductor Industry Association (SIA), US-located fabs accounted for just 12% of the world’s semiconductor manufacturing, down from 37% in 1990.
So, what happened? Fabs migrated to East Asia, which in 2020 accounted for 75% of the world’s chip manufacturing. That percentage continues to grow as government incentives and lower production costs attract new investments.
In addition, the SIA forecasted that China would have the world’s largest share of chip production by 2030 due to an estimated $100 billion in government subsidies. 5
This SIA report may have kick-started geopolitical concerns in Washington regarding America’s growing dependence on sourcing most semiconductors from Asia (the EU experienced a similar awakening).
The subsequent supply chain shocks of the pandemic, ongoing trade tensions between the US and China, and a heightened level of stress regarding the stability of Taiwan’s relationship with mainland China, have all added fuel to the fire of this geopolitical uneasiness.
Increasingly, governments around the world have grown concerned about ensuring that they have access to a readily available supply of chips. Under the banners of national security and supply chain resilience, geopolitics and government incentives are influencing the future of the semiconductor industry like never before.
SEMICONDUCTOR SUPPLY CHAIN UPDATE: THE $50 BILLION CHIPS AND SCIENCE ACT
In August 2022, the US congress passed and the President signed into law the CHIPS and Science Act. The law is sometimes referred to as “the CHIPS Act” as well as “CHIPS for America”.
The CHIPS Act intends to fund $50 billion towards advancing semiconductor production in the US. $39 billion is allocated for the construction of new and expanded semiconductor production facilities. Another $11 billion will be allocated to support research into new chip technologies. 6
In April 2023, the National Institute of Standards and Technology, which is part of the US Department of Commerce, published the CHIPS for America Fact Sheet.
Per the document, the program exists, “ to meet a critical need for a stable, secure supply of semiconductors to protect U.S. national security, enhance economic competitiveness, and accelerate American innovation.” Further the R&D allocation exists “to fund the research and development that will ensure continued U.S. leadership in emerging semiconductor technology that has underpinned our economic prosperity.” 7
HOW MUCH OF THE $50 BILLION HAS ALREADY BEEN GRANTED?
Not much. To date, $200 million in federal grants have been made. This represents less than one-half of one percent of $50 billion.
According to recent news coverage, the, “Commerce Department has announced two grants to individual companies so far under the CHIPS Act, with Arizona-based Microchip Technology receiving $162 million, and the U.S. subsidiary of European defense contractor BAE Systems receiving $35 million.”
Officials say that larger awards to other companies will be announced in the coming months. 8
However, there is concern that construction delays, a shortage of fab-production labor, government bureaucracy, and the many requirements placed on grant recipients will delay or minimize the impact of the CHIPS Act.
Noticeably absent from those receiving grants so far are the companies investing billions of dollars to build new fabs, including TSMC (Arizona), Intel (Ohio), and Samsung (Texas).
TSMC recently made a statement that the company will delay until 2025 mass production at the their first fab in Arizona and that construction of a second fab will be delayed, “due to a shortage of skilled workers and difficult negotiation over how much money the U.S. government will provide.”
While some analysts say the statement could be a negotiating tactic by TSMC management to secure a high level of government funding, the fact remains that so far TSMC has not received any funding from the CHIPS Act. 9
In addition, according to multiple sources, Samsung recently announced they will delay mass production at their new $17 billion chipmaking plant north of Austin, Texas, until 2025.
2025 is also the year Intel plans start production at their new fab in Ohio. Intel is also planning a wafer fabrication site in Germany that is scheduled to begin production in 2027.
Intel has publicly communicated their ambitious goals. For example, this excerpt is from a recent piece published by Forbes entitled, “Inside The Mission To Build A Disaster-Resistant Supply Chain.” 10
“Intel is partnering with the public sector to create a more geographically balanced manufacturing capacity. The company has set a goal to bring 50% of the world’s semiconductor manufacturing into the U.S. and the EU by 2030. Major new construction projects are now underway to create leading-edge chip factories, research and development sites and back-end production facilities.”
As stated previously, Intel has historically designed and manufactured the majority of the products it sells. In recent years, the company introduced Intel Foundry Services, that allows customer to specify their own chip designs and have Intel manufacture them.
With foundries in Asia, the US, and Europe by the end of the decade, Intel may eventually have the ability and agility needed to supply customer-designed chips on whichever continent their customers prefer.
According to Jackie Sturm, Intel’s corporate vice president of global supply chain operations, “our customers can leverage our supply chain’s resilience to bolster their own value chains and make them more resilient as well.” 11
SUPPLY CHAIN RECOMMENDATIONS FOR THOSE OF YOU WHO BUY CHIPS
EE Times is an electronics industry magazine that has been published in the US for more than 50 years. So, we turned to this publication to look for insights regarding what original equipment manufacturers (OEMs) can do to protect themselves from semiconductor supply chain disruptions.
According to a recent article, to achieve semiconductor supply chain resiliency, OEMs must have long-term plans that include these 4 tactics.
- Build a network of suppliers: Cast a wide net, using both global and local suppliers. This provides you options when shortages occur. Although this requires extra effort, maintaining relationships with several suppliers may prevent disruptions to your product output.
- Develop a short reaction time: Agility is essential when navigating supply chains. Successful OEMs rapidly adapt to supply chain disruptions. Those who are slow to react will surely suffer production issues if supply constraints stretch out over time (this is what happened to the automotive industry in recent years).
- Maintain a safety stock of vital inventory: Carrying excess inventory of mission-critical parts is expensive. You’ll need to get buy-in from multiple decision makers. Yet, it may be much more costly if your business cannot ship products because you failed to stock extra essential components. (During the pandemic, one major automaker parked thousands of unsold vehicles for weeks as they waited for a branded nameplate that needed to be affixed to each vehicle’s exterior prior to shipping the vehicles to dealers. Ouch!)
- Forecast demand rigorously: Modern data-analytics tools can assist you in staying a step ahead of supply and demand fluctuation. An encompassing view that includes information gathered regularly from partners, suppliers, customers, and competitive research is essential to boost your supply chain resilience.
Over time, technology needs will shift and what you maintain in your strategic inventory will need to flex to accommodate those evolving needs. 12
ADDITIONAL SUPPLY CHAIN INSIGHTS FROM ENGINEERS AROUND THE WORLD
Avnet, a global technology distributor and solutions provider, conducts an annual Avnet Insights survey on trends driving electronics distribution and design. The most recent survey of engineers includes respondents from the Americas, EMEA, Asia, and Japan and was completed in September 2023.
As reported by Electronics Weekly, the survey results show that 73% of engineers say the electronic component shortages experienced recently in the supply chain have improved in the past year. This is a remarkable change from the previous year when 59% stated that component shortages had worsened.
Yet, the chief concern remains chip availability, with 69% of respondents saying this was their top concern.
Shortages in recent years led to resourceful measures – the survey reported the top three methods to handle a lack of component availability were as follows:
- Seeking alternative sources for parts (32%)
- Increasing the buffer inventory of parts (19%)
- Increasing the timetable of demand forecasts (17%)
Improving relationships with distributors was the most popular supply chain strategy for managing the chip shortage in 2023. 13
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1, 4. Dale S, Rogers, Zac S. Rogers, Zenan Zhou, and John Parkinson, “State of the Global Semiconductor Supply Chain Report”, October 4, 2023, as published by the CSCMP.
2. Kate Magill, “CHIPS and Science Act not enough to strengthen the semiconductor industry: CSCMP report”, January 5, 2024, as published by Supply Chain Dive.
3. Meaghan Tobin, Vic Chiang and Pei-Lin Wu, “Economy vs. environment: Some Taiwanese consider cashing in their chips“, October 9, 2023, as published by The Washington Post.
5. Semiconductor Industry Association and The Boston Consulting Group, “Government Incentives and U.S. Competitiveness in Semiconductor Manufacturing“, September 2020, as published by SIA.
6. Ana Swanson, “The CHIPS Act is About More Than Chips: Here’s What’s in It”, February 28, 2023, as published by The New York Times.
7. National Semiconductor Technology Center, “CHIPS for America Fact Sheet”, April 25, 2023, as published by the National Institute of Standards And Technology, U.S. Department of Commerce.
8. Ana Swanson, “U.S. Awards Chip Supplier $162 Million to Bolster Critical Industries”, January 4, 2024, as published by The New York Times.
9. Yang Jie, “One of Biden’s Favorite Chip Projects Is Facing New Delays”, January 18, 2024, as published by The Wall Street Journal.
10, 11. Satta Sarmah Hightower, “Inside The Mission To Build A Disaster-Resistant Supply Chain”, November 14, 2023, as published by Intel in Forbes.
12. Frank Cavallaro, “OEMs’ Sourcing Strategies Need to Account for Node Sizes”, November 13, 2023, as published by EE Times.
13. Caroline Hayes, “Avnet shares insights – optimism for supply chain tinged with uncertainty”, December 12, 2023, as published by Electronics Weekly.
SSI blog post entitled: Semiconductor supply chain update.