Where are we with the semiconductor supply chain crisis?

• The supply chain issues will likely persist for the next six months to a year, possibly even longer, according to experts.

Earlier this year, when the outbreaks from the Delta variant began to peak, it worsened the already beleaguered global semiconductor supply chain, disrupting more businesses than when the pandemic first happened in 2020. Countries and companies around the world were scrambling to avoid further losses, with most pursuing semiconductor self-sufficiency.

Many had envisioned that by the end of this year, there would be some light at the end of the tunnel especially with it comes to the global supply chain crisis–barring unforeseen circumstances of course. Then came the latest Covid-19 variant–Omicron. No doubt, supply chains are opening up. However, experts reckon that it is much slower than anticipated.

In short, a hiccup like Omicron may easily cause backsliding. In fact, According to experts, it is a “perfect storm”, with a mix of supply shortages, high energy prices, high food prices, inflation, supply-chain crises, semiconductor shortages, and fears of a possible global recession.

How did the semiconductor supply chain crisis start?

Looking back, between late last year and earlier this year, the shortage was partly due to stronger demand for more advanced chips from the consumer electronics and computer industry through Covid-19. Demands from consumer products weren’t the only factor. 

By mid-2020 onwards, there was a surge in demand for semiconductor content in the auto industry, driven by the adoption of technologies such as driver assistance systems and autonomous driving. In fact, Intel projects that semiconductors will account for over 20% of the input costs for new premium cars, up from 4% in 2019.

To top it off, these chips, which function as the brains of our electronics, are the lifeblood of modern society, and even before the pandemic, demand for them exceeded supply. Therefore, it is not surprising that manufacturers are struggling to keep pace, especially given how the pandemic that led to a global lockdown has exposed pressure points in the global chip supply chain. 

What’s still causing the global semiconductor shortage?

As it has been made apparent by now, the vast majority of manufacturing is being carried out by two companies in East Asia – Taiwan’s TSMC and South Korea’s Samsung. These foundries manufacture as much as 70% of the world’s semiconductors. Although these chips were an American invention, the number of US manufacturers currently creating them has declined severely. In 1990, 37% of chips were made in America and by 2020, that number was only 12%.

What makes matters worse is the high entry barriers into semiconductor manufacturing, in most parts of the world. Aside from a steep learning curve required to set up a semiconductor foundry, it entails an upfront investment of US$10-$12 billion, which is further exacerbated by the need to spend at least three years to prepare to become production-ready. Even then, it would be almost impossible for a new foundry’s chip yields to match those of the incumbents. 

As said by experts, chips rapidly become obsolete and price pressures are a major problem in the tech sector, putting risk to profitability. That is why it only made sense for a handful of large players to invest in manufacturing capabilities as those companies are capable of spreading those costs and risks across a large base of customers.

Is the end in sight?

The recent holiday shopping season which has forced major ports to expand operations has eventually made supply chain a central political issue. It eventually became a key factor in rising inflation. According to maritime research firm Drewry, the crunch on container capacity could last until Q4 2022 while shortages of key components, including semiconductors, could take even longer to resolve. 

To sum it up, the supply chain issues are likely to last for many more months — if not years. What could make matters more complicated is how, inevitably, demand for semiconductors will continue seeing an uptake as more industries are transforming digitally. 

That has in fact been the case for the last couple of months which led chip makers and governments to build more capacity into supply chains. Beyond the factory floor, the World Economic Forum highlighted that organizations are also seen stepping up their efforts to move past the single-node relationships that had come to define the lean supply chain model pre-pandemic.