When the chips are down: how to manage the global semiconductor shortage

Inside mil­lions of smart­phones, lap­tops, house­hold appli­ances and cars, small elec­tri­cal com­po­nents work tire­less­ly to pow­er our every­day lives. How­ev­er, there’s a prob­lem as there aren’t enough of these com­po­nents, known as semi­con­duc­tors or, more com­mon­ly, chips, to go around and this is snarling up sup­ply chains.

The glob­al chip short­age start­ed dur­ing the mid­dle of last year when the coro­n­avirus pan­dem­ic start­ed to bite and car man­u­fac­tur­ers saw sales slump, forc­ing them to put a brake on pro­duc­tion. As the auto­mo­tive indus­try is inher­ent­ly focused on lean man­u­fac­tur­ing and opti­mis­ing sup­ply chain costs by only order­ing crit­i­cal com­po­nents when they’re need­ed, automak­ers paused the pur­chase of semi­con­duc­tors. Chip fac­to­ries then decid­ed to redi­rect their focus towards the elec­tron­ics indus­try which was expe­ri­enc­ing unprece­dent­ed demand for con­sumer gad­gets. 

“The pan­dem­ic cre­at­ed the per­fect storm,” says Sun­dar Kamak, head of man­u­fac­tur­ing solu­tions at smart pro­cure­ment com­pa­ny Ival­ua, whose clients include white goods giant Whirlpool. 

“On the one hand, it restrict­ed free move­ment of goods, ser­vices and labour, lim­it­ing sup­ply. At the same time, con­sumers had been locked down and this increased demand for home-enter­tain­ment sys­tems and stream­ing devices.”

Kamak points out that, with chip­mak­ers most­ly based in Asia, it’s much eas­i­er for the semi­con­duc­tor indus­try to sup­ply the large num­ber of gad­get fac­to­ries in the region than it is to ship parts to auto fac­to­ries around the world.

When the auto­mo­tive indus­try unex­pect­ed­ly rebound­ed towards the end of last year, automak­ers sud­den­ly found there weren’t enough chips avail­able to ful­fil orders and meet the demand for new vehi­cles. This stalled man­u­fac­tur­ing fur­ther. In ear­ly-April, Ford and Gen­er­al Motors cut pro­duc­tion at sev­er­al plants across North Amer­i­ca. 

It’s a prob­lem that could end up cost­ing the glob­al auto­mo­tive indus­try $60.6 bil­lion in lost rev­enue in 2021, accord­ing to Alix­Part­ners. The con­sult­ing firm has indi­cat­ed that the indus­try could shift between 1.5 mil­lion and 5 mil­lion few­er units this year than pre­vi­ous­ly planned. 

With the demand for con­sumer gad­gets show­ing no signs of relent­ing, the elec­tron­ics indus­try is now feel­ing the pinch as well. At Samsung’s annu­al gen­er­al share­hold­ers meet­ing in March, co-chief exec­u­tive Koh Dong-Jin warned of a “seri­ous imbal­ance”; the com­pa­ny has delayed the release of a new Galaxy Note mobile phone mod­el. And Microsoft and Sony have seen sup­plies of their next-gen­er­a­tion con­soles lim­it­ed in recent weeks. 

Over-reliance on Taiwan

While there are many fac­tors at play, giv­en the com­plex nature of glob­al sup­ply chains, the chron­ic short­age of chips has been made worse by a heavy reliance on just a few chip­mak­ers. 

The behe­moth of them all is Apple sup­pli­er Tai­wan Semi­con­duc­tor Man­u­fac­tur­ing Com­pa­ny (TSMC), which cur­rent­ly boasts a 56 per cent share of the chip foundry mar­ket. The chip­mak­er report­ed a 16.7 per cent year-over-year increase in rev­enue for the three months to the end of March. 

Despite TSMC announc­ing in Jan­u­ary that it would pri­ori­tise its pro­duc­tion efforts to help the auto­mo­tive indus­try ease its woes – it will also com­mit $100 bil­lion over the next three years to increase its chip man­u­fac­tur­ing capac­i­ty – there have been calls for glob­al man­u­fac­tur­ers to rethink their semi­con­duc­tor sourc­ing strate­gies. 

In the Unit­ed States, Pres­i­dent Joe Biden has pledged $50 bil­lion to boost domes­tic chip man­u­fac­tur­ing. And the Euro­pean Union is seek­ing to achieve dig­i­tal sov­er­eign­ty and wants to become an inde­pen­dent chip pro­duc­er that can sup­ply its own demand. 

Kamak says that such approach­es would enable com­pa­nies in Amer­i­ca and the EU to “design near-shore strate­gies that would elim­i­nate depen­den­cy on sin­gle-source ven­dors and reduce sup­ply chain risks”.

Yet there will be no quick fix. “Although semi­con­duc­tor sup­ply will even­tu­al­ly catch up with mar­ket demand, there will be some short-term pain ahead,” says Gabriel Wern­er, vice pres­i­dent and Europe, Mid­dle East and Africa solu­tions advis­er at sup­ply chain soft­ware provider Blue Yon­der. 

As demand con­tin­ues to out­strip sup­ply for the time being, the price of chips and oth­er crit­i­cal com­po­nents could rise. Retail prices have remained large­ly unaf­fect­ed, but Chi­nese gad­get mak­er Xiao­mi has con­ced­ed it may yet have to pass on some of the cost to its con­sumers.

Navigating future shortages

With the chip short­age like­ly to drag on for months to come, pos­si­bly well into 2022, the ques­tion is being asked how can man­u­fac­tur­ers avoid sim­i­lar sna­fus?

Automak­ers in par­tic­u­lar are being encour­aged to move away from the just-in-time mod­el of man­u­fac­tur­ing to a just-in-case one, stock­pil­ing chips to hedge against future slow­downs. But this could cre­ate a “bull­whip” effect, says Wern­er.

“There is a risk that the semi­con­duc­tor indus­try will over­com­pen­sate and then there will be too many chips in pro­duc­tion,” he says, adding the indus­try has always been cycli­cal, typ­i­cal­ly peak­ing dur­ing the fes­tive sea­son. 

Wern­er believes man­u­fac­tur­ers should be dou­bling down on their efforts to gain insight into their sup­ply chains so they’re able to respond to sud­den shifts in demand more effec­tive­ly. 

“Instead of rely­ing on tra­di­tion­al meth­ods to pre­dict con­sumer demand, man­u­fac­tur­ers need to explore the use of arti­fi­cial intel­li­gence to give the vis­i­bil­i­ty and flex­i­bil­i­ty need­ed to adapt to changes,” he argues. “Speed, real-time vis­i­bil­i­ty and automa­tion have become the defin­ing themes for effec­tive sup­ply chain man­age­ment. Those that are able to build robust sup­ply chains will have a bet­ter chance of deal­ing with future dis­rup­tion.”

Kamak agrees: “Com­pa­nies that have risk mon­i­tor­ing capa­bil­i­ties in place are def­i­nite­ly able to fare bet­ter against crit­i­cal sup­ply short­ages.”