What is Global Chip Shortage
Across industries, supply chain disruption has become a major concern. The chip scarcity has
halted car production, pushed back consumer electronics product debuts, and hampered
businesses' capacity to hire new workers. Businesses must prepare for production ramp-up and
the long-term effects of the economic crisis when the scarcity eases. In order to address the
chip scarcity and prepare for a return to "normal," a new deficit must be addressed: labour.
The moment has come to rethink our systems. What production models aren't working for you
anymore? Is just in time (JIT) a thing of the past? What role will automation play in addressing
the labour shortage? Understanding where the problems started can aid in answering these
questions.
What is the reason of this Chip Shortage?
Most people agree that Covid was a major contributor to the chip shortage, but what happened
behind the scenes? Because of the lockdowns and job losses, manufacturers expected a drop
in consumer purchases. To prepare for the economic impact, semiconductor chip purchases
were put on hold, and supply were shifted to other clients, according to Stephen Shankland in a
recent CNET piece. Due to stimulus finds and at-home demands, demand grew faster than
predicted, causing numerous businesses to lose money. The combination of this and
simultaneous shutdowns of semiconductor chip manufacturing facilities had a severe impact on
chip availability. Although we are not out of the woods yet, the chip shortage is expected to
resolve within the next year or two, according to some experts.
How Has Manufacturing Been Affected By The Chip Shortage?
As a consumer or a producer, you've probably already felt the effects of the chip shortage. Lead
times are four to eight weeks longer on average, and occasionally even longer. Manufacturers
of automobiles have had to cease production or transport unfinished goods. We are seeing
price inflation that has impacted millions of consumers as the supply of vehicles has dropped
and consumer demand has soared.
· Inflation in the United States reached 7% at the end of 2021, the highest level in 40 years.
· The annual inflation rate for vehicles was 14.4 percent in November 2021.
To mitigate supply chain risk, manufacturers are adjusting their spending. Globally, a 10%
increase in semiconductor equipment spending is expected, pushing total spending to a new
high of $98 billion.
New Opportunities For The U.S.
According to William Schulz in this SPIE article, the shortfall has forced the US government and
manufacturers to recognise their reliance on outsourcing. The Department of Defense's reliance
on chips in military operations makes this a national security issue. The US government and
corporate sector have committed to two major efforts to assist the country restore its chip
manufacturing leadership:
1. Proposals worth $52 billion to assist American chipmaker
2. Intel is investing $20 billion in two semiconductor manufacturing facilities near Columbus,
Ohio.
Digitalization is still growing at a breakneck pace, necessitating a large increase in chip
production. The $52 billion will take a few years to have a direct influence on the economy, and
Intel's facilities won't start producing until late 2024, but the United States will be prepared for a
spike in demand due to anticipated tech trends like the metaverse's expansion.
How One Can Reduce The Impacts Of These Shortages On Your Business?
• Make sure your organisation is ready to resume "regular" operations. As throughput grows, do
you have the requisite supplies and human capacity? Assess your employee perks with HR and
launch a hiring campaign.
• Improve R&D and production efficiency. To keep up with rising production, industrial
automation may be required.
• Examine your inventory management systems. Is JIT becoming obsolete? Rethink your
production methods. Is it more cost-effective to stockpile materials for a higher manufacturing
volume, or do you risk running out?
• Improve your supplier relationships. Open lines of communication to ensure they're prepared
to satisfy your ramp-up requirements and to assist set expectations for the future.
Impact of Shortage of Semiconductor on Automobile
Industry How can they recover
The paucity of a little, but generally ubiquitous piece of technology: the semiconductor, has
brought the auto and other sectors to their knees. Plans for millions of cars have been
scrapped, and the consequences will last for years. What can corporate leaders do to ensure
that this never happens again? They need to transform their company by prioritising suppliers.
Currently, CEOs spend only a small percentage of their time with suppliers. Instead, they should
adopt Apple's and other Big Tech companies' procurement-centric model by reengineering and
rebalancing the way they collaborate with direct and indirect suppliers, including initiating one-
on-one conversations with supplier CEOs, working with suppliers to develop mutually profitable
joint business opportunities, and making commitments about loyalty during future
semiconductor and other crises – in general, elevating procurement to a more strategic role.
Tesla is an excellent example of a corporation that has excelled at this. One or two strategies
will not ensure resilience and success; instead, a comprehensive strategy with procurement at
the centre is required. What can corporate leaders do to ensure that this never happens again?
Simply put, they must change the way they work with their suppliers. We don't just mean their
direct or "Tier 1" suppliers; we also mean their suppliers' suppliers: semiconductor designers
and manufacturers, silicon wafer suppliers, and semiconductor packagers — practically any
mission-critical entity in their supply chain. Not only the semiconductor supply chain; while the
shortage of semiconductors may be keeping them awake at night right now, a lack of other vital
components, such as batteries or tyres, may keep them awake in the future.
Today, CEOs spend only 1% of their time with suppliers on average. To put it another way, they
don't spend much time thinking about or participating in how their organisations spend more
than half of their resources. This is a mismatch with potentially life-threatening consequences
for businesses, and it helps to explain why so many businesses are struggling in the current
crisis.
The Approach taken by BigTech Companies to survive Semiconductor Crisis
When the semiconductor crisis hit, Apple, Dell, and the others sprung into action, running a
procurement and supply chain war room around the clock. They had learned from the previous
semiconductor crisis in 2017 and left nothing to chance, unlike the automakers. Automakers
(and other companies affected by the crisis) should take a variety of urgent Big Tech-inspired
initiatives to improve their current situation:
· Create their own bill of materials for semiconductors (it's incredible to believe that many
companies have no idea where their components come from — or at least didn't at the outset of
the crisis).
· Make a non-refundable and non-cancelable commitment to suppliers for a period of 18 to 24
months.
· Ascertain that their suppliers set aside specified components for their exclusive usage.
· Work with your vendors to track and trace each order.
They should also take advantage of this once-in-a-generation chance to reengineer their direct
and indirect supplier relationships. One of the counterarguments we hear is that once normalcy
returns, all the concerns about supply chains — and the resulting need for procurement to play
a larger role as a critical link with suppliers — will fade. We believe this is a futile hope.
The current semiconductor problem is unlikely to end until 2023 at the earliest. After then, the
next crisis will only be a matter of time before global supply systems are disrupted. There have
been seven semiconductor crises in the last 28 years (including the current one), and according
to our calculations, there are about 50 choke points in the worldwide supply of these critical
pieces of technology (such as the Suez Canal and Taiwan's TSMC's dominance).
Any one of these factors could trigger the next semiconductor crisis, and while President Joe
Biden has established a supply chain disruption task team to address some of these bottlenecks
for US companies, rapid answers to long-term issues are unlikely.
If business executives want to control their own fate, they must act now.
Impact of Ukraine Crisis on Global Semiconductor
Supply
The Ukraine crisis is the latest tectonic shift in a grueling two-year period for the semiconductor
industry, which was already beset by the COVID-19 pandemic and insufficient capacity to
satisfy increasing demand. This latest danger to semiconductor production could be the most
serious yet, with ripple effects expected across a wide range of industries, including high tech,
automotive, consumer electronics, and home appliances.
The problem stems from the fact that Ukraine is a major supply of neon gas, which is required to
run the lithography lasers, which are at the heart of semiconductor manufacture. Chip
manufacture comes to an abrupt halt without neon. The United States has traditionally gotten up
to 90% of its semiconductor neon from Ukraine, which also supplies roughly 70% of the global
supply. Ukraine is also a major supply of xenon and krypton gases, both of which are essential
in the chip fabrication process.
The concentration of these strategically important gases in Ukraine is the result of a
manufacturing mishap. Neon gas is a byproduct of steel manufacture, particularly from older
steel mills, which are primarily found in eastern Ukraine nowadays. Many of these enormous
steel mills were equipped with air separation technology to catch rare waste gases such as
neon, krypton, and xenon for use in experimental high-powered laser weapons, missiles, and
satellites in the former Soviet Union (which included today's Ukraine). These older steel plants
were mostly replaced by modern infrastructure after the disintegration of the USSR in 1991,
which did not have gas-collection technology since the economics did not support it. Ukraine, on
the other hand, became the leading provider of these gases to the global semiconductor sector
by continuing to operate old-style steel mills.
Bracing up for Shortages
Beyond these gases, Russia's intervention in Ukraine has exposed several associated
weaknesses in semiconductor supply. Russia currently controls 40% of the palladium market,
15% of the titanium market, 12% of the platinum market, and 10% of the copper market, all of
which are critical inputs for high-tech products such as catalytic converters, turbine engines, ion
batteries, and circuit boards, as well as plating processes in chip manufacturing. For the
foreseeable future, sanctions imposed by the G7 and other nations, spurred by international
condemnation of the Ukraine war, make Russia a doubtful supplier of such supplies.
What is the likelihood of additional neon supply disruptions in the semiconductor sector, and
how severe will they be? In the short run, existing supply should continue to cushion the shock.
Following the supply chain interruptions caused by COVID-19, the larger players — ASML,
GlobalFoundries, Intel, Micron, and TSMC — have allegedly bolstered up their supplies of neon
and other key gases. However, industry observers suspect that the bulk of other chip makers
have a similar buffer at the moment. The big players will almost probably use their buying power
to get first dibs on new supplies, and they will almost surely have a more diverse supply base.
All indications point to a long-term crisis that will put supplies under strain beyond the three-to-
six-month window. Nobody knows how long the Ukraine crisis will persist, how much damage it
will wreak, or how long economic sanctions will be in place, but the situation remains dismal for
the time being. Large stocks will continue to decrease in the absence of an immediate remedy.
As supply chains seek equilibrium, we should expect more supply shortages and more inflation.
Strategies for Mitigation
Is it possible to increase the supply of crucial chip manufacturing gases? Yes, with some effort
and expense. Following Russia's 2014 invasion of Crimea, numerous American steelmakers
modified their air separation systems to capture neon. (Because the main supplies of neon and
other gases are located outside of Crimea, the possible impact on chip supply did not attract the
level of media attention witnessed today.) A neon production facility was established in Texas
by Linde, a major industrial gas firm. China and South Korea have also increased their
production of neon supply.
A equivalent response today would be a rush to deploy gas collection technologies in more steel
mills, possibly through joint ventures between semiconductor foundries and steel producers.
That would take time, but given the events in Ukraine and the international response, it is critical
to begin immediately.
Another feasible approach is to recycle neon; firms that offer recycling systems strive for a
capture percentage of up to 90%. Recycling also produces less CO2 than collecting gas from
steel mills. To recently, few chip makers have installed recycling equipment; the cost of neon
was previously judged too low to warrant the investment, but that may soon change. Fabricators
who opt to recycle neon will have to shut down their semiconductor production lines until the
requisite equipment is built, reducing output in a world where chips are in short supply.
Because semiconductors are so widely used throughout sectors, all organisations must assess
their risk at numerous stages of their value chains, including at the very least secondary and
tertiary supply levels, to identify aspects that may be significantly at risk. Leading organisations
are already actively interacting with their supply bases to understand their own risk position (and
pressuring those suppliers to do the same), accumulating inventories, and qualifying alternative
suppliers. Great communication, rather than fancy analytics and AI systems, is the best
instrument for quickly performing a full risk assessment across the whole supply chain.
For forward-thinking organisations that deliberately seek, identify, and avoid the snares
sprinkled across the internationally squeezed supply chain, the past two years have proved that
preparedness pays enormous returns. This latest chapter of supply tightness makes planning
an imperative need for the various industries that rely on semiconductors. During these trying
times, companies like Tesla and General Motors have distinguished themselves by proactively
securing their raw material sources. Finally, successful businesses recognise that nothing is
more important than consistent product delivery. In the face of the biggest dangers, firms who
invest in forward thinking and scenario planning for even the most basic of raw resources will
reap the largest dividends.
Manufacturing of Semiconductors in India
With the introduction of IoT (Internet of Things) and 5G technology in India, semiconductor chip
consumption is estimated to climb to almost $100 billion by 2025, up from $24 billion currently.
Furthermore, the current geopolitical context places a premium on the security of essential
information infrastructure, which is why reputable semiconductor and display suppliers are
critical.
More information is available at https://economictimes.indiatimes.com/small-biz/sme-
sector/with-rs-76000-crore-pli-scheme-india-set-to-action-its-semiconductor-fab-vision/
articleshow/88848107.cms?utm source=contentofinterest&utm medium=text&utm
campaign=cppst&utm_
India's semiconductor demand is currently totally fulfilled by imports. As a result, there was a
need to incentivize the value chain in order for India to become economically self-sufficient and
technologically advanced. With a budget of about Rs 76,000 crores, the government envisioned
a comprehensive programme for strengthening India's semiconductor and display
manufacturing ecosystem.
The new programmes have committed Rs 2,30,000 crores in fiscal support for the whole
electronics supply chain, including electronic components, sub-assemblies, and completed
goods. Manufacturers of mobile phones, IT hardware (including tablets, laptops, servers, and
all-in-one PCs), telecom & networking equipment, auto components, ACC battery, White goods
(including LED and air-conditioner), Solar PV modules, and specified electronic components
were given incentives worth Rs 1,53,392 crores in the first phase of the rollout. Incentives for
silicon semiconductor fabs, display fabs, compound semiconductors, silicon photonics, sensor
fabs, semiconductor packaging, and semiconductor design are the most recent additions.
A stealthy blend of product, product technology, process technology, and substantial financial
expenditure is required for a semiconductor and display fab. In light of this, unlike previous
schemes that were based on industrial output, the government's incentive programme for the
sector is based on project cost or capital investment. The following is the basic structure of fiscal
support committed under the scheme:
· Semiconductor fab units will receive financial assistance ranging from 30% to 50% of project
costs, depending on the node size being fabricated.
· Display fab plants will be eligible for financial assistance of up to 50% of project costs, with a
maximum of Rs 12,000 crores.
· Approved compound semiconductor units, silicon photonics, sensors (including MEMS)
fabs, and ATMP/OSAT facilities will be eligible for financial assistance of up to 30% of capital
investment.
· Chip product design businesses (fabless companies) would get a design-related incentive of
up to 50% of eligible expenditure (up to Rs 15 crore per application) and a product deployment-
related incentive of 4-6 percent on net sales for a period of five years (maximum of Rs 30 crores
per application). The government intends to provide similar assistance to at least 100 local
enterprises, with at least 20 of them expected to generate income of Rs 1,500 crore in the next
five years.
The application period for the schemes begins on January 1, 2022, and lasts 45 days for
semiconductor and display fabs and three years for other plans. For semiconductor and display
fab approvals, special quality and cost-based selection criteria will be used.
Furthermore, as a non-financial incentive, the government wants to assist businesses by
providing them buy preference in electronic product procurement under the Public Procurement
(Preference to Make in India) Order 2017. This will assist companies establishing up
manufacturing in India by providing a captive demand base for Indian-made chips, which has
been one of the chip industry's main concerns.
Global firms from Taiwan, the United States, and South Korea have showed strong interest in
investing, with a particular focus on domestic firms and startups in the design sector. The
initiative is expected to bring in roughly $22 billion in investment and employ over 1,35,000
people over the next four years.
The government also intends to launch a "India Semiconductor Mission" to push long-term
plans for the chip and display industry's long-term development. The Central Government would
also collaborate with state governments to offer pre-requisite infrastructure in terms of land,
semiconductor-grade water, power, logistics, and the research ecosystem as part of this
mission. The government is also presenting a clear twenty-year plan that will focus on creating
highly skilled job opportunities.
Another positive deviation from subsidizing/incubating IP creation in India through a
government-sponsored agency has been to condition a large portion of the incentive on the
successful implementation of the design through a production-linked incentive, which will
incentivize companies/start-ups based on success rather than intent.
The initiative, which will benefit chip manufacturers from the huge response and demand
generated by the first phase of PLI, has kicked off the second phase of promoting India as a
manufacturing destination. Furthermore, with substantial fiscal incentives and non-fiscal
benefits, India's semiconductor dream is likely to come true, contributing significantly to the
country's goal of a $1 trillion digital economy and $5 trillion GDP by 2025, as well as having a
multiplier effect on allied sectors such as electronics, telecom, automotive, railways, and
electrical products.
How can the semiconductor industry emerge after Covid-19 crisis?
Semiconductor businesses moved quickly to protect personnel, secure supply lines, and
address other important concerns in the months after the coronavirus outbreak. Although the
situation remains critical, and many governments continue to impose physical-distance limits,
semiconductor executives are now looking forward to the time when the pandemic has passed
and the new normal has begun. They're planning methods for envisioning and transforming their
business models to prepare for that moment, two tasks detailed by McKinsey in a framework for
responding to the coronavirus.
Every component of the company model, including product portfolio composition, capital
expenditures (capex), R&D strategy, demand predictions, supply-chain footprints, production
decisions, and mergers and acquisitions alternatives, could change (M&A). However, with so
much uncertainty in the future, semiconductor companies may struggle to make strategic
decisions. They should first build a stable baseline for their company before moving forward (for
additional information on this issue, see the sidebar, "Determining the Starting Point").
Semiconductor businesses can use this foundation to create a path to the next normal by
concentrating on the following questions:
— Given changing demand, economic developments, and other global shifts, what recovery
scenarios are most likely?
— What effect has the COVID-19 situation had on long-term demand and trends?
— How can we come out of this crisis even stronger?
Companies that considered strategic questions early in previous downturns were more likely to
recover rapidly and become industry leaders.
Despite the fact that the COVID-19 pandemic is unparalleled in modern history, the necessity
for long-term preparation remains.
Developing recovery scenario
COVID-19 has had a substantial impact on the sector's fundamentals, including customer
behaviour, business revenues, and a variety of corporate activities. Many companies' future
prospects are uncertain, and some may not survive the crisis.
Depending on prospective government initiatives and other difficult-to-predict circumstances,
multiple recovery scenarios are feasible.
We previously released an essay on the semiconductor demand prognosis in the short to
medium term.
Our research was based in part on assumptions from two of McKinsey's nine COVID-19
recovery scenarios, both of which assume that the coronavirus is finally contained and that
catastrophic economic harm is avoided. The first scenario, designated A3, sees global gross
domestic product (GDP) revive in the fourth quarter of 2020; the second, designated A1, sees
recovery in late 2022. We've adjusted the projections to incorporate demand in 2021 since the
original analysis.
In all recovery scenarios, most semiconductor categories are expected to have negative sales
growth in 2020. However, we expect the situation to improve in 2021 when most end markets
recover, owing to the fact that the starting point for 2020 would be far lower than in past years.
Only a few areas in the more optimistic A3 scenario match the growth projections made before
COVID-19 was released in 2021. (Exhibit 1). The number of segments that recover in the more
pessimistic A1 scenario is substantially lower (Exhibit 2). A few trends stand out among the
various segments:
— PCs. The demand for this segment will plummet the most, and the performance disparity will
widen with time. The majority of consumers will purchase all of the home-office devices they
require for remote work in 2020, lowering demand for the following year. Meanwhile, even if the
recovery is progressing, businesses may continue to postpone PC purchases in order to keep
costs under control.
-- Automotive. In the most optimistic recovery scenario, A3, the automobile market will rise 28 to
36 percent year over year in 2021.
This projection is based on the premise that governments will provide car customers with
incentives.
Government incentives are less strong in A1, the scenario with the delayed recovery, and
growth remains in the 1 to 5% range.
- Communication through wire. In both 2020 and 2021, growth in this area could exceed pre-
COVID-19 projections. Because prolonged remote work and homeschooling will increase
demand for wired communication, a delayed recovery would actually contribute to higher growth
than the more positive forecast in this sector.
