No easy options to facilitate semiconductor compression

As the global semiconductor shortage enters its second year, the U.S. government appears to have decided that extraordinary times call for extraordinary measures.

Supply shortages continue to weigh on sectors ranging from cars to home appliances, undermining the global economic recovery from the Covid-induced crisis and exacerbating a global supply chain crisis.

In late September, Commerce Secretary Gina Raimondo told chipmakers that Washington wanted them to provide data on their business details, such as inventory, that would be used to help identify issues in the supply chain earlier and more clearly. Although participation is declared voluntary, Raimondo has signaled that the United States may force those who do not comply.

It is not difficult to see why such drastic action is being considered, given the scale of the disruption. But the intervention of the American government risks being in vain.

“What the Biden administration wants is a control tower that sees everything in the industry: forecast, inventory, capacity and utilization. But this is unlikely to be successful, ”says Peter Hanbury, partner at Bain & Co.

Taiwan Semiconductor Manufacturing Company, the world’s largest contract chip maker, and its peers “won’t want to say how much capacity they’re giving Apple, because then the U.S. government could tell them to give that capacity to someone else.” other instead, ”says Hanbury.

“There could also be antitrust issues, because if [carmakers] could see all this data, they could agree to lower the prices.

However, companies are getting creative in responding to supply shortages. At Luxshare, a Chinese electronics maker and supplier to Apple, executives say sourcing components from companies that aren’t their usual suppliers is now part of their job. Contract chipmakers try to “shape demand” by convincing customers to use slightly different specifications to get them served faster.

Customers of chipmakers are also adapting. “Companies have become accustomed to prepaying capacity and signing long-term agreements 12 to 18 months in advance,” says Phelix Lee, analyst at Morningstar.

“Sometimes the shortfall is such that you would need them to sign for 36-60 months,” adds Lee. “But some producers are turning down orders instead of letting the backlog build up, because if customers book so much in advance, they can lock in the price.”

Beyond short-term fixes, the compression of the supply chain triggers a broader overhaul of operations.

“While in the past the production process was divided into many tiny components, they [companies] now realize that while this may be the most profitable, it is also more prone to disruption, ”says Hanbury. He therefore predicts vertical integration through mergers and acquisitions.

Part of that is already happening: Foxconn, the world’s largest contract electronics maker, has acquired stakes in two chipmakers to secure supply for its nascent electric vehicle business. Meanwhile, some chip design houses that used only one contract manufacturer are now looking to add a second or third manufacturing partner.

Companies are also looking to better understand where the electronic components that go into their products come from. After the Fukushima earthquake and tsunami in Japan disrupted supply chains in 2011, Toyota built a system in-house to trace the origin of the many different electronic control units that go into every car. Further such efforts will create the transparency sought by the Raimondo initiative.

Supply chain spasms could also cause manufacturers to move away from an overly concentrated production footprint in one country. This would inadvertently contribute to the decoupling of supply chains from China that the US government has long pursued.

But to rule out a repeat of the massive shortages seen over the past year, a more radical approach would be needed.

“The fundamental problem is that in semiconductors, we have a concentrated industrial structure with huge multi-year investments, which are slow to respond to V-shaped demand movements as we are seeing now,” says Andrew Tilton, Asian economist at Goldman Sachs. “In theory, efforts to duplicate supply chains and create excess capacity could help, but it would be very expensive and take time. ”

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