State of The Global Semiconductor Supply Chain In 2022

The global semiconductor supply chain is fraught with many issues. This is mainly the result of technical limitations and planning deficiencies. These long-term issues were dangerously exposed during the COVID-19 pandemic, leading to a global shortage of semiconductors.

Industry experts hope the pandemic-induced shortage can serve as an important learning experience and a blueprint for how the global semiconductor supply chains can be reformed.

In this article we’ll discuss the current structure of the global supply chain, its weaknesses, and its future. In doing so, we hope you can have a better understanding of the supply chain and potential new trends.

Structure of the Global Semiconductor Supply Chain

According to Georgetown University, the semiconductor supply chains have three main components: 1) Design; 2) Manufacturing; and 3) Assembly, testing, and packaging. Design and manufacturing components are the most complex and capital-intensive, due to the technological sophistication of manufacturing equipment.

Different countries specialise in different supply chain components. The US and EU specialise in design and the manufacturing of manufacturing equipment but it does not have the manufacturing scale of Taiwan, South Korea, and, to a lesser extent, China. However, Taiwan and South Korea have stepped up their capabilities, being able to produce the most advanced 3-nanometre processors.

The Boston Consulting Group states that countries’ specialisation in a specific aspect of the semiconductor supply chain allows them to make the most of their respective comparative advantages. Manufacturing companies, while maintaining a just-in-time production model and maintaining a lean inventory, would produce semiconductors in bulk due to costs of manufacturing equipment.

However, companies manufacturing semiconductors have more generalised manufacturing capabilities. The Harvard Business Review writes companies are able to manufacture semiconductors used in electronic goods, medical devices, and vehicles, as evidenced by the semiconductors shortages for vehicles due to companies shifting production for electronics during the pandemic.

Weaknesses of the Global Semiconductor Supply Chain

Industry obsession with country specialisations and intense cost-cutting has arguably led to the most recent shortage. This is not the first such shortage, however. An increase in demand for electronic toys led to shortages in 1997. The Fukushima earthquake affected production at Renesas Electronics, the third largest supplier of car chips, leading to shortages in 2011, writes the South China Morning Post.

Demand shifts and natural disasters were evident in this shortage. According to HBR, “When the Covid-19 pandemic caused a precipitous drop in vehicle sales in spring 2020, automakers cut their orders… Then in the third quarter, when demand for passenger vehicles rebounded, chip manufacturers were already committed to supplying their big customers in consumer electronics...”

Moreover, country specialisation meant that supply chains may be susceptible to geopolitical tensions. This is especially concerning considering 75% of semiconductor manufacturing is centred in East Asia, a region exposed to China-US great power competition, China-Taiwan tensions, China-Japan tensions, and North-South Korea tensions, says BCG. 

Regional tensions’ direct effects on the global supply chain was evident following the blacklisting of Huawei. Huawei began stockpiling chips from various manufacturers in early 2019, greatly straining the global supply chain and arguably becoming a key catalyst for the current shortage, beyond the pandemic. Concentration is the result of a need to stay close to other plants and human capital. 

Future of the Global Semiconductor Supply Chain

As a result of all these limitations, experts have called for greater supply chain diversification. Deloitte writes “[Concentration] in East Asia… has attracted significant government attention from the United States, Europe and China, and plans are already underway to build new plants in those countries or regions, as well as Israel, Singapore… This process is also known as ‘localization.’”

However, this diversification effort should apply to companies as well as countries. While costly, it is possible and possibly worth it. The SCMP states, for example, Intel will begin producing chips for vehicles, an entirely new capability and market for them. In addition, Intel will also invest in the creation of new factories in the US and in existing factories in Ireland and Israel.

According to Deloitte, experts have also called for greater information exchange to prevent the same semiconductor-auto industry conundrum. “[Most companies] and customers have not adopted systems or processes to enable real time information exchanges. Hence, large fluctuations in production planning volumes happen at sub-tier levels in response to even small shifts in customer demand.”

On the other hand, Forbes has pushed for companies to adopt new “Integrated Business Planning Processes.” This planning model refers to the integration of key indicator tracking, supply-demand developments, and contingency-creation processes into a unified planning model, a means to more precisely address supply chain risks and supply chain opportunities.

What It Means For You

In conclusion, if your company is among the companies involved in the semiconductor supply looking to diversify, Southeast Asia may be a lucrative destination. Singapore already accounts for 19% of the global semiconductor manufacturing equipment market and 5% of global wafer fabrication capacity, according to the Business Times. 

Additionally, the Philippines top export is semiconductors (62% of all 2020 exports), Malaysia has major semiconductor companies such as Intel headquartered in the country, and Vietnam is twelfth in the global electronics industry, whereas Indonesia has plenty of natural resources needed for semiconductor production, according to Frontier Enterprise.Evidently, Southeast Asia can be a conducive area to concentrate semiconductor production, as semiconductor production tends to be clustered in areas with access to human capital and necessary resources, writes Deloitte. Based in Singapore and the US, and with expertise in both markets, Kusu can help you and your company with relocating your semiconductor factories to Southeast Asia.