Semiconductor Shortages – Part I

Part I: A ‘Chip’ on the Shoulder

How long will the global semiconductor chip shortage last? Read the first of this two-part report to find out:

That raging inflation and a slowing economy can eventually be traced back to a bunch of factors that have to do with the breaking down of global supply chains is now a fact well researched and reviewed. Whilst many of these disruptive factors that continue to affect global supply chains – especially magnified for crucial intermediate goods such as semiconductor chips – extreme weather, war or the COVID-19 pandemic – are still present, there may just be a number of other wildcard factors around the corner.

The million-dollar question to answer, in this regard, isn’t when chip shortages will end. It is to answer how far specific firms are on their curve to relief.

A Staggered Exit

A Bain & Co. report recently opined: “The reality is the chip crunch probably won’t end on a single date…(the) structural supply chain weaknesses that have caused shortages of “leading-edge” 12-inch wafers with transistors of 28 to 130 nanometers, “lagging-edge” 6- and 8-inch wafers, and advanced substrates for “bleeding-edge” chips with transistors of 5 to 14 nanometers each (have their) own timeline to resolution.”

Some firms are expected to see relief as soon as the end of this year, while others may have to wait till 2024 and beyond. As always, these numbers need to be taken with a pinch of salt, especially as the world faces possibilities of further disruption such as geopolitical tensions, recession worries and shortfalls in equipment needed for the manufacture of bleeding-edge chips.

A major factor involved in the delay in semiconductor chips reaching desired locations is in the way firms reacted to the shortage in the first place. A number of automotive companies chose to cut back on orders in the initial stages of the pandemic – they now find themselves way at the back of the pecking order with the resuscitation of demand.

The larger impact has been felt, in this regard, by skyrocketing demand from technology firms and the longer lead times needed in the building of fabrication plants that supply said chips. All of these have affected end-market demand in some way or the other.

Longer lead times, inconsistent recovery and some Wildcards

Demand for certain specific types of chips – and the industries using them – have been hit harder than others at different times. After rising sharply in 2021, lead times for chip deliveries have flattened considerably, albeit at elevated levels.

While shortages are set to improve for certain types of products and industries, the balance is set to be very tight moving forward. As one shortage recedes (giving chip buyers all the computing components required to complete one aspect of the product), new chip shortages are set to pop up in some other areas. Experts at Bain & Co. opine that the shortages will play out depending on some wildcard factors both on the demand- and supply-side.

• A pullback in demand: The fastest route to relief, as always, is going to be softening demand as recession worries grow ever stronger. Bain & Co. writes, “inconceivable for the past 2½ years, this now seems a distinct possibility, given the economic outlook. There are already reports of tech companies temporarily pausing new component orders and asking suppliers to delay or shrink shipments amid inflation worries and growing inventories.”
• Shortages of EUV lithography equipment: Extreme ultraviolet lithography equipment – priced at about $150 million a pop – are necessary goods in the production of bleeding-edge fabrication plants. Since the number of producers here is rather limited, capacity constraints are set to persist and newer plant openings are set to be curtailed, further exacerbating supply constraints.
• Geopolitical troubles: With semiconductor supply chains becoming a major strategic asset in recent global geopolitical events, semiconductor consumers will need to be increasingly wary of where they source their chips from.

[Read Part II: ‘Resilience in the time of Chip Shortages’ to find out about the effect of geopolitical tensions and what tech executives can do to build resilience]

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