Today chips are the most strategic resource in the world
Published on : Thursday 07-09-2023
Steve Banker, Vice President, Supply Chain Management, ARC Advisory Group.
What caused the severe disruption in the semiconductors supply chain during the Covid pandemic?
A shift in demand was part of it. People stuck at home were buying consumer electronics and there was more demand for remote working in some areas. But the semiconductor sector was also too cautious. Even without Covid, there were indications that multi year supply was going to exceed demand. But when a chip plant costs billions of dollars and years to get up and running, Taiwan Semiconductor Manufacturing Company (TSMC) is building two plants in AZ that will cost $40 billion; there are reasons why these suppliers would be conservative. Finally, you can’t just blame the chip companies. Many big companies do not have a risk management program that includes visibility to sub tier suppliers to the chip manufacturers. If the sub tier suppliers don’t provide the fabricator with their parts, chips don’t come out the other end. Similarly, if a Tier 1 component supplier to an auto company suffers a chip shortage, the OEM still ends up with a supply chain issue.
Is indiscriminate use of high-end semiconductors for applications that do not use their full potential, adding to the crisis? In other words, is there a case for rationalisation of use?
Not sure I’d say “indiscriminate.” But Tesla, the most vertically integrated of the auto makers, had the fewest problems both because of better visibility to their supply chain and because their use of chips was more focused and targeted.
The US and Europe with active government support has embarked on a massive production spree to correct the geographical imbalance. How will this impact the supply situation?
I think this needs to be put in context. In August of 2022, the CHIPS and Science Act was signed into law by President Biden. The Act provides $280 billion in new funding to boost domestic research and manufacturing of semiconductors in the United States. But the reason for this has to do with growing tensions between China and the West. In decades past, oil was strategic. Today chips are the most strategic resource in the world.
Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest contract chip manufacturer, and it is responsible for supplying semiconductors to most of the world’s largest technology firms. It produces the world’s most sophisticated chips. While Apple designs the most advanced chips for their smartphones, only TSMC can manufacture them. These chips are currently manufactured at a single site in Taiwan.
The semiconductor industry is a global supply chain. No other facet of the global economy is so dependent on so few firms. Chips from Taiwan provide 37 per cent of the world’s new computing power each year. Two Korean companies produce 44 per cent of the world’s memory chips. The Dutch company ASML builds 100 per cent of the world’s extreme ultraviolet lithography machines, without which cutting-edge chips are simply impossible to make.
As a highly capital intensive industry with heavy demand on resources like land, water and electricity, how difficult is the task of ramping up capacities?
Right now as new plants are opening in the US the greatest problem is finding the right talent. When an industry gets outsourced to a foreign country, the talent dries ups.
India too has embarked on a government backed initiative for creating a semiconductor ecosystem. What is the present status in terms of implementation?
The Government of India has allocated a financial outlay of $30 billion to make India a global hub for electronics manufacturing. Several subsidies and other incentives are on offer for setting up electronics manufacturing units in India. The Government of India has allowed 100 per cent Foreign Direct Investment (FDI) under the automatic route in the sector. The US Semiconductor Industry Association (SIA) and the India Electronics and Semiconductor Association (IESA) announced in January 2023 to organise a private sector task force to strengthen bilateral engagement in the global semiconductor ecosystem.
Digitalisation in industry in general and the electrification of mobility with future autonomous operations are developments that will need semiconductors in bulk. Will the world ever have enough capacity?
Yes, the industry goes through cycles of too much capacity followed by too little. There is no reason to think that will change.
Are there any new technology trends that are likely to revolutionise semiconductor production either with materials other than silicon, or some other breakthrough?
Semiconductor industry is now an inseparable part of almost all sectors as it forms an essential component of all electronic items. It defines how efficiently and smartly we live. Artificial intelligence, 5G, and IoT will have major implications on the semiconductor industry in the coming years. 5G technology is likely to create a huge impact as the 5G chipset allows faster flow and processing of information. AI and IoT have sparked a new wave of innovation in the semiconductor industry and for maximum profitability both technologies must progress in tandem.
(The views expressed in interviews are personal, not necessarily of the organisations represented)
Steve Banker heads the Supply Chain & Logistics consulting team at ARC. Steve's technology focus areas include transportation management, managed transportation services, warehouse management, and supply chain planning. At ARC, Steve has been covering supply chain technologies since 1996. He is one of the best known industry analysts covering supply chain management and a frequent speaker at industry events. He has been widely quoted in trade publications covering logistics, material handling, and supply chain management and has had his articles published in Supply Chain Management Review. In recognition of his contribution to the supply chain and logistics field, Steve was selected as a 'Pro to Know' by Supply & Demand Chain Executive Magazine.
Steve has a column in Forbes.com covering sustainability and transportation and writes the Monday column in Logistics Viewpoints. Steve's research includes ROI analysis of a variety of supply chain applications and 3PL services, benchmarking, and best practice reports. He has aided users in supplier and consultant selections and suppliers with acquisitions and product roadmaps.