Semiconductors are key components in modern electronics and are used in everything from smartphones and laptops to cars and medical equipment. Includes microprocessors, memory modules and integrated circuits therein.
The semiconductor supply chain refers to the network of distribution companies involved in its design, manufacturing, testing and packaging. Supply chains are complex and involve the coordination of many different stages from sourcing parts and materials to sale to end use.
One of the main reasons for the shortage of semiconductors in the past two years is the supply chain obstacles caused by the epidemic, which disrupted global production and transportation. Lockdowns and other restrictions have forced many people to stay home and semiconductor manufacturers have reduced capacity or temporarily shut production lines, while staffing shortages, quarantines and port closures have caused shipping delays and slowed the distribution of chips.
Semiconductor Supply Chain Overview
The semiconductor supply chain involves a complex network of companies, organizations and individuals involved in the design, manufacture, testing, packaging and distribution of semiconductors. The semiconductor supply chain involves multiple stages, typically including:
1. Design and development: Semiconductor companies, also known as "fabless" companies, design and develop new chips either in-house or through collaboration with other companies. They are called fabless because they do not manufacture the chips they design and sell themselves.
2. Manufacturing: The actual manufacturing of semiconductor chips is done by specialized factories called foundries. Foundries take chip designs from fabless companies, use custom equipment to manufacture the chips and etch them onto silicon wafers.
3. Testing and packaging: After the chip is manufactured, it needs to be tested to ensure it is functioning properly. This is usually performed by independent companies that specialize in testing and packaging. Once the chips pass the tests, they are assembled into products that can be used in electronics and other devices.
4. Sharing: The packaged chip is sent to the company that sells it to the end user, or integrates it into the product directly or through a distributor.
In addition to these major stages, the semiconductor supply chain may also include intellectual property (IP) licensing as well as disposal and recycling.
All of these stages require logistics and supply chain management, which also includes inventory management, order fulfillment, and shipping logistics. Efficient logistics and supply chain management are critical to ensure chips are delivered to end users on time and in good condition.
Semiconductor Supply Chain Vulnerabilities
Semiconductor supply chains have become increasingly complex over the past few decades. This complexity also makes the supply chain vulnerable to disruptions, as a problem or bottleneck at one stage of the supply chain can have ripple effects that affect the entire system. These can include natural disasters such as the 2011 earthquake and tsunami in Japan that disrupted the global semiconductor supply chain, leading to shortages and sharp price increases.
One of the worst disruptions to the semiconductor supply chain in recent years was the outbreak of the pandemic in early 2020, which caused widespread shutdowns and disruptions in shipping and logistics around the world. The lockdown has resulted in worker shortages and companies at all stages have been forced to reduce capacity or temporarily close. This has led to chip shortages in many industries. Automakers in particular have been hit by disruptions that have had a knock-on effect, leading to a shortage of new vehicles that has pushed used-car prices to record levels.
Another factor contributing to the vulnerability of the semiconductor supply chain is the concentration of manufacturing in a few key regions, especially in Asia. This concentration makes supply chains vulnerable to geopolitical tensions and trade disputes, which could disrupt the flow of materials and components. For example, the United States recently imposed trade restrictions on Chinese semiconductor companies to prevent them from stealing the most advanced Western chip designs, which are widely used in the military and advanced artificial intelligence.
In addition to these external factors, the semiconductor supply chain suffers from shortages due to internal factors such as manufacturing capacity constraints and changing demand, as the industry is characterized by long lead times and high capital investment. When supply exceeds demand, it can take months or even years for semiconductor manufacturers to build new foundries and ramp up production to meet rising demand.
Responding to Semiconductor Supply Disruptions
There are several steps that can be taken to better manage supply chain disruptions, but none are easy or cheap to implement.
For example, increasing production capacity and diversifying suppliers to reduce dependence on any one company or region requires careful planning and coordination, as well as billions of dollars in investment. Similarly, companies can invest more in research and development to develop new technologies and processes to make chips faster and more efficiently, but this also requires a lot of time and money.
Because of this, the government can help cover some of the costs by providing incentives and tax breaks, and help coordinate the establishment of new domestic production facilities.
These efforts appear to be working. Intel broke ground in 2021 on two new foundries in Chandler, Arizona; a $20 billion investment and an advanced packaging facility in New Mexico. Micron, another big chip maker, also invested $15 billion to add a memory chip manufacturing facility to its Boise, Idaho headquarters. As a result of these efforts, GlobalFoundries, Samsung Foundry, Texas Instruments, and TSMC are all building new fabs in the United States.
In addition to these efforts, Deloitte warns that more than 1 million additional skilled workers will be needed by 2030 to meet the demands of the semiconductor industry. To prevent supply chain disruptions caused by talent shortages, advocate for new talent pools in new locations and leverage education and community partnerships in unprecedented ways.
