The bottlenecks in the supply chain that we experience worldwide start with the components. Rather, they begin withcomponent shortage.Of all the component shortages, by far the most severe is certainsemiconductor, or chips. The current global chip shortage rivals only some of the unbalanced markets of the past. However, it is unique in the breadth of product families that feel the gap between supply and demand.
Despite headlines to the contrary, we are not seeing an end to the global semiconductor shortage. Based on market data and discussions with our customers, we anticipate that the market for basic semiconductors will be constrained at least well into 2023; The market for complex semiconductors (microcontrollers, microprocessors and FPGAs to name a few) will be tight throughout 2023. There simply has never been a higher demand for semiconductors. Worldwide is theSemiconductor industry is expected to growby about 7% between 2021 and 2022, from $595 billion to $639 billion -- the first time the market has hit that revenue milestone.
A few segments in particular are fueling the current increase: the growth of the Internet of Things (IoT), 5G and automotive, especially theelectrificationof theautomotive industry. Throughout 2022, some previously strong drivers of chip demand -- consumer electronics like smartphones and laptops -- have slowed, causing problems for companies that now have too much inventory or the wrong inventory mix. Still, increasing demand in these other areas is creating shortages of the semiconductors needed to manufacture them.
Like most unpleasant things in our lives over the past two years, there is a single cause of the global semiconductor shortage that is now prolonging and exacerbating them: COVID-19. The demand caused by the pandemic is straining capacities at all points in the worldsupply chain, starting with component suppliers.
What is behind the ongoing global chip shortage?
The COVID-19 pandemic has sparked the chip shortage, and its wide-ranging impacts -- including virus outbreaks, labor problems, and geopolitical uncertainties -- have fueled it. Every link in the global supply chain remains extremely disrupted. Unfortunately, there are no signs of a recovery in the short term.
This is because the pandemic has also stunted growth and demand has been so remarkable and unpredictable that supply chains will struggle to keep up until that demand falls to more manageable levels or more capacity and component supply chain issues are resolved. Demand for all commodities initially fell sharply with the outbreak of COVID-19 and the closure of factories. Then the massive consumer spending we saw after the initial shocks of the pandemic subsided led to a V-shaped recovery in the global economy that spurred extraordinary demand for semiconductors. Now we're faced with chip shortages, unprecedented delivery times from analog vendors, and huge price increases. Risk has risen to unprecedented levels throughout the semiconductor supply chain.
The effects of this sustained demand are particularly noticeable in wafer foundries. Wafer starts are the main constraint within the chip supply chain. Even the largest chip manufacturer in the world,TSMC– which controls 28% of global semiconductor manufacturing capacity – suffers from persistent shortages. In order to ramp up chip production, manufacturers have e.gTexas-Instrumente, Intel andTSMCinvest billions of dollars in building new fabs. However, this is not a quick fix; These new plants are not expected to be ready for production until 2023 and beyond.
International governments have also joined the effort to increase chip capacity. In July 2022, the United States Senate and House of Representatives passed theCHIPS law, which includes approximately $52 billion in federal subsidies for semiconductor research and manufacturing in the United States. The law also provides tax credits for chip factories worth about $24 billion, with the goal of spurring U.S. chip manufacturing to alleviate some of the supply chain problems that are holding back the company's automotive and consumer electronics industries, among others .
The European Union is planning aChipsgesetz" own to increase the production of semiconductors in Europe, whileSouth Korea has pledged $450 billionto his own industry, and theThe Japanese government is working with TSMC and Sonyto open a new factory by the end of 2024.
Beyond the wafer foundries, there are bottlenecks or delays in wire bonding, substrates, materials and testing. In China, ongoing COVID-19 outbreaks and heat-related power outages have impacted raw material supplies, assembly and testing. In addition, the invasion of Ukraine has increased prices and restricted the supply of raw materials for semiconductor production, causing turmoil in all key markets of the industry.
This ongoing mismatch between demand and supply continues to lengthen delivery times. As of summer 2022, lead times for most semiconductors – regardless of type – are at least 40 to 50 weeks, with many in the 50 to 60 week range. Essentially no wait times are shorter than 30 weeks, but most are much longer (over 70 weeks).
Analog chip suppliers are seeing an average book-to-bill ratio (the number of orders placed vs. the number of orders filled) above 1:1, indicating backlogs. High-end semiconductors like microcontrollers (MCUs) and chipsets are still constrained, with positive book-to-bill ratios, but the decreasing demand for smartphones and consumer electronics will allow manufacturers to catch up on orders for other industries. Most of these high-end components are in allocation, with average lead times running 52 weeks or more.
As delivery times have increased, so have prices. Raw materials, testing and assembly in foundries, logistics and labor have become more expensive than ever. In turn, semiconductor suppliers are forced to pass on their costs to their customers to help stabilize the supply chain. TSMC - again the world's largest foundry supplier of 300mm wafers and the most advanced process nodes - announced thisIncrease chip prices by 6% in January 2023after a10% increasefor high-end semiconductors and by 20% for less advanced chips in August 2021.
Across the border,Chip suppliers have raised pricesbetween 10% and 20% on average in response to supply shortages, increasing shortages, commodity costs and inflation in the second half of 2022. Like the shortage, price increases are expected to continue into 2023.
Having already taken a hit from the uncertainties of 2021 and 2022 (so far), the markets most reliant on chips - including auto, 5G and IoT and smartphones - brace for more unknowns.
How have chip shortages affected the markets?
The automotive industry is probably the hardest hit by the chip shortage. Depending on the level of connectivityan average car can have more than 100 chipson board, withMany vehicles require thousands of semiconductorsto control safety functions, electrical and drive systems, infotainment, connectivity and more.
As a TSMC spokesman saidtime, the roots of the industry's current chip challenges date back to 2018. Everything was connected, from packaging to refrigerators, and demand for smartphones skyrocketed, but demand for cars was weak. To meet demand, semiconductor manufacturers began reallocating more supplies of now-critical automotive components, such as MCUs, to other industries. This became a major concern when auto demand unexpectedly surged in the final quarter of 2020continued until the first half of 2021thanks to low interest rates and consumers who have more disposable income than they anticipated.
By spring 2021, the impact of the chip shortage on the auto industry had become clear. Factories have been forced to cut production or evenclose temporarilydue to part failures. Putting more pressure on this limited supply of chips is the growing number of chipselectric vehicleMandates given by governments around the world. Industry experts and automakers have already raised concerns that an ongoing chip drought could delay the launch of these new vehicles, particularly in the USUnited States.
Chip shortages are also driving up new car prices. The average price of a new car hit record highs in 2021 and 2022 and came up46.259 $ im August 2022; the average price at the end of 2020 was $40,000. According to J.D. Power, new vehicle sales fell 2.6% year over year between August 2021 and 2022 -- due to a combination of supply constraints and a fall in demand from inflation and rising interest rates -- consumer spending on new vehicles is up 13% over the same period.
All in all, the chip shortage is believed to have cost automotive OEMs all around$210 billion in lost revenue for 2021, with many individual brands continuing to report quarterly results below expectations and as a result adjusting their future financial targets throughout 2022.
It took longer, but the smartphone market is also feeling the effects of the chip shortage.Smartphone sales recovered throughout 2021after a dip in 2020, but in Q3,global shipments were down 6%compared to Q3 2020; The supply could not meet the demand.
gardenerfound that smartphone companies are delaying the launch of some of their most sought-after products due to shortages, but production of basic smartphones has been hit harder than premium smartphones (whose sales have actually increased). In a report related to smartphone sales in the third quarter, an IDC analyst stated as muchDelivery issues for most smartphone companieswill not be resolved well into 2022. Some of thethe most demanded phonesare expected to be more available from February 2022.
The chip shortage is also slowing or halting IoT projects — including the implementation of IoT modules that use 5G networks. demand forcellular IoT chipsets and moduleshad surged as companies worked to implement 5G technologies, but a 6% decline in shipments in the third quarter of 2021 will hamper that growth. Every connected device, from smart meters to point-of-sale systems in retail stores, uses these chipsets, and this delay could further delay the long-awaited transition from 4G to 5G.
As the raw materials needed for semiconductors remain in limited supply, they are likely to be allocated first to the high-end chips used in cars and smartphones, rather than the lower-end microcontrollers and sensors used in IoT devices. AForrester report on IoT in 2022predicts it will take longer for the IoT market to regain the supply of chips needed to meet demand.
The full impact of the bottlenecks on the rollout of 5G is yet to be seen. However, a number of telecom companies warned the F.C.C. in June 2021 that aThe lack of chips could have a significant impact on the deployment of 5GLinks.
So far, the industries have mostly dealt with the shortage of chips at short notice. The automotive industry has turned to spontaneous decisions like cuttingHigh-tech features of new car models.Meanwhile, the smartphone industry has weathered the early stages of usage scarcitySemiconductors they had storedat the beginning of the pandemic – a solution that, as already mentioned,is no longer viable. Addressing this or any other component shortage begins with a robust supply chain strategy based on transparency, predictability, and communication.
How to navigate the global chip shortage
Perhaps the only thing that can be said for certain about the global chip shortage is that no one is sure when it will end. If demand holds up as expected based on market data and discussions with our customers, we expect the semiconductor market to be tight going into 2023.
All in all, the answer to this burning question is not "soon".
There's no easy way around a semiconductor supply shortage and rising costs when all companies are in the same boat. However, there is a big difference between a leaky kayak and a powerboat that can navigate rocky waters. Any Original Equipment Manufacturer (OEM) can take a number of steps to ensure they are in the best possible position if chip shortages persist:
- Alignment:Your company's product design teams should align with your suppliers' technology roadmaps and investment plans to increase your chances of getting the components you need when you need them.
- Supplier qualification:Have multiple approved suppliers for common products and continually expand this list as suppliers expand their capabilities and offerings. Review and consider supplier global footprints as part of the qualification process to mitigate risks that may arise from supplier focus on a specific region.
- Visibility:Provide your suppliers with as much transparency as possible so they can plan their product capacity and potential longer-term capital investments. With some suppliers looking for transparency after 12-24 months, as soon as possible, consider placing long-term orders through late 2023 and even 2024 to allow better transparency for wafer and capacity planning.
- Increase throughput times in planning systems and additional buffered stocks:As lead times for most goods are increasing, update your planning systems to accommodate these delays. Call-offs and support for unscheduled orders will be very difficult.
Both short-term and long-term strategies are needed to withstand the challenges of semiconductor shortages. This isn't the only ongoing component shortage, and it certainly won't be the last.
The pandemic threw thoseglobal supply chainin disarray. But the challenges of recent years have also exposed their deep interdependence, underscoring Stark's critical importancesupplier relationshipsand a prepared, resilient supply chain andprocurementStrategy. Wherever the chips fall this time, it's always a good idea to have a plan.