Stalled chip chains require long-term solutions

The global semiconductor and component supply chain has been severely disrupted by a combination of factors that experts describe as the “perfect storm.” Chip shortages and hard-to-supply components are the result, while demand for such electronics is expected to continue to grow strongly, according to all models. Why has the supply chain proven to be so fragile? What are the solutions?

By: Dimitri Reijerman

Car manufacturers worldwide are forced to halt production, Philips warns of a production stop of medical equipment and electronic products, both for the consumer market and the B2B sector, are getting longer delivery times and significantly higher prices. All this is the result of a growing chip shortage on a global scale. The problems are structural and have a high economic impact, especially at a time when companies are hungry for growth to escape the economic crisis.

The obvious reason for the problems in the supply chain of semiconductors and components is of course the corona crisis. In the first months of the pandemic, early 2020, the first disruptions occurred. For example, companies in the automotive sector canceled orders en masse. In addition, production lines and even entire factories came to a standstill as a result of lockdowns and other corona measures. Companies became uncertain, which severely disrupted the balance between supply and demand.

The lockdowns caused another shift: the consumer electronics market saw a surge in demand as people started working from home. This requires hardware, not just to work but also to entertain themselves. Laptops and PlayStations were in high demand. This in turn caused chip manufacturers to use their idle production lines to manufacture semiconductors and components for the consumer market. But car factories soon started running again, while demand in this sector is also high. Due to insufficient inventories and an ever-increasing amount of chips per car, car manufacturers hit a wall.

More complex picture of causes

In addition, a number of factors that made the entire chain vulnerable before the corona pandemic were still at play. For example, all major foundries concentrated in Asia. For example, TSMC’s giant factories in Taiwan were vulnerable to water shortages due to the worst drought in decades. In Texas, where Samsung also produces semiconductors, there was again the problem of large-scale power outages. In short, the changing climate is already playing tricks on the semiconductor sector.

Another sore point is that the market is heavily dependent on 'the big boys', especially Samsung and TSMC. This involves chips based on small production processes (7nm or smaller). Building new factories for the production of such high-end chips costs billions of dollars, investments that only a few parties can afford.

The electronics market was already struggling with the trade war between China and the United States before the corona crisis. This is far from over. The US decided to take measures against the Chinese electronics giant Huawei, among other things. These trade restrictions in turn had an effect on companies such as TSMC: orders were reduced and production capacity had to be reallocated.

Solutions

It is clear that the corona crisis is not the only cause of the problems. Companies and governments therefore also speak of a 'perfect storm' that everyone in the electronics chain is or will be affected by. The global chip shortage may also continue for some time: analysts think it could last until deep into 2022 or even into 2023, while chip manufacturers also do not expect a recovery in the short term.

However, people are thinking hard about structural solutions. The United States acknowledges its (too great) dependence on the Asian chip chain and wants to invest tens of billions to stimulate the construction of factories on its own soil. TSMC wants to set up five completely new factories in the state of Arizona, part of an investment program of no less than 100 billion dollars for the next three years. Dutch companies such as NXP are also customers of TSMC and can profit from this.

Samsung and Intel announced similar mega-investments. The latter also wants to open factories in Europe and is investing 80 billion dollars in the coming ten years. Factories may be opened in Germany, France or Poland. Intel wants to focus primarily on the automotive industry. TSMC is also said to want to invest in Europe and focus on the automotive sector.

Subsidies for new factories?

The plans of companies such as Intel to set up factories in the EU are music to the ears of the European Commission. Currently, less than 10 percent of all semiconductors are manufactured in Europe. European Commissioner Breton (Digital Affairs) has therefore indicated that he wants to double chip production in the EU and provide subsidies to companies such as TSMC and Intel. In his view, countries such as Germany, France, Italy and the Netherlands are examples of countries that can contribute.

Despite plans for the construction of fabs on European territory, this is a partial solution for the longer term; it can easily take five years for a new chip factory to become operational. In the medium term, it already provides breathing space to add production lines to existing factories. Nevertheless, a whole new ecosystem of suppliers must also be created, while sufficient technically trained personnel is also needed. In the EU, and especially in the Netherlands, there is a huge shortage of this, despite gems such as ASML. An exciting time is coming: how are we going to reduce chip shortages and eventually produce and control more ourselves?