Semiconductor shortage due to the Pandemic automobile manufacturers suddenly cut back on their orders of semiconductor chips at the start of the Pandemic in 2020 because they expected a sharp decline in sales. However, as they cut back on production, the demand for digital transformation grew as more people started attending online schools and working from home. Sales of home IT equipment for internet and video conferencing surged, while consumers’ need for smartphones and entertainment devices like PlayStations and VR headsets to cope with the lockdown period increased.
As customer demand for goods expanded, semiconductor manufacturing facilities switched from making cheaper vehicle chips to more expensive processors and other devices based on current orders. The space in the foundries had already been filled with other items by the time the auto sector realized a rise in consumer demand and resumed its chip orders.
Understanding the Shortage Origins
The semiconductor shortage, an enduring challenge since 2022, continues to cast its shadows over chip manufacturers and the industries reliant on them. As we step into 2024, the global semiconductor industry finds itself grappling with a complex web of issues that demand strategic solutions.
Looking back, the roots of the semiconductor shortage can be traced back to 2021, during the latter stages of the COVID-19 pandemic. Supply chain disruptions emerged, and as the pandemic waned, the demand for technology soared. The cyclical nature of the semiconductor industry faced an unprecedented acceleration in demand, fueled by increased consumer tech purchases and the strain on data centers from the surge in video-calling and streaming.
The CHIPs Act: A Response to the Crisis
Recognizing the critical role of the semiconductor industry, President Biden signed the CHIPs Act in 2022. This act, aimed at supporting U.S. chipmaking, provided a 25% tax credit and $52 billion in funding for semiconductor programs. The United States also extended its reach to Vietnam, injecting $2 million into facilities, training, packaging, and testing. Major companies, including Micron and GlobalFoundries, seized the opportunity to apply for funds, propelling plans for significant expansions.
Challenges Across the Industry Spectrum
While the origins of the shortage lie in the pandemic, the challenge persists into 2024. Taiwan, South Korea, and China stand resilient in the face of high production costs and material shortages, producing 90% of their normal output. In response to increasing competition, manufacturers worldwide are turning to innovative packaging solutions. COWOS, an advanced chip packaging methodology, emerges as a transformative approach tailored for artificial intelligence applications. However, entering the AI production arena remains a challenge, with Nvidia’s dominance presenting barriers for startups.
Diversification and Oversupply Concerns
The demand for consumer products post-pandemic has fluctuated, leading to an oversupply of NAND and DRAM memory chips. As economic factors come into play, chip sales have slowed, impacting major players like Samsung and SK Hynix. Furthermore, the industry needs more skilled technical workers, prolonging the hiring process and hindering production acceleration. While the CHIPs Act funding provides an avenue for investment in new employees, the process remains time-consuming.
Expert Insights on 2024’s Outlook
Despite a significant $67.4 billion revenue decrease in the semiconductor industry from 2022 to 2023, the outlook for 2024 is optimistic. Projections suggest a $98.7 billion increase in revenue. However, opinions on when this upward trajectory will commence differ. Market analysts anticipate a restoration of normal capacity and production by the end of 2023, lasting three to five years. Disagreements arise on the timeline for alleviating the AI chip shortage, with varying predictions from industry leaders.
Strategic Initiatives Amid Uncertainty
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Causes of Semiconductor and chip shortage in 2024
A large portion of the microcontroller inventory has already been sold for use in phones, toys, and IT goods. The shortage of automotive chips was a result of this. To optimize the number of chips produced, semiconductor fabs raised capacity to over 95%, yet they could still not satisfy the growing demand.
Worldwide semiconductor manufacturing firms were impacted as wafer production was abruptly halted. Depending on how the production line was interrupted, some countries’ fabs were offline for longer than others, and it may take weeks or months to get a fab back online.
Once a fab is operational, it takes 26 weeks to complete the entire wafer production pipeline. Wafers are processed in lots or batches that cycle through the fabrication facility in 12 weeks (14 to 20 weeks for complex process technologies).
Testing, die bonding, and packaging takes an additional 12 to 14 weeks. Manufacturers gave the current semiconductor inventory top priority to fulfill orders, so as fabs restarted, supply already lagged behind demand. Demand was difficult to meet due to longer lead times, and semiconductor makers discovered that expanding capacity was insufficient to close the gap between supply and demand.
More reasons affecting the semiconductor shortage
Apart from the Pandemic, other factors affected the semiconductor shortage. Some of the following are-
- In March 2021, a fire at the Renesas fab in Japan forced the suspension of microcontroller production for three months. These gadgets largely assisted the automotive industry.
- A Texas ice storm in February 2022 caused a power outage that shut down NXP, Samsung, and Infineon factories.
- Early in 2019, a fire in Ukraine stopped the production of a substance needed to package semiconductors.
- Production was hampered by labor constraints brought on by China’s ongoing lockdowns during the outbreak.
- In March 2021, a cargo ship became trapped in the Suez Canal, obstructing traffic for more than a week and affecting the delivery of chips en route.
Will the construction of a new semiconductor factory fill the gap?
At least three new fabrication factories are being built in the United States to aid re-shore chip manufacturing, including Texas Instruments’ fabrication facility in Texas and the TSMC fab in Arizona, which might be operational in 2024.
Samsung also disclosed in 2021 that it would be investing in a new fabrication facility in Texas.
In Ohio, Intel revealed plans to invest $20 billion in developing two cutting-edge logic fabs. Work is scheduled to start in 2022, and production is anticipated to start in 2025.
Strawn and Silverglate agreed that while geopolitics continues to drive the demand for manufacturing and the supply chain transformation, not much sourcing has returned to the United States in the interim.
New semiconductor fabs are now being built to meet future demand for developing technologies like artificial intelligence, 5G, the internet of things, and others. Professionals in the sector know the need to avoid flooding the market with new products. Manufacturers attempt to balance implementing 200mm and 300mm technology and maintaining older technology and geometrical process nodes.
Foundries and chip manufacturers are now planning twenty-nine new semiconductor facilities. The US, Japan, and Korea are the next most common locations for these high-volume fans, followed by China and Taiwan. In 2021, 14 fabs for 300mm technology broke ground and began building. Ten new fabs started construction in 2022 or are scheduled to do so by the end of the year.
Besides that, 13 more fabs are scheduled to start building in 2023. The industry anticipates 200 fabs using 300mm technology by 2026. It takes 1-2 years to finish construction and another year to set up equipment and prepare for wafer starts. Although it takes time, the practice is essential to reducing the current market turmoil.
How should companies react to the shortage issue?
There are only a few levers available in this circumstance. The two major strategies for obtaining supply in the short term are paying a premium or working with distributors and brokers. Going several steps below, businesses should determine their exposure to the high-tech ecosystem if possible.
The objective is to increase visibility and perhaps create more long-lasting connections for the future. Longer-term plans include:
- Developing devices to employ more widely available components.
- Cutting down on the number of components used.
- Maybe switching to programmable logic integrated circuits (ICs) allow software-based differentiation.
In the end, developing strategic, long-term connections is a tactic worth thinking about, whether they are founded on scale or innovation (like co-engineering).
Reexamine long-term business planning with a focus on supply assurance and risk mitigation. Build the idea that circumstances will most likely lead to shutdowns and production and logistical issues for the foreseeable future into your strategy.
Recognize that pursuing just-in-time manufacturing could cause delays in procurement, and think about changing to a longer-term evaluation of inventory needs. Not simply for the short term but also internally and, most crucially, with suppliers, accurate forecasts of inventory requirements must be made.
Think about setting up and maintaining a buffer or collaborating with a business that will handle it for them.
Global semiconductor shortage – root causes
The World Automobile Industry one of the main causes of the shortage of semiconductor chips is the automotive industry. Modern autos, computerized panels, and cutting-edge security systems require computer chips.
Beginning with COVID-19, automakers halted orders for new chips as they anticipated declining demand for new vehicles. Standard manufacturing timetables were impossible for automakers to follow. Additionally, the need for circuit boards in the automotive industry is expected to soar.
The production of computer chips is currently being increased by auto manufacturers and governments worldwide. But it will take some time. Companies will continue to be frustrated by the global lack of microchips in the meanwhile.
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Growing Interest in Electronics
Global production was suspended due to a wave of industrial closures brought on by the COVID-19 epidemic. People were stuck at home and looking for activities and ways to simultaneously keep their families and themselves busy.
As a result, consumer electronics saw a huge demand increase, but manufacturers could not meet it. This led to a domino effect of shortages in semiconductor manufacturing. The supply was consequently either constrained or limited.
Unstable Logistical Methods
The transit of chips from one location to another is a problem that, in addition to the primary issue with microchips, also contributed to the shortage of microchips. Technology, machinery, and other industries all start with semiconductor chips. Due to a lack of these chips, company operations have not progressed at their regular speed.
Due to the COVID-19 epidemic, there is a vast supply. When early-epidemic shipping ports reopened, they ran into freight restrictions and had mountains of goods waiting to be delivered.
Chronic global labor issues haven’t helped, and the supply chain still needs time to recover. Working on alternatives can also be difficult, given that the semiconductor chip shortage will last a while. For example, will a company’s staff be productive when using newer techniques?
Numerous elements and strategies are ones that multinational corporations have begun to adopt. Companies worldwide have started identifying infrastructure components that will be severely impacted if a component is not provided promptly. Due to the shortage, corporations focus on finding a substitute as their main strategy.
How 2024 may redeem the semiconductor shortage?
According to Counterpoint Research’s most recent smartphone Component Tracker Report, global semiconductor chip shortages will continue easing during the second half of 2022 as demand-supply gaps close for most components.
Over the past two years, these shortages have affected many industries, and suppliers throughout the supply chain have put a lot of work into addressing the concerns. Demand-supply gaps have been closing since late 2021, indicating that supply constraints across the larger ecosystem are about to vanish.
In the first quarter of 2022, inventories of 5G-related chipsets, such as mainstream application processors, power amplifiers, and RF transceivers, considerably rose, quickly alleviating the scarcity of smartphone components. However, some outliers exist, such as older 4G CPU generations and power management ICs.
The supply gap for the most crucial PC components, such as power management ICs, Wi-Fi, and I/O interface ICs, has decreased for desktop computers and laptops. According to research analyst William Li, who specializes in semiconductors and components, “we witnessed OEMs and ODMs continue to amass component inventories to cope with uncertainty springing up from COVID-19 earlier this year.”
However, Li predicts that H1 2022 will experience lower shipment revisions, mostly due to rising channel inventories and a slowdown in the momentum of consumer PCs. “Coupled with wafer production expansion and continuous supplier diversification, we have witnessed significant improvement in the component supply situation, at least in the first quarter,” observed Li. “The big risk factor moving forward is the current lockdowns happening across China, especially in and around Shanghai. But if the government can manage the outbreak and help key ecosystem players turn the corner quickly, we believe the broader semiconductor shortage will ease around late Q3 or early Q4.”
“Last year, supply tightness dovetailed with the rebound in consumer and business demand, causing many headaches across the supply chain. But over the past few months, we have seen softening demand intersecting nicely with higher inventories,” observed Dale Gai, director of Counterpoint Research’s semiconductor and components practice. “The issue now isn’t shortages but a shock to the system from lockdowns, which is having a domino effect across China at the moment.”
Both businesses and the government have been concentrating on reducing the immediate hazards brought on by sudden and erratic production halts. Senior analyst Ivan Lam said that holding the line is a priority, particularly for local governments, and we have seen how certain businesses can continue operating as closed-loop systems.
Last year, the supply chain was fortunate, but this most recent COVID wave is a significant challenge that the nation needs to handle rapidly but with caution. Now when the situation is urgent, all eyes are on China.
Intel CEO Pat Gelsinger said on Friday that he now anticipates supply bottlenecks in the semiconductor sector to last until 2024.
According to a “TechCheck” interview with Gelsinger, the global chip crisis may continue due to the limited supply of essential manufacturing tools, making it difficult to increase capacity levels to meet high demand.
“That’s part of the reason we believe the overall semiconductor shortage will now drift into 2024, from our earlier estimates in 2023, just because the shortages have now hit the equipment, and some of those factory ramps will be more challenged,” Gelsinger said.
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Since February 2021, when Gelsinger became CEO, Intel has made several significant announcements to diversify its chip manufacturing globally. The corporation invests a lot of money in constructing fabrication plants across Europe and the United States, often known as semiconductor factories. Asia now houses the majority of the world’s semiconductor production capacity.
“We’ve invested in those equipment relationships, but that will be tempering the build-out of capacity for us and everybody else, but we believe we’re positioned better than the rest of the industry,” Gelsinger said.
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