Semiconductor Supply Chain Disruption – Challenges and Solutions

The US and China have been engaged in a trade war for over three years now. This has impacted the semiconductor industry which has a global supply chain. The outbreak of COVID-19 worsened the situation, leading to a shortage of semiconductor materials, the critical components of most electronic devices. While both the countries are hoping to establish dominance in this industry, the most viable solution will be a cordial settlement and an agreement to work together.

The relationship between the US and China has been worsening for the past few years. In April 2021, the US Congress called on the new Biden administration to tighten technology restrictions on China. It suggested banning exports of electronic design automation software for chip design. The main casualty of this war has been semiconductor chips which are used in a wide range of products, from missiles and cars to smartphones. A thriving USD430 billion semiconductor industry powers the USD3,000 billion IT sector and everything which falls within the electronics category.

The disruption in the supply of non-memory chips could significantly impact the global economy; moreover, it could adversely affect the production of automobiles, smartphones, and home appliances, among others. The effect is already being felt by the auto industry wherein production has been hit by chip shortage since late 2020.

The chip-making industry’s competitive landscape is changing, specifically in the US and China. The market leader, Chinese chip manufacturer HiSilicon, which owned 23% of the 5G phone chipset market in 2020, is estimated to be left with only 5% this year. Its share could well go to US’s Qualcomm and Taiwan’s MediaTek which are all set to expand their businesses.

Semiconductor industry
The semiconductor industry is widespread and diversified. No one country or company has true independence in its value chain. It has different inputs ranging from wafer materials and specialty chemicals and gases, to processing tools, final testing, and packaging; the companies supplying the various ingredients are spread with their businesses across the world.

The highly engineered tools needed for manufacturing semiconductors are sourced from various parts of the world. The industry needs equipment like metrology machines and lithographic systems which also have highly complex supply chains. Hence, the manufacturing process integrates hundreds and thousands of people and processes with different skill sets.

Semiconductors have different product categories. Each of these has specialized applications and is distinct. There are some niche markets; these are ruled by companies that have created specialized products after years of R&D. Due to complexity in the semiconductor industry, it is not easy for any new player to enter the space and be the leader in a short time.

This industry is growing by leaps and bounds. In the next decade, the industry as a whole would need to incur R&D and capital expenditure of about USD3 trillion to meet the fast-growing demand for semiconductors from all sectors of the global economy. There is a growing demand for increasingly sophisticated chips to power transformative applications such as AI, IoT, or autonomous vehicles.

The strategy
Both the US and China seek independence in the semiconductor industry and control over the entire value chain. However, due to the global nature of the supply chain, this is highly challenging. Major companies like Samsung and TSMC are making huge investments in this sector in the US. China is also taking steps to invest and develop the entire value chain within the country. Hence, the competition is expected to intensify in the next decade.

The shortage of semiconductors in 2020 shows that organizations which are connected to this industry need to collaborate and innovate the materials, design, and manufacturing process to not only meet the rising demand but also increase the quality of existing products. Challenges such as geographic concentration of some critical spokes of the supply chain and geopolitical friction among nations must be addressed to make the semiconductor global chain more resilient.

In the current scenario, the outsourced semiconductor assembly and test companies such as Amkor, ASE, JCET, PowerTech Technology, and Siliconware Precision Industries, and equipment supplier companies such as Tokyo Electron, LAM Research, ASML, and Applied Materials should consider making their business relations with both the US and China safe.

Trying to achieve self-sufficiency in this industry will only result in significant changes in national industrial policies and large-scale investments in new industries. The success of such an extensive project is questionable. It would be more feasible to have policy interventions and negotiations which could help the industry grow, despite the industry’s multi-locational nature.