What initially looked like a blip in chip production now looks like a long-term supply crunch. The chip shortage has hit the production of almost everything from home appliances to PCs and even automobiles. Although market forces will solve this crisis, the shortage is expected to last years! But there are a few steps that governments, businesses, and the wider industry can take to ensure that we are better prepared for something like this the next time.
The trigger for the shortage in chip supplies was the Covid-19 pandemic which forced plant closures to stem the spread of the virus. And while supplies were cut out, the demand for chips on the other hand increased with a change in customer behavior to buy more electronic devices in response to lockdown measures across the world.
And during this time, the demand for cars was predicted to be low but somehow it rebounded faster than expected. Now, with production schedules set ahead of time, chipmakers were simply unable to respond to these sudden fluctuations in demand and supply. This further worsened by trade frictions affecting the semiconductor sector, severe weather forcing the shutdown of chip factories in Texas in February, the outbreak of a fire at the Renesas factory in Japan in March, and the Suez Canal blockage in April.
If you haven’t already guessed, it’s the automobile industry that has been affected the most by this unprecedented crisis. Carmakers usually rely on just-in-time supplies of chips to enable flexible manufacturing but the shortages have led to production halts or slowdowns across the industry which is now impacting the profits of major brands including Volkswagen and Tesla whilst potentially costing the sector $60.6bn in lost revenue this year.
Did you Know?
Electronic systems powered by semiconductors now make up 40% of the value of modern cars.
The Lessons to Learn From the Global Chip Crisis
However, certain improvisations like expanded production capacity and the return to more stable consumption habits will resolve the shortages over the coming months and years but what is to be learned from this global crisis are a few lessons that we will share with you today.
The first step to be taken should be to make chip supply chains resilient to unexpected shocks like the chip shortage crisis. To achieve this goal, facilities should be made more resistant to freak events, such as fires, floods, and extreme weather. Along with that, manufacturers and consumers of chips like automakers should ensure that they are better prepared for shocks when they do occur. For example, Automakers could build limited stockpiles to tide them through short-term shortages.
The second most important thing we must learn from this global shortage crisis is that we need to accelerate the variety of geographies where these chips are produced. The majority of chip production being in East Asia makes global supplies particularly vulnerable to geopolitical, meteorological, and technical disruptions in that part of the world. This is one reason why US President Joe Biden committed $50 billion to support its domestic semiconductor industry. Similarly, the EU has also outlined its intention to achieve “strategic autonomy” by increasing its global market share of chip manufacturing.
Diversity in Production
Another important point of concern here is that while manufacturers focused on high-end microprocessors, the production of basic chips was neglected. This affects the auto industry which uses older technology such as 200mm wafers. Similarly, the shortage of basic chips affected a lot of industries. This is why we must seek to expand production capacity. To meet growing demand, governments and chipmakers must not lose sight of the importance of lower-end chips and shall aim to increase manufacturing capacity more diversely.
Governments will most certainly play a significant role in ensuring open, flexible, and agile supply chains by seeking to break down barriers to international trade rather than engaging in isolationist trade and tariff disputes.
How to Build Supply Chain Resilience to Recover from Global Chip Shortage Crisis?
Talking from the Supply Chain perspective, here are a few more points that must be noted to build resilient supply chains:
A global chip shortage makes it essential for supply chain leaders to extend visibility beyond the supplier. This will be critical in projecting supply constraints and bottlenecks will eventually improve the crisis situation.
Like we mentioned earlier as well original equipment manufacturers with smaller and critical component requirements must look to partner with other entities and approach chip foundries as a combined entity to gain some leverage.
Track Leading Indicators
While the current chip shortage is a dynamic situation, it is essential to understand how it changes on a continuous basis. This is why it is essential to track leading indicators, such as capital investments, inventory index, and semiconductor industry revenue growth projections as an early indicator of inventory situations. This will help organizations in staying updated and see how the industry is evolving.
Diversify your Supplier Base
Qualifying a different source of chips will require additional work and most probably some investment too, but it would go a long way in reducing risk. Additionally, creating strategic and tight relationships with distributors, resellers, and traders can help in finding a small volume for urgent components.
Conclusion: To recover from a crisis like the Global Chip Shortage, leaders from various industries will need to acknowledge the suggestions made above because these are the only ways that can lead to building a resilient supply chain for semiconductor chips.
The Projected Worldwide Semiconductor Inventory Index Movement, 2021-2022
Gartner says, “1Q21 is a modelled estimate and is subject to change based on actual financials reported by vendors in 2Q21. The index bar for 2Q21 to 4Q22 is only a directional estimate.”
Recommended Read: How to Up your Supply Chain Game by the End of 2021