John Ciacchella, principal, Brandon Kulik, principal, Chris Richard, principal, Dan Hamling, specialist master—members of the Semiconductor Industry Team, Deloitte Consulting
The authors of this report seek to identify the strategic issues and opportunities for semiconductor companies to consider in the coming year, including their impacts, key actions to take and critical questions to ask. The goal is to equip US semiconductor (aka semi or chip) companies with the information and foresight they need to position themselves for a robust and resilient future.
In 2022, the global semiconductor chip industry is expected to reach about US$600 billion1. However, while it is still dwarfed by farming, oil and gas industries—which are worth an annual US$10 trillion and $5 trillion in revenue, respectively—80 percent of the world’s food or fuel does not come from a handful of manufacturers concentrated in just a few countries.
Across multiple end markets, the absence of a single critical chip, often costing less than a dollar, can prevent the sale of a device worth tens of thousands of dollars. Based on the authors’ analysis, the chip shortage of the past two years resulted in revenue misses of more than $500 billion worldwide between the semiconductor and its customer industries, with lost auto sales of more than $210 billion in 2021 alone2.
Although annual semiconductor sales have traditionally trended upward, they have also demonstrated a characteristic cyclicality, with periods of growth and contraction. In contrast, the growth in chip criticality has been a steady one that may even accelerate. Two factors are driving this trend. First, more and more products have at least some chips integrated into their design every year, and more and more products have more chips than they used to, from connected devices in homes to smart tags on every box in a warehouse. That is not all; chips are also rising in their value and capabilities. For example, the semi content per car will roughly double between 2013 and 20303.
Although shortages have been painful for some customers, the chip industry itself is thriving. The comparable analysis of market indices on November 4, 2019 and November 4, 2021 showed the Philadelphia Semiconductor Index (SOX) was up 117 percent, while the Nasdaq has only been up 90 percent. Revenues, earnings and cash flow are strong for chip companies, allowing for ongoing investment in new plants, new business models and accelerated digital transformation.
Semi companies have also been making strides in their efforts at greater diversity, equity, inclusion and sustainability. They are becoming more diverse and inclusive (specifically narrowing the gender gap)4 and are committing to reducing their environmental footprint. Interestingly, the sector’s biggest challenge may be water usage5, although improving their energy use is also a focus area6.
Over the long term, semiconductor revenues are likely to oscillate around a trend line. However, that trend line looks steeper than ever before as the industry enters a period of robust secular growth.
The authors’ expectations are as follows:
- The global industry will grow 10 percent in 2022 to over $600 billion for the first time. Growth will likely be down from 25 percent in 2021, as forecasted by the Semiconductor Industry Association (SIA) and World Semiconductor Trade Statistics (WSTS)1. Chips will be even more important across all industries, driven by increasing semiconductor content in everything from cars to appliances to factories, in addition to the usual suspects—computers, data centres and phones.
- Shortages and supply chain issues will remain front and centre for the first half of the year, hopefully easing by the back half, but with longer lead times for some components stretching into 2023, possibly well into 2023.
- The ongoing talent shortage will be made even more severe by the addition of increased semiconductor manufacturing facilities outside Taiwan, China and South Korea. The higher demand for software skills required to program and integrate chips into fast-growing markets such as electric vehicles, robotics, homeautomation, artificial intelligence (AI) and 5G, as well as part of theshift from fossil fuels to green energy, will further exacerbate the shortage, and there is also an overall labour shortage.
- The digital transformation within the industry will continue and accelerate. Nearly three out of five chip companies have already begun their transformation journey. However, Deloitte’s Semiconductor transformation study (STS) shows that over half of those are modifying their transformation process as they go in response to various pressures7.
The chip shortage continues, as production will take time to catch up to demandThe top semiconductor issue in 2021 was the imbalance between supply and demand. This imbalance led to chip shortages that affected both traditional chip end markets, such as data centres and smartphones, and traditionally less dependent markets, such asautomotive, consumer white goods and—rather infamously—dog-washing machines8.
It is likely that supply and demand will also be the top issue in 2022. However, next year will not be an identical repeat of 2021. In contrast, the authors expect the severity and duration of the chip shortage, and its economic ramifications, to be less pronounced, not only because of increased capacity but also supply chain improvements that chipmakers, distributors and end customers make.
Adding new capacity began in 2021 but will not be operational until 2023 at the earliest. Luckily, some new capacity additions were already in the pipeline before the shortage—the authors therefore expect to see 200 mm and 300 mm wafer capacities rise by more than 10 percent and by 15 percent, respectively.
In terms of process technology, the authors’ analysis (based on Gartner data9) shows that year-over-year growth in 2022 for most advanced nodes (10 nm and under) will be 24 percent, for intermediate nodes (14 nm to 45 nm) will be 14 percent and for mature nodes (65 nm and above) will be 9 percent. However, although much attention has been paid to more advanced nodes, the analysis also shows that even in 2022, mature node manufacturing is expected to account for nearly 64 percent of global chip output, measured in wafer equivalents10.
More capacity is a good thing; however, other, less obvious supply chain improvements may positively impact excessive lead times just as much. These fall into two interdependent trends: moving to a digital capabilities model and collaborating on a digital supply network. While neither trend started amid the pandemic and its related shortages, both were accelerated because of it.
To find their footing in 2022, semi companies should 1) move to a digital capabilities model, 2) redesign their traditional organisational silos to create a more connected and integrated model—one that encompasses their customers, talent, suppliers across all tiers, channel partners and internal facilities, and 3) work to adopt better customer connections, synchronised planning, dynamic fulfilment, supplier collaboration, operationscommand centres and digital development.
Meanwhile, semiconductor producers, distributors and customers should work together to transform their legacy supply chain into a digital supply network by sensing, collaborating, optimising and responding with greater agility. As an example of effective collaboration, companies can work closely with ecosystem partners (both upstream and downstream) to facilitate real-time information sharing and understanding, in addition to greater capturing and addressing of the potential impact to sensed signals. As an example of better data sharing from 2021, one prominent Silicon Valley company that shared its chip needs with manufacturers for the next 12 months moved to five-year forecasts instead.
Strategic questions to consider:
• How can C-level executives balance the actions and investments that they are making toward alleviating or expediting shortages in the short term with longer term fixes to capacity and supply chain?
• How can a better view of true aggregated demand forecast be developed realistically(e.g., by filtering out double/triple-counting, over optimism), while gaining insight into the real supply capacity investment needed?
• How can the changing nature of demand from core devices to edge/internet of things (IoT)/5G-enabled devices be addressed? This shift to the edge is changing the ecosystems, products and routes to market that semiconductor companies have to operate in, and there are big operating model, partnership/channel and product strategy decisions they should make.
• How can a better end-to-end, multi-enterprise view of the supply chain be built by considering vital aspects related to data sharing, privacy, security and confidentiality?
The hunt for silicon talent intensifies
A widespread post-pandemic worker shortage prevails, propelled in part by the ‘Great Resignation’, in which more than 4 million American workers quit their jobs in August 2021 alone11.
The semiconductor industry is also feeling the pinch, but exponentially more so. In addition to sharing the factors affecting other industries, the chip business has four megatrends that are making the war for talent even more severe:
- Global semi industry revenues by the end of 2022 will be almost 50 percent higher than at the end of 20191, 12.
- There were already talent shortages in Taiwan and South Korea in 2017. The talent pool in these countries was relatively well developed, but recent growth has nearly exhausted it13.
- Over time, building more local chip fabrication plants (aka fabs) in the US, China, Singapore, Israel and other countries will allow chip companies to access a broader, deeper pool of talent. However, in the short term, although there are millions of talented workers in those areas, they must be trained to acquire essential skills—a necessary step that will not be resolved in 2022.
- The mix of job skills is changing, and the industry has a strong need for software skills. The authors’ analysis of multiple industry estimates suggests that global electronic design automation (EDA) software revenue is anticipated to double from approximately $10 billion in 2020 to $19 billion by 2027. The need for software hires is likely to follow a similar trend.
On a global level, the most severe talent shortage this year is likely to be in China. There were about 510,000 professionals in semiconductor design and manufacturing in the country as of 2019. A 2021 report by the China Institute for Educational Finance Research at Peking University suggested a talent shortfall that year of about 300,000 workers, a number projected to fall only slightly to 250,000 by 202214.
There are about 280,000 American professionals in semiconductor design and manufacturing15. Based on the authors’ analysis of publicly available information sources, new plants in Arizona and Texas will likely create close to 5,000 high-tech manufacturing and engineering jobs, and other proposed new plants could more than double that number.
In addition to engineering talent shortages, domestic chip companies are facing competition for talent from other tech majors aggressively expanding in high-growth areas demanding similar skills, including AI, edge computing, robotics, 5G and smart devices, intensifying the ongoing battle for semiconductor talent.
The chip industry can help address its talent shortage by more proactively engaging with universities to advance STEM skills of graduates and bolster innovation. Both efforts are critical to helping the US sustain its long-term global semiconductor leadership and competitiveness.
Another step chip companies can take to address the talent gap is to directly tap into international alliances and ecosystems. Initiatives such as the MicroElectronics Training Industry and Skills (METIS) project and the SEMI Foundation’s Workforce Development programme have established multi-entity models to attract, train and retain qualified engineers.
To cater to the growing hybrid work model, semi companies need innovative ways to help enable collaboration between core manufacturing, technical and R&D staff. Many companies already seem to be on this path; in Deloitte’s STS, 42 percent identified corporate culture/environment and collaboration as crucial for their business transformation7.
Major chip manufacturers also enhanced their work/life balance initiatives, employee assistance and well-being programmes to better support their organisations during the pandemic. This year will likely require them to be even more agile with their workforce development and employee benefit programmes, both of which will prove crucial to their ability to retain and grow talent.
Strategic questions to consider:
• As companies adopt alternative talent strategies to cater to a distributed workforce, what local- and state-level tax policies should be considered, and what specific roles should be permanent or full-time versus contract-based?
• How can companies develop their talent pool in a hybrid work model that leverages a range of options such as on-the-job training, self-paced learning and onsite/offsite mentorship?
• What specific tasks can be automated or robotised within each job role? How can companies enhance the human-machine connection—e.g., using augmented reality (AR), virtual reality (VR), mixed reality (MR) or AI—for more effective teaming and productivity?
The move to localise chip manufacturing gains momentum
The global semiconductor industry is committing to increasing its overall output capacity at an unprecedented level. Based on the authors’ analysis of public announcements from selected large public companies that make semiconductors, capital expenditures from the three largest players will likely exceed $200 billion from 2021 to 2023. Furthermore, based on the authors’ analysis of publicly announced US, EU and Chinese initiatives, 24 governments have committed hundreds of billions of dollars more. The authors expect global wafer starts to be 50 percent higher by the end of 2023 than they were in 2020. Some will occur in traditional manufacturing clusters located in Taiwan and South Korea; but increasingly, they will be in the US, China, Japan, Singapore, Israel and Europe, increasing chip production closer to the next step in the supply chain—a trend known as localisation16.
There are multiple drivers for localisation, but it is worth noting that it reverses a multi-decade trend to a well-developed and fine-tuned global supply chain. From chip design and wafer manufacturing to packaging, testing, original equipment manufacturer (OEM) assembly and more, there are dozens of countries involved.
Moving global supply chain capabilities to a single country or region will not be easy, but when making the argument for localisation, here are some points to consider:
- As the pandemic has demonstrated, having all semiconductor eggs in one basket leaves multiple industries vulnerable to the hazards of having manufacturer and consumer thousands of miles apart: blocked canals, jammed ports and so on. Over 60 percent of all chips were made in East Asia in 202017.
- Moving manufacturing closer to end users is now seen as a prudent national strategy to reduce risk.
- Heightened tensions in the East Asia manufacturing region have drawn attention to a global vulnerability of profound supply disruption due to blockades or military action18.
- Ongoing trade restrictions and embargoes suggest a need for greater local autonomy of manufacturing, especially in China19.
- Chipmaking is increasingly seen as a driver for the overall digital economy. In addition to providing local jobs, having a minimum critical mass of semi manufacturing capacity within borders is a key part of national or regional industrial policy in 2022 and beyond, an issue seemingly pressing in Europe at present20.
As is customary in industrial policy conversations, chipmakers are more than happy to build new plants in new locales as long as the incentives (usually tax-related) are large enough. Hundreds of billions of dollars will likely be needed going forward.
Moreover, one of the reasons the industry has been so highly concentrated geographically was that there were multiple economies of scale at work that rewarded concentrations. As chip companies move toward localisation, they should consider inherent risks and other possible pitfalls.
Strategic questions to consider:
• As companies pursue localisation, what changes should they make in the near and long term with regards to manufacturing and supply-side capacity footprint?
• While companies intend to localise chip production, what potential sources ofinvestment—including national, local and strategic partners—can they tap into?
• How might access to talent markets, support for technical services, energy and water availability, and tax structure and policies change and affect the long-term expansion strategy and roadmap?
Digital transformation efforts accelerate
If semiconductor companies are to strengthen their competitive edge, they need to be the first to launch new products, rapidly scale production and focus on innovation and efficiency. These factors—coupled with the advent of new technology end markets, customers’ shift to designing chips in-house, global trade wars and the supply chain disruption during the pandemic—have forced them to reinvent their business and operating models. In line with these external market drivers, Deloitte’s STS found that nearly three out of five chip companies had already embarked on some form of digital transformation by mid-20217.
Nonetheless, the survey revealed that half of semiconductor companies had yet to modify their transformation strategy to adapt to the dynamic marketplace changes that took place during 2021. For two-thirds of those surveyed, their transformation strategy did not fully align with their organisation and culture. Moreover, nearly one in ten had no defined transformation strategy whatsoever. It was of little surprise that almost half of chip companies experienced material changes to their digital transformation plans while they were in progress.
In 2022, chip industry executives should address the fallouts of a complex and unpredictable market environment that has affected their business functions and supply chains. They should establish a clear end-state vision, versus being hasty when planning and formulating a transformation strategy. As digital business model transformations require changing operating models and adopting new digital and talent capabilities, chip companies should take an integrated approach—considering various entities both within and outside the enterprise—to be more resilient to future business disruptions21.
Semi companies should also bolster their collaboration with extended supply network partners so that they can better implement integrated AI, edge computing, 5G communications and IoT solutions. Their transformation should represent the end markets they are expanding into and the capabilities that will best enable their growth and expansion. Deploying these technologies internally can help unleash capabilities, such as greater visibility of data across the corporate and supply network, timely and real-time intelligence, and automation of key processes. All can be essential to executing their transformation initiatives. Enhancing customer experience is also a critical element as chip companies strive to acquire new customers in new markets.
Deloitte’s STS noted that starting in 2022, half of chip companies might plan to offer everything as a service (XaaS)-based solutions, representing a shift from the traditional one-time product sales model7. As companies ponder on this path, they should also consider how new offerings could change the way they go to market, what product engineering and design changes would be required, and how revenue models need to change. The study also noted that nearly half of respondents plan to introduce usage, subscription or outcome-based revenue models. Even hardware companies, including those producing chips and equipment, are forging paths toward non-traditional models.
Strategic questions to consider:
• Does the transformation strategy consider all the various entities, including technology, workforce, business functions, including strategic business units, channel and distribution partners, and end-market customers?
• As part of the transformation roadmap, what business partnerships, alliances, and novel talent and design capabilities do companies need to consider or develop?
• How do companies need to change their business and operating models to monetise more of the value their intellectual property (IP), chips and solutions provide (e.g., silicon as a service)?
Signposts for the future
In 2022, the semiconductor industry will experience continued strong growth, even as it takes steps to address chip shortages, manage lead times with suppliers and end customers, build manufacturing capacity locally or nearshore, hire specialised engineering and design talent, and bolster its supply networks using advanced digital solutions.
For fab equipment makers, integrated device manufacturers, fabless chip design companies, foundries and chip distribution partners alike, the trends and developments will affect and influence their strategies and business moves.
For 2022 and beyond, the authors recommend semiconductor industry executives bemindful of the following signposts:
• Lead times for chips: 12 weeks is about average, so moving toward that level is a key goal before the end of the year22.
• Inventory levels for end customers and distributors: As a result of the shortage, some customers may be hoarding or at least over-ordering. Once the shortage resolves, they could start working down excess inventories, leading to abruptly decreased demand.
• Money and pressure from governments: There is currently strong financial and political support for localisation at both the national and regional levels of government, but semi companies should be on the alert for flagging support, as well as cancelled or abandoned incentives.
• Wage inflation: The ongoing talent war continues to see companies struggle to fill positions. Compensation has not risen materially; however, as the competition for talent intensifies, that could change.
• Capital expenditure levels: Current run rates are over $100 billion annually, and as the industry shifts into balance, stakeholders may start arguing for a reduction.
• Unforeseeable global and regional disruptions: Significant global/regional political, trade or conflict events or environmental issues (typhoons, earthquakes, droughts) could cause supply chain shocks and disruption and yet again radically alter chip companies’ strategies and business models.
Deloitte Consulting
www2.deloitte.com
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