Greg Moyle, head of energy and discrete industries, SAP UKI
As the world marked two years since the beginning of the pandemic, many would have hoped for everyday life to return to normality, none less so than in business. However, many industries, including automotive and consumer electronics, are still operating at limited capacity, with some factories grinding to a near standstill, impacting their productivity and their long-term sustainability.
Why? For many, the ongoing semiconductor chip shortage is preventing manufacturers from increasing their output to pre-pandemic levels. Concerningly, this global issue is likely to be a challenge for years to come with Intel’s CEO, Pat Gelsinger, suggesting in a recent interview that he expects the shortage of these invaluable components to continue into 20241.
The impact of chip shortages is hardly surprising. In the case of the US, the semiconductor industry only accounts for 0.3 percent of the country’s GDP. However, semiconductors are required to produce 12 percent of the US’s national output. To say they are indispensable would be a giant understatement.
But how did we reach this point, and how can manufacturers manage this crisis going forward?
Mapping the crisis
While there is no definitive reason for this shortage in semiconductor chips, there is a range of factors that can be attributed to this lull in supply.
To be expected, the pandemic has played a key role. With civilians around the world forced to stay home, demand for products in heavy industries such as automotive dropped suddenly, leading manufacturers to significantly cut their chip orders. However, as restrictions were lifted and demand for cars rebounded, semiconductor chip manufacturers have struggled to react quickly enough to meet this new level of demand, stalling production and causing lengthy waiting times.
Another contributing factor has been the globalisation of supply chains. For cost-reduction purposes, the production of semiconductors and microelectronics has moved offshore, being concentrated in Taiwan, South Korea and China, and has led to Europe’s contribution to the semiconductor market share to fall from 40 to 9 percent between 1990 and 2020. When many factories in these markets closed, the knock-on effects were devastating, with heavy industries carrying a high level of exposure due to the majority of semiconductor factories being based in South-East Asia.
No easy solution
Ostensibly, the solution to this problem is to create more chips to meet the current sky-high levels of demand. However, the reality is far more complicated than simply injecting more supply into the market.
At the best of times, the semiconductor manufacturing process is lengthy and variable. Progress from water fabrication to die bank alone can take 12 to 14 weeks. This only becomes more complicated when trying to add new capacity. To build and qualify a new fabrication takes between three to five years, with associated costs ranging between US$4 billion to $10 billion. Combined with the issues of defects, contamination and technical factors, manufacturers have limited options when responding to major changes in demand from customers.
Understanding the three timelines
The truth is clear—the semiconductor chip shortage is an issue that manufacturers are going to need to manage over the coming years. However, how they choose to do this will determine the level of success they enjoy moving forwards.
To that end, it’s critical that manufacturers address the challenge across three different timelines, namely the immediate, the near term and the long term.
The immediate
In the short term, organisations need to be in firefighting mode, ensuring that customers are receiving constant updates on production and timelines. It’s key that expectations are constantly reset and clearly communicated to stakeholders. This can be helped by using predictive analytics to maximise capacity and smart testing to optimise efficiency.
The near term
Manufacturers need also be looking and planning for 6–12 months into the future. Here, they are in a containment phase where the business leaders must be focused on establishing tighter processes and deploying improved tools to create more visibility and insight to aid decision making. In this stage, manufacturers must try to get ahead of unforeseen problems through integrating end-to-end business processes, ensuring they are all communicating, to replan and allocate supply to customers.
The long term
Looking past 12 months, manufacturers need to define their vision and strategy for the value chain with the aim of improving resilience to future challenges and mitigating the effects should another supply chain shortage come along. In turn, this will help them to become more agile, sustainable and transparent—all traits that are critical to rebuffing unexpected shocks in their supply.
By taking this approach, decisionmakers can help ensure revenue continuity, fulfil customer expectations and develop greater organisational resilience.
It’s clear that there is no quick fix to the challenges created by the semiconductor chip shortage. However, while these issues are likely to persist, manufacturers do have the capacity to manage this issue and maintain business continuity. Key to this will be working collaboratively with partners. Whether it’s providing innovative technologies, such as predictive analytics and end-to-end maintenance management, or consultative advice, partners throughout a manufacturer’s supply chain can be invaluable allies when planning for and navigating the adversity these challenges present.
SAP UKI
Reference
1CNBC (2022). Intel CEO now expects chip shortage to last into 2024. [press release] CNBC.
Available at: https://cnb.cx/3QFc4W2