This article is part of TechXchange: Chip Shortages and Counterfeits
The global chip shortage, now dragging into its second year, has shaken the electronics industry to its core, crimping the world's ability to build everything from cars to consumer goods and raising prices.
Even companies that produce chips are themselves being hit—at least indirectly—by sourcing problems, adding to the upheaval facing the semiconductor industry as it attempts to solve the chip shortage.
Applied Materials, the world’s largest maker of the high-end machinery used to manufacture chips, said late last year it has been unable to get its hands on some of the chips used in its products due to snags in its supply chain. Demand for the analog, power and logic chips it uses is outstripping supply. This is exposing the company to some of the same supply chain issues affecting other areas, such as autos.
“That is the definition of a vicious cycle,” said Chris Richard, supply chain expert and principal analyst at Deloitte, where he covers the semiconductor market. “You can’t make more equipment to put in factories because you don’t have a chip that gets made in the same factory.”
The chip shortage is complicated even more by the fact that electronic devices use a very wide range of components that have varying levels of availability, Richard stated. It only takes a single part on a bill of materials (BOM) being out of stock or on allocation to halt production. At Applied Materials, executives said that out of the thousands of components used in its tools only 10 were giving its suppliers trouble.
Part of the problem is that semiconductor equipment makers are fighting over the same finite supply of chips as companies in other sectors. The reality is that no one is getting their hands on ample supplies.
Where Do Things Stand?
The chip industry is cyclical, driven by fluctuating demand for chips used in consumer goods and other sectors that follows the ebb and flow of the economy, with the market swinging from gluts to shortages.
But the pandemic sent a shock through every part of the semiconductor ecosystem when it hit in 2020.
The virus shut down factories where chips are made, packaged, and tested. It also took a toll on other parts of the supply chain, such as sourcing silicon wafers, substrates, and other raw materials, straining supplies. The complex logistics that companies use to move chips around the globe and ship finished stock to customers was also hit, leading to tighter inventories that companies are at pains to replenish.
“We aren’t even close to being out of the woods,” U.S. Commerce Secretary Gina Raimondo said in January. “The semiconductor supply chain is very fragile and it’s going to remain that way until we can increase chip manufacturing.”
In January, the U.S. Department of Commerce released a report using survey results from over 150 U.S. companies, including nearly every major chip maker as well as automotive, industrial, and medical firms that have been hit hard. The report noted that median inventory levels of chips at U.S. companies fell from 40 days in 2019 to five days in 2021, leaving them exposed to even the slightest extra disruption.
“The current global chip shortage rivals only a few of the past imbalanced markets,” said Graham Scott, head of global procurement at Jabil, in a blog. “However, it’s unique in the breadth of product families."
Widespread shortages are holding companies back from rebuilding inventories, he said. Companies tend to place chip orders several months ahead of time, but fulfillment is taking longer than usual. Electronics companies are wrestling with lead times of more than 28 weeks for virtually every type of chip, he said.
Many microcontrollers and logic chips are in worse shape, on allocation or with lead times of 52 weeks.
What Is Taking So Long?
The semiconductor industry continues to dig out of the deep hole created by booming demand for chips.
Global sales of semiconductors soared to a record $556 billion in 2021, up more than 26% year over year, according to the Semiconductor Industry Association (SIA).
Companies have been ordering more chips than they actually need to shore up stocks, squeezing capacity and driving up prices, said Masatsune Yamaji, semiconductor analyst at Gartner.
To discourage double-ordering, many chip makers are requiring customers to lock themselves into long-term, non-cancelable orders. Even those vendors have their hands full, though. Broadcom has said that it is fully booked through the end of 2022 and into early 2023.
Semiconductor firms are shifting chip factories into higher gear in response to the supply constraints. Most companies run chip fabs at around 80% of their maximum capacity, leaving time to shut down parts of the plant for maintenance and upgrades. But robust demand for chips is keeping capacity utilized at a high rate: an average level of between 90% and 95% for more than a year at this point.
But as supply chains remain in turmoil, the world is piling the pressure on the semiconductor industry. Chip firms are, in turn, moving aggressively to beef up capacity at fabs and develop new technologies.
But adding production capacity for chips the world is lacking is difficult or impossible in the short term. Expanding the capacity of a fab takes up to a year and a half to install, test, and qualify the equipment.
According to Deloitte's Richard, companies plan to add production capacity throughout this year. But he warned that chip supplies will likely continue to fall short of demand despite the production build-up.
Jan-Philipp Gehrmann, head of global marketing for the advanced analog business at NXP, said the auto industry has been affected by component sourcing issues more than any other sector, and it learned too late that it is impossible to fix it with the flip of a switch.
“What auto makers were unfamiliar with was the process of how chips are made and the complexity behind that,” said Gehrmann. While it usually only takes a single day to manufacture a vehicle from start to finish, the average chip has a front-end production cycle of 12 to 24 weeks. Additionally, it takes 4 to 8 weeks on the back-end to package and test it before the finished chip is finally shipped to the customer.
“The fact that producing a single chip can take six months was hard to understand,” said Gehrmann.
When Will It Finally End?
Unless there is a sudden drop in demand, the chip shortage will not be over anytime soon, analysts said.
Most industry executives warn the shortage will likely not ease before the second half of 2022, with some products continuing to be delayed by a deficiency of chips in 2023.
“Demand remains robust across most system markets but inventory levels by the middle of the year and slower economic activity in the second half could be what ultimately eases the constraints," said Mario Morales, VP of semiconductor research at IDC, in a January report.
Although the chip shortages are broad-based, the companies feeling the pain most acutely are those trying to buy chips based on long-lasting legacy nodes, specifically microcontrollers widely used in cars as well as a wide range of analog and power management ICs.
The industry is warning these constraints will not be resolved for some time. GlobalFoundries, the largest U.S.-based contract chip maker, said that wafer capacity for its more mature nodes is sold out through 2023 even as it plans to boost its production capacity by 50% in the same span.
Varying levels of availability also mean different industries and even companies in the same industry will regain access to components at different rates, said Glenn O'Donnell, VP of research at consulting firm Forrester, said in a 2021 report. He said widespread shortages could soften for some sectors, such as PCs and consumer electronics, in 2022, while weighing on others, such as cars.
The route out of the global chip shortage is complicated by the supply chain's vastness, which leaves it exposed to unpredictable events, according to Avnet VP of global supplier development Peggy Carrieres.
The components in an average chip, from the intellectual property used to design it to the blank wafers used to build it, can travel 25,000 miles and cross over 70 international borders before a customer gets its hands on the final chip, according to a report released by the Global Semiconductor Alliance in 2020.
A disruption at any point in the supply chain—caused by a once-in-a-century pandemic, a massive fire at a fab, or sanctions imposed as part of a trade war—can snag production, straining supply and hiking prices.
What’s Being Done About It?
Once the world falls into a chip shortage, little can be done to address it in the short term, at least on the part of the semiconductor industry. Besides boosting production rates, chip makers have started hiking prices and adjusting their order books.
The last time the world went through such a supply shock was more than a decade ago in the wake of the global financial crisis, Richard said. If what happened then is any model for the future, he sees today's shortage lasting at least another year.
But what stands out about the shortage of 2020 and 2021 is that companies are responding by building in more excess capacity to get ahead of future demand, he said. Every company fears overreacting to a shortage. The risk is by the time fabs come online, the demand that spurred companies to build them in the first place will be over, leaving them with some of the most expensive unused capacity in the world.
But the semiconductor industry is loading up its bets that underlying demand for chips has permanently increased. “There is definitely more—and substantial—capacity coming online,” Richard said.
Many of the world’s largest semiconductor companies are racing ahead with ambitious plans to build U.S. plants. Intel, Samsung, and TSMC have announced projects in Ohio, Arizona, and Texas, in recent years, with a minimum total investment of $69 billion. Intel said investment at its manufacturing site in Ohio could grow to $100 billion over the next 10 years. But the plan hinges on it getting government aid.
TI announced plans to invest up to $30 billion in a new sprawling manufacturing site in Texas by 2025.
Companies are being lured to the U.S. by the prospect of massive subsidies. The U.S. has proposed $52 billion in funding to boost the country’s self-sufficiency in chips, as part of the America COMPETES Act.
But none of these investments will alleviate today's chip shortage, as most of the fabs are still years out.
For now, though, customers are going to take what they can get.
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