WHEN THE CHIPS ARE DOWN

If the pandemic has taught us anything, it’s that self-reliance is the way forward. The global semiconductor shortage is likely to continue well into next year extending lead times and delaying product deliveries. In a recent interview with CNBC, Martin Daum, chairman of the board of management of Daimler Truck AG, said he was more concerned about semiconductors than the pandemic. Martin is not alone with this view. Most manufacturers haven’t been able to meet customer demand this year due to the parts shortage, and therefore, view this situation as the single biggest crisis to overcome by next year.

Vehicles nowadays are increasingly becoming connected and smart, which makes them computers on wheels, and semiconductors, their core components. This is a relatively new application of semiconductors, unlike the consumer and industrial electronics industries that exisit only due to the existence of these parts. With the emergence of the automotive industry as a leading buyer of semiconductors globally and the technological leadership of manufacturers heavily dependent on the availability of these parts, there’s a need to scale-up semiconductor manufacturing globally.

A Mckinsey & Company analysis points out that lack of capacity is the cause of the shortage. While the total capacity in the semiconductor industry has expanded steadily by around 4 percent annually, in line with sales, it is not enough to keep up with demand because semiconductor utilization has been consistently high, at or above 80 percent, in the past decade. The utilization in 2020 was close to 90 percent, which many industry leaders regard as full utilization, since exceeding that level often results in disproportionately longer lead times. Therefore, while the semiconductor industry has increased its production capacity by nearly 180 percent since 2000, its total capacity is nearly exhausted at the current high utilization rate.

Major American automakers are looking at new partnerships to secure their future supply of semiconductors. Ford Motor Company is collaborating with Globalfoundries and General Motors has entered into a supplier agreement with Wolfspeed. These alliances are aimed at advancing semiconductor manufacturing and technology development within the US.

Governments have a major role to play in attracting investment in local semiconductor production. Texas, which recently attracted Tesla to set up its headquarters in the state, has signed up Samsung Electronics to invest $17 billion to build a semiconductor manufacturing facility. This will be the largest investment by Samsung in the US; the manufacturer chose Texas because of the local semiconductor ecosystem, infrastructure stability, government support and community development opportunities.

Japan is supporting the Taiwan Semiconductor Manufacturing Company (TSMC) and Sony Semiconductor Solutions to set up a $7 billion semiconductor fabrication plant in the Kumamoto prefecture to secure a stable supply of logic wafers for the entire Japanese industry.

India is offering new incentives to global manufactures to set up an alternative production hub to China.

Meanwhile lawmakers in the EU and US are pushing for legislation, called ‘Chip Acts’ to reduce their dependence on Asian manufacturers and enhance their local production capacities.

All these developments are positive indicators, but the plans will materialise only through a combination of vertical integration, strategic alliances and government incentives.