Knotty supply chains deepen global chip shortage

News: Recently, Toyota Corporation has been struggling to meet its production targets. It has apologised to its suppliers and customers a third time in less than two months for delaying making new vehicles and changing production plans.

Nature of Semiconductor Industry

The manufacturing process is a complex, and interconnected ecosystem with its own ebb and flow.

The chip-making process is divided into front-end and back-end parts. Wafer fabrication and probe are generally referred to as front-end operations, and assembly and test as back-end operations.

The front and back-end processes are spread out across the globe, creating a global chip-making ecosystem. This semiconductor manufacturing ecosystem involves roughly 25 countries in the direct supply chain, and 23 countries in allied functions.

A semiconductor-based product could cross international borders about 70 times before finally making it to the end customer.

Semiconductors are produced as 200mm or 300mm wafers. The larger wafers are expensive and mostly used for advanced equipment, whereas smaller diameter wafers remain in high demand in automobile sector, laptops, tablet, and smartphone production.

Why there has been a global shortage of semiconductor chips?

There has been a global shortage of chips or semiconductor devices. This has been due to many reasons:

The industry faced its share of glut and shortage in the past decade as consumer preferences shifted from one electronic fad to another.

The manufacturing equipment needed to make the semiconductor devices were in short supply even before the pandemic began. That’s because the industry was moving in the direction of 5G and advanced communication, which required expensive wafers.

The chip making production also halted as the factories were closed during Covid-19 induced lockdowns.

Due to the pandemic hit, people switched to work from home, children connected to schools through laptops, get-togethers happened over video calls, and subscription-based mobile games became popular. This shift led to a surge in demand for semiconductors in laptops and tablets production.

Post-lockdown, the industry gradually tried to pull itself out of the supply crunch, but they started facing the problem of exacerbated logistical complexities. The global supply chains were disrupted.

The Just-In-Time (JIT) Approach used by the chipmakers became a weakness. It let firms take inputs from suppliers only when they are needed. During, due to poor demands from automobile industry, chipmakers concluded deals with other industries.

About a decade and half back, semiconductors have been produced through global supply chain by interconnecting several parts of the world.

The geopolitical events in Central Europe and production shutdowns in China add pressure to the already complicated semiconductor supply chain.

Russia’s invasion of Ukraine strained exports of essential commodities required to make chip sets. For example, Moscow supplies rare materials like palladium, and Kyiv sells rare gases to make semiconductor fab lasers.

Way Forward

Europe and the US have taken measures such as the European Chips Act (45 billion euros) and CHIPS for America Act ($52 billion). These measures would incentivise fab makers to set up their units in these regions and balance.

Together, these two will enable the semiconductor manufacturers to have equal investments in the East and West by 2030. At present, 80% is in Asia, and 20% is in Europe and the U.S.

Source: The post is based on an article “Knotty supply chains deepen global chip shortage” published in the “The Hindu” on 27^th May 2022.