A month ago, Supply Chain Matters indicated to readers that the ongoing global-wide semiconductor chip shortage is not going away anytime soon. Now, a month later, High-tech, consumer electronics, automotive and general equipment supply chain management teams continue scrambling to secure any available semiconductor chips, but the situation is such that any available inventories are committed with few options but to wait out direct material purchases.

Of late, some in social media are now questioning why certain industries such as automotive producers elected to continue with their just-in-time inventory practices without grasping quick enough that global wide demand for various forms of semiconductor components would turn into a severe shortage. Isn’t hindsight wonderful when a pandemic is not factored or when those that are critical may not be fully aware of what was really happening in planning meetings.

For the automotive industry, that reality has become visible as major auto companies report their latest financial performance. While automakers such as Ford Motor and General Motors reported record operating profits, executives had to warn that semiconductor shortages will further impact production plans in the coming weeks, at least through June.

Ford alone warned of the potential of half of its planned second-quarter production may be impacted. Toyota, which indicated in February that as part of its business continuity plans, had secured ‘one to four months of stock if necessary’ indicated this week of a likely two-week production shutdown because of the lack of availability of semiconductor components. The latest assessment from industry consulting firm Alix Partners indicates that upwards of a 3.9 million shortfall in production as a result of the current chip shortages would amount to an estimated $110 billion in lost automobile sales, roughly 4.6 percent of total planned production for 2021.

In high-tech and consumer electronics supply networks, the deepening demand and available supply imbalance is now getting more visibility as well as industry senior executives report their latest financial and operational results.

Supply Chain Matters Editorial

The Semiconductor Supply Network

On the semiconductor supply network front, Bloomberg reported earlier this month that ongoing chip demand fueled the biggest jump in Taiwan exports since 2010. The value of exports reportedly rose nearly 39 percent in April to a value of $35 billion. Taiwan is the home of the globe’s largest chip fabricator, Taiwan Semiconductor Manufacturing Co. (TSMC), and with production levels at all-time highs, all eyes are on what may be occurring. Thus, reports last week of a widespread power outage that occurred caught immediate headlines. An incident of human error which caused a power plant technician to accidently flip an improper switch, caused a sudden drop in voltage and utility plant shutdown. That in-turn caused an electric blackout that impacted Taiwan’s major cities and reportedly half of industrial parks. TSMC itself experienced power dips and was without power for “a few hours” before service was completely restored. While this may have been an isolated incident in normal times, the global wide chip shortage coupled with the reality of a continued water shortage on the island has many planners nervous, to state the obvious.

Thus, the near-term planning and operational implications of this ongoing shortage have clearly caught the attention of multi-industry senior executives as well as shareholder and equity investment communities. While the drumbeat of news headlines adds to the pressures on business sales and operations as well as supply chain planning and strategy teams, there are added forces to the bigger picture that should be monitored for longer-term sourcing strategy.

 

Pay Attention to the Bigger Picture

In our Supply Chain Matters commentaries on developments that are occurring among various industries including the semiconductor industry, we provide readers not only assessments of the current tactical, but also the longer-term strategic developments related to supply networks. For semiconductor and indeed deemed critical high-technology supply networks, geo-political forces are increasingly becoming more visible and meaningful.

The reality is to address the needed resiliency of semiconductor and high-tech supply networks which are increasingly being recognized as essential for economic growth and national security.  Clearly that is a different dimension than that of lower cost or singular global supply network concentration.

The U.S. and China trade relationships continue to cool and China itself is becoming more vocal and demonstrative relative to the reunification of Taiwan, the existing global hub of advanced semiconductor fab production. The Economist last month featured a series of reports on the political stakes of Taiwan and of global trade impacts. Such stakes grow far more significant in terms of the risk for bifurcation of semiconductor, smartphone, telecommunications and now automotive supply networks.

Last week, Bloomberg reported a rather noteworthy development regarding South Korea, and the unveiling of a reported ambitious plan to invest roughly $450 billion targeted in building the globe’s largest chipmaking capability over the next decade. President Moon Jae-in’s Administration has set a goal for the country to remain a key industry supplier and to safeguard this country’s most economically crucial growth and export industry. Key players in this effort are reported to be a supply network of upwards of 153 companies anchored by Samsung Electronics and SK Hynix.

The plan outlines the creation of a “K-semiconductor belt” that will extend south of Seoul and bring together chip design, fabrication and component supply. Noted is that the government of South Korea will provide incentives in the form of tax breaks, eased regulations and added infrastructure. Both Samsung and Hynix, which together produce the majority of memory chips, are reportedly developing plans to produce advanced logic chips currently dominated by TSMC.

And as Supply Chain Matters has also noted, both the United States and Europe are also stepping up efforts to incent more domestic supply network capabilities relative to semiconductor and crucial high-tech supply networks.

The Biden Administration’s Executive Order calling for a review of four deemed strategic industries essential for U.S. national security and competitiveness includes the feasibility of a broader semiconductor domestic supply network. U.S. Commerce Secretary Gina Raimondo conducted a second meeting of major chip producers Intel, Samsung, TSMC and other industry participants this week to add further clarity to the U.S. effort. Reportedly, TSMC is hinting of adding five additional fabs in Arizona while Samsung is close to finalizing a $17 billion plan for a second fab facility in Austin, Texas. Intel vowed to begin producing chips for domestic auto makers, a new product area. Secretary Raimondo has been vocal in her policy conversations that the current chip shortage should not cause favoritism to any single industry for longer-term policy planning.

While there are often tendencies to not worry about the future when the present provides lots of supply heartburn, the takeaway message for senior supply chain executives is that this area is indeed one that requires a supply network resiliency strategy.

These devices and components require billions in capital investment in order to remain leading-edge, and the open question is that given the longer-term demand, how will key industry participants ultimately place those investments to assure their own business resiliency or geo-political navigation needs.

If anything, this is a time where product design and strategic sourcing teams need to be working in lock step to ensure that there is multiple qualification and sourcing of deemed critical electronic components. For the automotive and general equipment industries, the takeaway is especially direct, do not assume that your demands have buying leverage. Teams must be cautious of longer-term, multi-year supply contracts related to crucial semiconductor or sophisticated high-tech equipment without factoring whether the supplier or distributor can provide the flexibility of leveraging multi-region sourcing.

When huge demand and supply imbalances occur, there is often a tendency of over-response on the part of suppliers or distributors. The high-tech industry has a classic history of such practices of valleys and peaks followed by over-supply. Add in these new, and ever-moving geo-political factors and the message is that it likely makes sense to consider a dedicated strategic sourcing and supply management team made-up of multi-functional stakeholders, focused on deemed critical supply components. Semiconductor suppliers will likely not have a tendency to execute regionally focused fab capabilities without some assurances of customer supply commitments.

As an example, Apple has demonstrated its prowess by extending long-term supply contracts to strategic semiconductor chip providers, while at the same time controlling the design requirements of its chips. However, even Apple will likely have to outwit the current geo-political sourcing landscape, buy alas that is the subject a dedicated future commentary.

 

Bob Ferrari

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