On the path to a resilient supply chain

The current chip shortage has highlighted how sensitive the complex semiconductor supply chains are to disruption. Politics, the semiconductor industry and companies that require chips for their products are now taking different measures to increase the resilience of the supply chains.

A boom in consumption meets a delivery bottleneck – this is how we can summarise the current global trade situation. Especially when it comes to supplies of semiconductor products, there have been large bottlenecks in recent months. And these will in part continue until at least 2023. 

Semiconductor industry expands capacities 

The semiconductor industry has already reacted by increasing the capacity utilisation of the existing factories and thereby increasing the volume of semiconductor products made. Special “command centres” have also been set up in order to process the most urgent customer queries and to avoid duplicate orders in close collaboration with the customers. And this has been successful, as reported by the European Semiconductor Industry Association (ESIA), as the global turnover in semiconductors increased in 2021 by 26.2 per cent compared to 2020. “The record figures reached by the semiconductor market in 2021 indicate the industry’s strong response to the unprecedented growth in demand of semiconductors worldwide,” stated Hendrik Abma, ESIA Director-General. In this way, it was possible to supply customers with products faster and more efficiently in the short term. To ensure long-term supply security, the chip manufacturers are also planning on creating new production capacities around the globe through high investments. 

Small manufacturers are seizing their opportunity

In parallel to this, auditing firm Deloitte Global states that you can see increasing venture capital investment in semiconductors – and this mainly concerns companies that manufacture new types of chips, for example ones with particular functions for special applications. Deloitte Global forecasts that venture capital providers will invest more than six billion US dollars globally in 2022 in newly founded semiconductor companies. This is more than three times as much as in each year between 2000 and 2016. RISC-V is attracting investment here in particular. Thanks to this open-source instruction set architecture for the chip design, smaller device manufacturers also have the opportunity to make hardware at a reasonable cost. According to Deloitte Global, the market for RISC-V cores will double in 2022 compared to 2021.

More resilient supply chains

But it is not just the semiconductor industry that is responding. Due to the semiconductor shortage, the dependency on a few countries and manufacturers for the supply of semiconductor products has clearly come to light. This has woken up both customers and politics. Since then, everyone has been asking how the supply chains can be made more robust. Within this context, the new buzzword “resilience” describes the strength of a supply chain to be able to resist external disruptions, or to be able to re-align itself. 

Producing more chips domestically

In order to increase this strength, governments around the world are spending a great deal of money. They are focussing on producing more chips domestically in particular. “The global bottlenecks show that Germany and Europe have no time to lose. Together, we must work on covering our micro-electronics needs ourselves, and bring more production to Germany and Europe again. For this, we will be providing funding amounting to billions,” said Robert Habeck, German Federal Minister for Economic Affairs and Climate Action. “We are aiming to boost chip production in Germany and Europe and make it more independent of international supply chains.” 

The European Commission has implemented the European Chips Act for this. It is intended to mobilise 43 billion euros in the form of public and private investments in order to prevent disruptions in the supply chains in the future. Thierry Breton, Commissioner for the Internal Market, described the aims as follows: “Securing the supply in the most advanced chips has become an economic and geopolitical priority. Our objectives are high: doubling our global market share by 2030 to 20%, and producing the most sophisticated and energy-efficient semiconductors in Europe.” In the USA as well a similar law passed the House of Representatives recently. It is earmarking investments amounting to a total of 52 billion dollars for boosting domestic semiconductor manufacture and research. 

Optimising procurement

Even the “consumers” of semiconductors themselves are increasingly taking measures to make the supply chains more resilient for their part. At the forefront here is the automotive industry, which has particularly suffered from the semiconductor bottleneck. Business consultancy Roland Berger is recommending that companies in the automotive industry and other sectors reliant on semiconductors actively tackle the crisis. This includes technical measures such as a faster change-over to a centralised/zonal structure of the vehicle electrics and electronics to be able to reduce the number of chips required this way. “In the long term, OEMs and suppliers must adapt their design philosophy in order to keep pace with the dynamic changes in capacity in the semiconductor industry. Managing the crisis requires strategic measures,” highlighted Thomas Kirschstein, Principal at Roland Berger. Here, direct, long-term supply contracts with semiconductor companies involving mutual capacity commitments and purchase obligations over several years can provide important leverage. “Automotive semiconductor supply chains are complex,” said Gaurav Gupta, research vice president at Gartner. “In most cases, chip makers are traditionally Tier 3 or Tier 4 suppliers to automakers, which means it usually takes a while until they adapt to the changes affecting automotive market demand. This lack of visibility in the supply chain has increased automotive OEMs’ desire to have greater control over their semiconductor supply.” Ford and BMW, for example, have therefore already concluded agreements with Globalfoundries regarding the supply of chips. “We are deepening our partnership with suppliers at key points in the supplier network and synchronising our capacity planning directly with semiconductor manufacturers and developers. This improves planning reliability and transparency around the volumes needed for everyone involved and secures our needs for the long term,” said Dr Andreas Wendt, member of the Board of Management of BMW AG responsible for Purchasing and Supplier Network.