ECONOMY

No easy options to ease semiconductor squeeze

As the global semiconductor shortage enters its second year, the US government appears to have decided that extraordinary times require extraordinary measures.

Supply shortfalls continue to weigh on sectors ranging from cars to home appliances, putting a dent in the world’s economic recovery from the Covid-induced slump and adding to a global supply-chain crisis.

In late September, commerce secretary Gina Raimondo told chipmakers that Washington wants them to provide data about details of their business such as inventory which would be used to help identify snags in the supply chain earlier and more clearly. Although participation is declared voluntary, Raimondo has flagged that the US might force those who fail to comply.

It is not hard to see why such drastic action is being contemplated, given the scale of disruption. But the US government’s intervention is likely to be futile.

“What the Biden administration wants is a control tower that sees everything in the industry: forecasting, inventory, capacity and utilisation. But that is unlikely to succeed,” says Peter Hanbury, a partner at Bain & Co.

Taiwan Semiconductor Manufacturing Company, the world’s largest contract chipmaker, and its peers “are not going to want to tell how much capacity they are giving to Apple, because then the US government might tell them to give that capacity to someone else instead”, says Hanbury.

“There could also be antitrust issues arising, because if [carmakers] could see all that data, they could collude to drive down prices.”

Companies are getting creative though in response to the supply shortages. At Luxshare, a Chinese electronics manufacturer and Apple supplier, executives say that searching for components from companies that are not its regular suppliers has become part of their job. Contract chipmakers try to “shape demand” by convincing customers to use slightly different specifications to be served faster.

Chip manufacturers’ customers are also adjusting. “Companies have gotten used to paying for capacity upfront, and to signing long-term agreements for 12 to 18 months in advance,” says Phelix Lee, an analyst at Morningstar.

“Sometimes the shortfall is such that you would need them to sign for 36 to 60 months,” Lee adds. “But some producers are turning down orders instead rather than letting any more backlog build, because if customers get to book that much in advance, they can lock in the price.”

Beyond short-term fixes, the supply-chain squeeze is triggering a broader rethink of operations.

“While in the past the production process was broken up into many tiny components, they [companies] realise now that while that may be most cost-effective, it is also more disruption-prone,” says Hanbury. He therefore predicts vertical integration through mergers and acquisitions.

Some of that is already happening: Foxconn, the world’s largest contract electronics manufacturer, has acquired stakes in two chipmakers to secure supplies for its fledgling electric vehicle business. Meanwhile, some chip design houses that have been using just one contract manufacturer are now looking to add second or third manufacturing partners.

Companies are also seeking to understand better where the electronic components going into their products come from. After Japan’s Fukushima earthquake and tsunami which disrupted supply chains in 2011, Toyota built a system in-house to trace the origins of the many different electronic control units that go into each car. More such efforts will create the transparency Raimondo’s initiative is seeking.

The supply-chain spasms could also incentivise manufacturers to move away from a production footprint overly concentrated in one country. This would inadvertently help bring about the decoupling of supply chains from China that the US government has long pursued.

But to exclude a repetition of the massive shortages seen over the past year, a more radical approach would be needed.

“The fundamental issue is that in semiconductors, we have a concentrated industry structure with huge multiyear investments, which are slow in responding to V-shaped demand movements as we are seeing now,” says Andrew Tilton, Asia economist at Goldman Sachs. “In theory, efforts to duplicate supply chains and build surplus capacity could help, but that would be very costly and take time.” 

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