The absence of a US$1 chip can prevent the sale of a device, appliance, or vehicle worth much more. The world experienced a severe and long-lasting semiconductor shortage across multiple chip products from 2020 through fall of 2021 and we predict the chip shortage will continue through 2022, with lead times for some components pushing out to 2023, meaning it will have lasted over 24 months. The impact is still being felt across PCs, smartphones, data centers, other consumer goods and especially the auto sector.1 The cumulative revenue impact of the shortage will likely be over US$500 billion globally from 2020 to 2022.2
The next semiconductor shortage could be as big or bigger than this one. Given the ever-increasing importance of chips to multiple industries,3 the economic harm could be even greater. What can semiconductor manufacturers, distributors, customers (the semiconductor supply chain) and governments do to avert another potential catastrophe? It likely needs to be all of them: The problem is so big that no single company, or even industry, can make a difference on its own.
Some might think that today’s shortage is a one-off. As long as we don’t have a once-in-a-century global pandemic, a massive fire at a key Japanese chip plant, a Texas freeze and a ship stuck in the Suez Canal—all coinciding—the next shortage couldn’t possibly be as severe.
History never repeats, but as the saying goes, it often rhymes. In the coming decade, it’s a near certainty that some combination of events such as a global recession, major weather event and disruption near a critical maritime port or strait could all occur roughly at once. The chip manufacturing industry and supply chains, as they currently exist, inherently are vulnerable to disruptions, which makes shortage inevitable.
The current disruption is nothing new. Over the last three decades, we’ve seen six shortages of similar duration or magnitude to today’s (figure 1). Sometimes shortages occur or are exacerbated by external shocks such as the tech bubble or 2009 recession, but sometimes they “just happen.” Adding capacity in the chip industry has always been expensive and chunky. It occurs in waves driven by both technology and market forces and has long lead times between deciding to build a fab (or semiconductor fabrication plant) and that fab producing its first output (finished wafers). So, the real question is not if there will be another shortage, but “when and how severe?”
The table below summarises five possible actions and which players are most involved with each action (figure 2). Our research suggests that no single one of these is a panacea, capable of fully mitigating the next shortage. All are important to some extent, with breaking the bull whip, in particular, requiring unprecedented global teamwork and coordination. All of the various players need to do all of their respective parts, work together and at the same time not create a glut. Additionally, these recommendations are not meant to be absolute. Rather, companies should choose a specific action or a combination of actions depending on what role they play in the broader semiconductor ecosystem and value chain.
The global industry is committing to increasing overall output capacity at an unprecedented level. Capital expenditures from the three largest players will likely exceed US$200 billion from 2021 to 2023 and could reach $400 billion by 2025.4 Governments have committed hundreds of billions more.5 We expect annual global 200mm-equivalent wafer capacity to increase from about 80 million in 2020 to 120 million by the end of 2024. Capacity will grow at both the 200-mm and 300-mm wafer size, at about the same rate for each.6
To be clear, growth in 200-mm is mainly from increasing capacity in existing fabs, rather than the construction of entirely new plants, which account for nearly US$12 billion of capital equipment spending between 2020 and 2022.7 From a technology perspective, capacity at mainstream nodes and the more advanced 300-mm process nodes (under 10 nm, mainly at 3 nm, 5 nm and 7 nm) will grow more rapidly than more mature process nodes (figure 3 and figure 4 below). It is worth noting that demand is growing for both wafer sizes and at all process nodes, not just the most advanced.
Surely increasing capacity broadly by 50% in only three years will more than cover any future shortage, right? Demand is growing roughly as quickly (or more) than planned capacity growth. Demand drivers include 5G, artificial intelligence and machine learning (AI/ML), intelligent edge and Internet of Things. Some of these are about delivering increasingly powerful chips to products that already use a lot of chips, but some are about adding chips to products that had no chips before.
Chip manufacturing is highly geographically clustered, both at the overall chipmaking capacity level and at the third-party wafer foundry level (figure 5).
At a high level, it’s completely normal for half or more of the total global capacity to be found in a few countries or regions. It was the United States and Silicon Valley at first, then the United States and Europe in 1990, and most recently Taiwan and South Korea. The 2020 level of concentration in East Asia (including Japan and China, which are nearing 60%)8 has attracted significant government attention from the United States, Europe and China and plans are already underway to build new plants in those countries or regions, as well as Israel, Singapore and others.9 This process is also known as “localisation.”
Almost certainly, distributing manufacturing capacity to more regions and decreasing extreme local concentrations will reduce geographic-specific supply risk and help alleviate the severity of future supply shortages … to some extent. It will likely not solve the problem entirely:
Chip buyers (demand side) and their wholesale distributors and retailers have multiple levers to become more or less lean. Being less lean is about buying early and building buffers or slack. Being leaner is about buying later with limited buffers or slack. Buyers and distributors can have a purely just-in-time supply chain management system or opt for a hybrid model. They can stockpile. They can single-source or dual-source.
They can be more or less aggressive on pricing. They can have purely quantity-based pricing or have non-cancellable, non-returnable (NCNR) options for extended periods: During the current shortages, some companies are giving firm NCNR orders for the next 12 months and others are giving five-year projections for their chip needs to suppliers, up from 12 months prior.12 Most companies or industries use a mix of these approaches, but two things jump out:
Still on the demand side, most OEMs, distributors/suppliers and customers have not adopted systems or processes to enable real time information exchanges. Hence, large fluctuations in production planning volumes happen at sub-tier levels in response to even small shifts in customer demand. This is typically known as a bullwhip effect where delayed communication between stakeholders at each tier in the supply chain is often amplified by judgements placed on the demand signals received (figure 7).15
Semiconductor companies can transform their traditional supply chains by developing and bolstering six key digital capabilities, which can allow them to transcend the physical-digital boundaries to include people, processes and technologies (figure 8). Using a digital capabilities model, they can redesign their traditional organisational silos into one that is more connected and integrated, encompassing their customers, talent, suppliers across all tiers, channel partners and internal facilities.16
Adopting some or all of these facets of a digital capability model could help semiconductor companies transform their traditional, linear supply chains into digital supply networks (DSNs).
Moreover, companies across the chip industry value chain can benefit from the distinct operating characteristics of a digital supply network by sensing, collaborating, optimising and responding (see sidebar, “The four digital disciplines of a DSN: Effective data-sharing to drive differentiated performance and value”). These digital disciplines could enable them to gain greater visibility and insight into demand, and to have a more granular and timely view of both the external and internal events across the supply network—allowing them to make timely decisions and adjustments.
What is the difference between a supply network and a supply chain? Companies that operate supply networks are skilled at practicing four digital disciplines.
Semiconductor companies can build a differentiated, value-based digital supply network in which data-sharing transcends physical boundaries. Such networks are enabled by advanced tech like blockchain and are established on strong cyber and data integrity principles.
According to Deloitte’s Semiconductor Transformation Study conducted in collaboration with the Global Semiconductor Alliance, most semiconductor companies that participated in the study had already embarked on some type of digital transformation journey by the spring of 2021 (figure 9).17 Moreover, chip players have proven to be adept at innovating across the organisation.
Taking a combined approach toward digital transformation by addressing business, technology and workforce and operational considerations can enable them to be more adaptive to future supply chain-driven business disruptions.18
Semiconductor companies should consider keeping the end-customer demand patterns and buying experience at the core of their transformation approach, which requires working with supplier tiers (both upstream and downstream), distribution channel partners, and third-party logistics and transportation providers. By collaborating with their supply network partners, they can implement the advanced technologies they need such as blockchain, sensors, AI/ML, mobile and broadband tech. These technologies can advance their business processes and enhance data access and analytics across their extended supply network.
This strategy-based digital/tech-enabled transformation can help them gain greater visibility and insight into demand patterns. That can enable them to proactively manage capacity, production, inventory and shipments, which in turn lets them build measured slack into their supply chain, allowing them to adapt and thrive in the face of any future disruptions.
As semiconductor companies navigate through this period of shortages and prepare for future shortage events, leaders should consider the following questions:
The semiconductor supply volatility which we are experiencing today will likely not be the last. To better prepare and deal with such future disruptions, companies in the broader semiconductor industry supply chain should build some measured slack into their overall supply chain to become more strategically lean. By doing so, chip players can be on a much better footing to be more agile and sustain and expand their competitive advantage in the long term.
Traditional supply chains are evolving into sets of dynamic digital supply networks. Deloitte Consulting LLP’s Supply Chain and Network Operations (SCNO) practice helps companies build supply network strategies and platforms, align processes with new technologies, develop persona-driven user experiences and explore opportunities to grow and innovate. Through innovations like our digital capabilities model (DCM) for supply networks, our SCNO practice transforms traditional supply chains into tightly integrated and synchronised supply networks.