As the global semiconductor industry is facing both shortage and oversupply challenges at once, how can companies move forward? Our annual outlook takes a closer look at five major trends in the industry—and how an economic downturn could provide an opportunity for the industry to reset and refocus.
Heading into 2023, global macroeconomic and geopolitical factors are emerging as the dominant forces shaping the semiconductor industry. Rising interest rates, high inflation, lower consumer confidence and tech-led stock market retreats have led to a dramatic loss in market capitalisation: The top 10 global chip companies’ combined market cap is down 34% from US$2.9 trillion in November 2021 to US$1.9 trillion in November 2022.
In response to the higher cost of capital, inventory drawdowns from customers and the supply chain, and a decline in earnings, many chip companies are cutting costs, reducing employee headcount and pushing out (but not cancelling) capital expenditures for additional capacity.
But there could be a bright side: A downturn may provide an opportunity for the industry to focus on things other than just trying to catch up during a shortage. As the sections that follow will show, Deloitte anticipates that 2023 could act as the “pause that refreshes” and allow the semiconductor industry to consider five big things:
In the United States and Europe, the goal for both the chipmakers and policymakers is likely to make their domestic industrial capacity appropriately more self-sufficient while recognising that self-sufficiency may be unattainable. As Ursula von der Leyen, president of the European Commission, said in her remarks introducing the EU Chips Act: “It should be clear that no country—and even no continent—can be entirely self-sufficient.”
After all, “chips” is not a monolithic category: Many kinds of chips (memory, logic, mixed signal, power semis, etc.) are manufactured for many different end markets. Each type of chip may require different wafer sizes and process technologies as well as different materials, facilities, equipment and design tools, radiation tolerance and so on. There are two dominant but different models: the fabless foundry outsourced assembly and test (OSAT) ecosystem; and the integrated device manufacturing model, which usually combines all three roles.
Deciding what mix of onshoring, nearshoring and friendshoring (while almost certainly still relying on offshoring as well) may be best for each manufacturer or country/region will make 2023 an interesting year. These decisions could resonate for years to come: New or expanded facilities started in 2023 will likely still be in operation in 2030 and beyond, and so will their supply chain linkages.
Strategic questions to consider, by region or country:
The US and Europe chip industries are looking at diversifying not just fabs but all parts of the semiconductor supply chain, including AT. They would move chipmaking out of the traditional strongholds in the Asia/Pacific region into North America and Europe.
Replicating the capabilities of Asian manufacturing locations won’t be easy. Until the supply chain, pandemic and trade issues surfaced, Asia had secured supply of raw and manufactured materials to make hundreds of components. Replicating and building that model in multiple geographically unconcentrated new locations would likely take years or even decades. Nonetheless, starting in 2023, the chip companies need to plan and prepare for potential risks involved in diversification.
One of the crucial starting steps is expected to be identifying new sourcing and trade routes. The ongoing war in Ukraine and US-China technology restrictions introduce additional complications and risks and will likely require new air corridors, sea routes and export-control compliance. These new pathways are likely to increase freight, transportation, and logistics costs and, in turn, pricing of the end products—which are already elevated due to higher energy costs.
With supply chains most likely to fan out to dozens of new locations within the next two to three years, semiconductor companies may need to invest in advanced software and analytics in 2023 to track their products and solutions at any given point in time across the supply chain and facilitate timely decisions.
Strategic questions to consider:
The global semiconductor industry is anticipated to grow to US$1 trillion in revenues by 2030, doubling in this decade. This growth is expected to require investment in high-end advanced wafer manufacturing materials, equipment, and services—but also in the back-end AT solutions and services.
Currently, more than 90% of the AT base is in Asia, either in foundries or OSAT providers. With around US$100 billion pledged to support localisation of semiconductor capacity, several companies in the industry are adding new AT capacity in Europe, North America and Southeast Asia. And that could exacerbate the existing challenge of disparate and siloed supply chain tech and systems, rendering it even more difficult to predict potential supply chain disruptions. This is where integrated data platforms, next-generation ERP, planning and supplier collaboration systems, along with AI and cognitive technologies, are expected to make OSAT processes more efficient and help sense and preemptively plan for future supply chain shocks.
Beyond OSATs, data analytics platforms that are integrated into ERP, planning, and procurement systems can help semiconductor companies predict events that could disrupt the supply chain: unexpected weather events, transport bottlenecks, logistics challenges that require rerouting shipments and labour-related issues. Sharing real-time data and intelligence across the ecosystem—encompassing the equipment and tool suppliers, chip design companies, wafer fab facilities, AT facilities, distributors, OEM and ODM customers and more—is likely essential to build a digitally connected supply chain.
To realise maximum benefit from AI tech and data-driven solutions, data quality matters. So in 2023, semiconductor companies need to modernise their ERP systems and integrate diverse data sources, such as customer data, manufacturing data, and financial and operational data. And they should consider investing in data management and data analytics modernisation solutions, establishing the required data governance and fixing data quality issues.
Strategic questions to consider:
Semiconductor talent was in short supply in 2022—and the shortage is expected to get even worse in 2023 for parts of the industry and be a challenge for the rest of the decade. The race to localise semiconductor manufacturing is intensifying globally and is exacerbating the chip talent and skill shortage issues. Deloitte predicts that the semiconductor workforce—estimated at more than 2 million direct semiconductor employees worldwide in 2021—will need to grow by more than 1 million additional skilled workers by 2030, adding roughly more than 100,000 workers annually.
In 2023, chip companies should consider expediting hiring people with diverse skills for building and automating their manufacturing facilities and to design chips and tools. Their talent challenges are compounded by the urgent need to build large-scale fab facilities in multiple regions. Therefore, they need to accelerate hiring for a range of skills: electricians, pipefitters and welders; technical engineers, maintenance personnel and smart factory automation specialists; and graduate electrical engineers to design chips and the tools and manufacturing processes that make the chips.
Besides skill development, the chip industry may need to join hands with the various local governments to enhance fungibility and mobility of skills between regions, secure support in the form of favorable talent immigration policies and seek assistance for local recruitment and skills-based training. Further, after years of M&A activity and consolidation, many companies may need to find a better way to integrate the various talent workforces.
Strategic questions to consider:
The global semiconductor industry has experienced the impact of climate-driven adverse events in 2021 and 2022. Extreme heat and drought conditions affected power supply in China’s Sichuan province, leading to factory closures at several electronics component makers. Drought in Taiwan caused water restrictions to some chipmaking plants. Intense winter storms triggered power outages in Texas, affecting three major semiconductor plants’ operations.
But the chip industry is not just facing climate issues; it is likely contributing to climate change. The production process for every new generation of chips uses more energy, water and greenhouse gases—especially process gases with high global warming potential (GWP) that are difficult to mitigate—than the generation before. And by 2030, the information and communications technology industry is likely to account for 20% of global electricity demand. As a result, investors, customers, board members and regulators are requiring more transparent and comprehensive disclosures on greenhouse gas emissions, environmental risks and mitigation actions.
In 2023, the chip industry can form strategic alliances with all parts of the supply chain and work more cohesively to explore and develop new technologies and methods to help accelerate decarbonisation efforts—although there is some skepticism that the industry can achieve net-zero. Besides reducing carbon emissions from their own operations, the chip industry has the potential to reduce others’ carbon footprints. Compound power semiconductors, such as silicon carbide and gallium nitride, can help enhance energy efficiency and improve the green carbon footprint of sectors such as automotive, industrial automation, rail transportation and renewable installations.
Strategic questions to consider:
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