The State of Semiconductor Industry
Top Strategic Imperatives
Semiconductors are the fourth-most-traded product in the world after crude oil, refined oil, and cars. Semiconductors, being the highly complex products to design and manufacture, capture a truly global supply chain in the literal sense. To give you a sense of its vastness, the US leads research and development-intensive activities such as electronic design automation (EDA), core intellectual property (IP), chip design, and advanced manufacturing equipment. At the same time, East Asia is the hub of wafer fabrication, and China has been the undisputed leader in assembly, packaging, and testing. At the same time, all these countries are interdependent for the movement of material, equipment, IP, and products around the world to the optimal location for performing each activity.
A fully 'self-sufficient' local supply chain in each region to meet the current levels of semiconductor consumption would require at least $1 trillion in incremental upfront investment, resulting in a 35% to 65% overall increase in semiconductor prices and ultimately higher costs of electronic devices for end-users. The high geographic concentration of manufacturing capacity has been a great area of concern for the resilience of the semiconductor supply chain. To achieve a well-balanced supply chain network, the semiconductor industry needs nuanced, targeted policies that strengthen supply chain resilience and expand open trade while assessing the needs of national security. Three clear imperatives demand a resilient semiconductor supply chain. Let's explore each one of them.
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Diverse demand patterns
Back in the 2000s, the semiconductor market was driven by data processing (PC, enterprise data centers) and communications (mobility, network rollout), with the primary supply chain model being the Build-to-stock. Over the years, the fast-paced use of semiconductors in almost every hi-tech product basket, smartphones, electronic appliances, and the automobile has catapulted the demand dynamics.
Lead time reduction across the global value chain is critical for semiconductor companies to optimize logistics costs and improve speed to market. Keeping sufficient backup inventory of key parts and safety stock can reduce the financial impact of disrupted supplies and help companies meet sudden spikes in demand.
The semiconductor industry is the most geographically dispersed value chain, making it highly complex. The process takes more than 100 days between manufacturing, assembly/packaging, and test sites. The semiconductors cross international borders 70 or more times and eventually make the equivalent of three full trips around the world. The rising global tension is forcing many semiconductor manufacturers to lose access to the large Chinese market, which consumes more than 50% of all semiconductors, both for imports and exports.
Demand shocks are becoming apparent as the smoothening effect across geographies ceases to exist. On the supply side, these dynamics push the semiconductor players to move from global collaboration to self-sufficiency and allied strategies. Such changes will not only impact the industry's ability to utilize the comparative advantage for productivity and cost efficiency, but they will also intensify supply shortages. To adapt to geopolitical changes, entities must focus on redesigning micro supply chains for critical components rather than applying one-size-fits-all supply chain procurement models.
Fragmented product supply chains
A semiconductor manufacturing capacity involves complex nodes such as varied wafer sizes (100mm, 150mm, 200mm, 300mm, and the futuristic 450mm) and processes (from 350nm to 5nm), requiring a specific supply network. If the semiconductor industry had continued on the yesteryear growth path, such fragmentations wouldn't have been a problem for companies. The moment new-age technologies started challenging the expanse of semiconductors, the need for a resilient supply chain became evident.
A collaborative planning approach across the semiconductor product design, manufacturing, and test value chain can help the industry manage demand-supply shocks. To simplify the productization and reduce engineering development cycle time and WIP (wafer-in-process) requirements for NPIs, companies need to expand their platform-based product design across families of products and generations, using the open sharing of technology roadmaps between customers and chip designers.
Why Supply Chain Modernization is the Answer
The advent of Cloud, 5G deployment, connected vehicles, and digitization have collectively created never-seen-before demand for high-performance computing, and the most sought-after semiconductor market is also in the race to join the digitalization bandwagon. According to the 16th annual KPMG global semiconductor industry outlook, 50% of industry leaders say Covid-19 has accelerated their digital transformation, which is way behind the tech sector overall (89%) and other industries (81%).
Data insights are a critical component of enhanced supply chain resiliency. Using technology and applications to collect granular data and metrics at all supply chain points enables semiconductor companies to make faster, data-driven decisions. Digitalization in the supply chain helps companies define micro supply chains and apply true segmentation to deliver greater value versus a 'one size fits all' supply chain strategy. The digitalization journey also assists companies in determining if the inventory strategy should be 'just in time' vs. heavier assets-on-hand, as highlighted by the KPMG study. Let's take a look at the benefits of building a modern supply chain.
'Cycle Time Drives Everything' is an apt adage to highlight the importance of product delivery on time. It is particularly crucial in the ruthlessly fast-paced semiconductor manufacturing industry due to tremendous competition in the market. Automation was a boon, and a necessity when wafer size increased from 200 mm to 300 mm. Recent research published in IEEE stated that an optimized strategy for batch preparation and dispatch showed an overall 30% reduction in total dispatch time.
A McKinsey study observes that, on average, companies lose 33% of the PAT when the product shipment is delayed by six months, as compared to the losses of just 3.5% even if 50% is overspent product development. With each passing day, manufacturers learn that the production and development time and faster GTM time required are the core drivers for success than the costs invested in these activities. This makes responsiveness an extremely crucial imperative towards building a digital supply chain.
The semiconductor value chain has multiple tiers, and any decline or increase in demand at each tier affects the entwined supply chain. As semiconductor manufacturing requires long cycle times with more than 90 days for high-volume manufacturing (HVM) end-to-end process and higher for product development, any unexpected disruption in the local supply chain can interrupt months of planning, ultimately resulting in huge cost implications.