An update on the semiconductor crisis and its impact early 2022.
You have probably heard about the semiconductor crisis that is affecting many sectors today. In this article, we will review the current state of this worldwide shortage at the beginning of 2022. We will analyze its causes and consequences on the concerned actors, then the possible solutions.
The semiconductor: an essential element in any modern electronic system present in many sectors
First, let us recall what a semiconductor is. It is a small electronic piece that is essential to ensure the proper functioning of any electronic device. Indeed, this chip has properties that allow it to act as both a conductor and an insulator. In particular, it allows electricity to be conducted in certain cases. All these characteristics make it an indispensable part of our computer and connected devices, but also our vehicles.
Silicon is one of the most used materials to produce a semiconductor, because of its advantageous properties such as its availability, accessibility and low cost of implementation.
It is important to know that the weight of the semiconductor market in 2020 was around 400 billion dollars. By 2035, this figure will more than double.
However, this precious part is becoming increasingly rare: the world has been experiencing a serious semiconductor crisis for almost 2 years now, which affects various sectors in a rather uneven manner.
The semiconductor crisis: causes and consequences
The semiconductor shortage today can be explained by a combination of factors.
In the first half of 2020, the automotive industry faced a sharp drop in demand, leading to significant disruptions in the supply chain. At the same time, the shift to remote working due to the Covid-19 health crisis and the resulting need for increased connectivity has led to a considerable increase in demand for hardware (personal computers, video games, communication equipment, etc.). However, the manufacturing of the latter requires semiconductors.
Therefore, the companies producing these chips have concentrated their efforts on these other sectors, which have proven to be much more profitable (than the automotive sector in particular).
As a result, by the time automotive demand picked up faster than expected in the second half of 2020, the semiconductor industry had already redirected much of its production to meet demand in other, more lucrative areas.
This has also led to suspensions of many automotive production lines and a drop in new vehicle sales (with significant production delays due to lack of parts).
We also see the need for semiconductors increasing in many sectors, which puts further pressure on demand.
The automotive sector is currently undergoing a massive electrification process. In order to offer a more responsible and sustainable mobility, European manufacturers are striving to offer a range of electric and/or hybrid vehicles. However, the production and marketing of these vehicles requires a significant amount of semiconductors.
The cryptocurrency sector, which is currently in full development, needs to be equipped with semiconductors in order to function optimally. According to Nomura Bank, bitcoin & cryptocurrency applications accounted for 10% of the total sales of TSMC, one of the largest semiconductor producers today.
Moreover, the semiconductor market is oligopolistic (i.e. characterized by a strong demand (customers) and only a few suppliers (sellers). A few key players (the majority of which are Asian) have control over supply. They can therefore favor certain sectors to the detriment of others that they consider more profitable.
Indeed, today, three companies dominate semiconductor production: the American Intel, its South Korean competitor Samsung, and the TSMC group, based in Taiwan. Asia dominates this sector: China and Korea hold 75% of this market. These Asian companies master the entire value chain of the semiconductor: from production to marketing. This is one of the reasons why Europe is so dependent on Asia.
Finally, it should be noted that a series of fires has impacted the supply of semiconductors.
For example, in the past (March 2021), a fire at the Naka plant in Japan owned by Renesas Electronics, one of its three largest semiconductor suppliers, caused more damage than expected. This led to long delivery delays, further exacerbating supply tensions in the automotive industry.
More recently, a fire broke out in the Berlin plant of ASML, one of the world’s leading manufacturers of photolithography machines for the semiconductor industry. A delay in its production could therefore have a serious impact on the customers concerned.
Alternatives and solutions to cope with the semiconductor shortage
Today, there are several ways to limit the negative impacts of this shortage.
Is building factories in Europe the key?
The American company Intel, a major player in the production of semiconductors, plans to build a chip factory in Europe. It will announce very soon the city that will host this project (although the city of Dresden in Germany appears to be the favorite for the moment).
Intel wants to build two production units at 10 billion euros and 1,500 employees each. This would allow European players to source directly in Europe, and thus solicit Asian companies less often.
What is planned at the global level?
The Renault x Qualcomm Alliance: US chipmaker Qualcomm has signed an agreement with Renault to extend their semiconductor partnership. Qualcomm’s technologies will be used in Renault’s upcoming more connected and intelligent vehicles.
“Working closely with a technology leader like Qualcomm Technologies allows us to innovate faster to keep up with emerging trends and meet the need for sophisticated functionality,” said Thierry Cammal, Alliance Vice-President Software Factory at Renault.
TSMC x Sony partnership: The Japanese government has announced its intention to invest nearly $400 billion in the construction of a new factory in southwestern Japan. This will be built by TSMC, a Taiwanese company, leader in the semiconductor market. At the same time, the company has also confirmed its intention to invest, alongside Sony, nearly 7 billion dollars for the construction of this plant. It is expected to open in 2024.
Ford x GlobalFoundries will join forces: Ford recently announced its ambition to explore the different possibilities of semiconductor manufacturing to support the development of the automotive industry. The carmaker will join forces with the American GlobalFoundries, one of the largest independent semiconductor foundries in the world. The aim is also to boost the supply of chips for Ford but also for the American automotive market.
Innovation and R&D to replace conventional semiconductors
Today, there are more innovative chips that can replace “classic” semiconductors. Tesla is proof of this. Indeed, despite the global shortage of semiconductors, the company has managed to deliver nearly one million vehicles in 2021, which is far better than its performance in 2020. This is because Tesla is using chips with more advanced technologies, where the shortage is much less severe. Of course, this means being particularly innovative and investing in R&D.
Is the semiconductor crisis here to stay?
This is a question that everyone is asking today, and opinions differ on the subject.
Some experts believe that there is hope.
Indeed, the various partnerships announced (or already launched) as well as the projects for the construction of semiconductor factories (especially in Europe) should help reduce the negative consequences of this shortage.
In addition, some governments have also announced encouraging measures that would help fight against this crisis. This is notably the case in Japan (notably in the framework of the TSMC x Sony partnership) and India. The latter has developed a global strategic plan of 10 billion dollars, to ensure the supply of semiconductors in India in the long term. Indeed, the country wants to produce high-end chips locally, which would allow Indian semiconductor manufacturers to have a more secure and competitive supply chain.
But some are less optimistic: indeed, they stress that this global crisis could only be alleviated if the players concerned put the announced measures into practice.
Moreover, the consequences of Covid-19 are still very present in this market, which makes the future all the more uncertain.
In conclusion, it is difficult to estimate a precise date when this crisis will end. However, a mobilization of the different actors affected by the shortage could effectively accelerate the end of the crisis.
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