The story of the semiconductor shortage starts as many have over the last 3 years; with challenges brought on by COVID-19. When demand in automotive plummeted in the first half of 2020, semiconductor orders came to an abrupt stop. Due to the short-notice nature of contracts, semiconductor companies in turn stopped production. In short: no demand, no manufacturing.

Then came the flip. The second half of the year saw a spike in demand that went far beyond the needs of the automotive industry alone. With the increase in remote work, electronics were in high demand to set up new working conditions.
The semiconductor industry was not prepared for the sudden rise, and, because of the pause in production, was now facing a shortage, and ultimately a crisis. 

Here's why. Historically, semiconductors operated with the just-in-time production mentality to minimize waste and increase efficiency. But as the industry quickly learned, this was fickle and not a long-term and sustainable operating solution. As stock dropped, companies around the world started stockpiling to ensure they would have access to the semiconductors they needed, elevating the intensity of the shortage.

5 strategies for combating the semiconductor shortages

The electronics value chain is complex. It is made up of, starts with, and heavily relies on the semiconductor value chain. Several players take part in the process, everything from procurement and design to back-end manufacturing. This adds a layer of risk. If one partner faces a delay, a massive kink is created in the chain, sending everything to an immediate halt in the production of electronics.

While there may be a slow period of relief, with consumer electronics shipments decreasing by up to 30%, the slow in demand is not expected to last. The industry needs more resilience in its semiconductor inventory management to be able to withstand the turbulence ahead. To overcome this, the industry should secure long-term contracts, prioritize regionalisation, maintain higher stock levels, be cautious with drastic changes, and increase communication.
Secure long-term contracts
In the automotive industry, semiconductor contracts, historically, are short, providing only a few weeks' notice of orders. As mentioned earlier, this creates a fragility in production; when demand drops, production drops.

Since the crisis, semiconductor producers have been prioritising long-term contracts to create a more stable demand that is much easier to forecast. Making this shift in the contract approach could be in the difference in securing the semiconductors needed for production.
Higher stock levels
Managing stock levels is a balancing act; one doesn’t want too much or too little of any product on hand. Traditionally, with semiconductors, the automotive market has operated by the just-in-time methodology. But the last years have proved that this is not a feasible long-term strategy.

Moving away from just-in-time practices and having higher stocks could help combat fluctuations in product availability and navigate a more and more complex supply chain.

What we can expect next

To avoid the risks posed by geopolitical issues and build a more resilient market that is not as susceptible to supply chain chaos, countries around the world are looking to expand semiconductor manufacturing. But will it be enough? Let’s explore.

Today, Taiwan accounts for more than 60 percent of the world’s global foundry revenue. TSMC, the world’s largest semiconductor manufacturer, will soon invest $44 billion in new manufacturing facilities in Taiwan to increase their production capacities. Although this investment seems substantial, it will only represent about 1 percent of their global capacity.

Currently, experts are forecasting a 7.5 percent decline in APAC in 2023. And while TCMS, and other companies in Asia, are considering expanding their plant operations into other regions, the shortage will continue to be a challenge in the region as the need for chips rises to meet the demands of 5G, automotive and industrial applications.

Expert Q&A

Across the globe, efforts are being made to mitigate the shortage, but are falling short of the immediate needs. Despite this, our expert, Sophie Pozzi, Product & Market Manager for IMCD Industrial Solutions, remains optimistic about the future.
What should be the priority for the industry today to overcome its many challenges?
The priority needs to be in regional sourcing. This is highly discussed today, and countries around the world are working towards building the right production facilities for this to happen. But we still have a journey ahead of us to be in the right position to heavily rely on regional product sourcing.
Today, the automotive industry accounts for about 40 percent of the semiconductor market demand. But with the advancing technology, we will soon experience a massive need for chips in other industries as well. In my opinion, the 5G rollout will create a major disruption, because it will require massive amounts of small chips that will all need to be created at one time for a successful rollout. If the 5G industry can get them, this will create a scarcity of chips and put a strain on other industries that rely on them as well.
It is well known and must be acknowledged here that the last years of electronics production have been very difficult. We have relied on our ability to communicate openly and transparently about the market and the challenges we face so that our customers do not face them alone. As a distributor, we are uniquely positioned between both sides of the production chain and able to be the trusted advisors that our customers need to navigate today’s storms.

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