What can we learn from the great chip famine?

from AMT DEC 2021

MANUFACTURING HISTORY: A look back in time

On 19 August 2021, Toyota, the world’s largest car manufacturer by volume, announced it would cut production by 40% in September, in response to the global shortage of microchips. For some experts, this announcement confirms the worst is yet to come from the great chip famine. John Young assesses what’s in store next for manufacturing.

The automotive sector has been hit especially hard, but few will escape the clutches of the global chip shortage. Recent predictions, unfortunately, suggest the worst might be yet to come. Singapore-based Flex, the world’s third-largest electronics contract manufacturer, recently released a pessimistic forecast predicting the crisis will last for at least another year. A similar prediction was made by the head of Intel, which itself manufactures chips. So, how did we end up like this? Anatomy of a perfect storm

The COVID-19 pandemic has wreaked havoc in global value chains but is only one factor in this multi-faceted drama. The current situation is the outcome of a perfect storm of demand and supply factors, a storm that has decimated what with hindsight looks like a house of cards. On the supply side of the equation, the following statistic demonstrates the scale of reliance on a small number of Asian chip manufacturers. As much as 70% of the world’s semiconductors are manufactured by just two companies, Taiwan Semiconductor (TSMC) and Samsung. In retrospect, economic historians will probably balk at the world’s overreliance on one or two companies for the supply of a component that is crucial to so many technologies. The supply has also been disrupted by an unfortunate series of disasters, from a drought in Taiwan, to a flood in Texas, to a fire in Japan. It may be disputed whether these were natural disasters, or consequences of climate change brought about by human action. One supply side factor that is certainly man-made is the ongoing US-China trade war. In anticipation of the measures introduced during the administration of former president Donald Trump, Chinese tech giants like Huawei had been stockpiling chips in preparation for future shortages. On the demand side of the equation, we can see the impact of COVID-19 more clearly. Lockdowns led to a surge in demand for consumer electronics, while automakers scaled back production, expecting that the economic downturn would mean fewer sales of new cars. When demand for new cars rebounded strongly at the end of 2020, the automotive sector, which relies on a fragile just-in-time supply chain, moved to rebook the orders it had previously cancelled. However, the foundries were already operating at full capacity to meet the increased demand and automakers found themselves queuing behind the electronics manufacturers who had taken their place. The final straw on the demand side of the equation was the sharp rise in Bitcoin prices in early 2021. This had a knockon effect on demand for the graphics processing units that are used for mining the digital currency, adding further strain to the semiconductor shortages. What next for manufacturing?

The crisis is not expected to abate any time soon, with some of the more gloomy forecasts predicting that these supply and demand issues will not be resolved fully until 2023. Actions by Western governments are indicative of one potential outcome: a move toward reshoring production. The logic behind reshoring is clear, given the strategic value of semiconductors and their role in military applications. US President Joe Biden has passed an executive order in response to the crisis and pledged US$37bn to cover the short-term costs of rebuilding and securing US supplies. However, semiconductor manufacturing is uniquely complex and expensive. The entry barriers are astronomically high, with upfront investments of more than US$10bn required to set up a foundry and a minimum wait of three years to become production-ready. Over 90% of the world’s advanced chips are produced in Asia and recent moves suggest that region will remain the powerhouse for many years to come. US semiconductor manufacturer GlobalFoundries, the third-largest chipmaker in the world, recently announced a fresh US4bn investment in Singapore. With no quick-fix solution on the horizon, manufacturers might find that they will have to halt or slow production, but they might also change their approach to equipment purchases. The price of new equipment that uses semiconductors is set to rise. Manufacturers could consider postponing expensive equipment upgrades, by adopting alternative strategies. Now is a pressing time to make sure your factory’s obsolescence management plan is up to date. If equipment is set to rise in cost due to the chip shortage, then postponing or delaying full system overhauls for the next year or two – until the situation recovers a level of normalcy – might be a preferrable option. It is also a good idea to carry out a full audit of all equipment and components, so you can plan ahead for potential shortages of parts. Pairing with a reliable automation parts supplier like EU Automation will mean you can source obsolete equipment parts and keep legacy equipment running longer.

Another viable strategy is to retrofit your legacy equipment. Many automation parts like variable speed drives or smart sensors can be retrofitted to existing legacy equipment, giving your facility the benefits of greater automation without the higher capital costs of full system overhauls. Of course, the wider lesson in all of this is to diversify your supply chain. Although extensive reshoring might not be likely, there is some talk or regionalisation emerging in response to this crisis. We have seen the benefits of having sites in four strategic locations – the UK, the US, Germany and Singapore, allowing us to remain agile in the face of shocks to our supply. In every crisis lies a lesson and an opportunity. Toyota was able to hold on without halting production for longer than many other manufacturers, in part because it revised its strategy following the Fukushima nuclear disaster of 2011. Let’s hope that manufacturers can derive important lessons from the great chip famine of 2021, and leave global value chains better prepared for the next storm that will inevitably come.