When the Covid-19 pandemic hit the world in 2020, the balance of supply and demand in the electronic component industry was at a critical point where supply could just meet demand – in most cases. From time to time there were some part shortages for short intervals, but these could be managed. The value chain, from the mining of the raw materials to the processing thereof and finally the manufacturing of the actual parts, was mostly balanced in the sense that from raw materials to final distribution, everything was working fine. When Covid lockdowns hit the world the first part of this value chain that suffered was the mining of the raw materials. With mines shutting down worldwide, the value chain for components were staring down the barrel of a gun.
Fire and pestilence
Another big factor in the value chain is the actual component manufacturers. The epicentre of the breakout, Wuhan in China, is also where several prominent component manufacturers and distributors are located. When Wuhan and later the rest of China, was locked down, most of these factories could not meet the demand for components. As the pandemic spread further around the world, more component factories had to stop production. This was the start of a snowball effect which has led us to a point now in 2022 where most of these companies are still trying to catch up on production.
To make the already existing problem of semiconductor shortages worse, there were some unrelated fires in semiconductor plants around the world. One of these plants, owned by Asahi Kasei which specialises in analog-to-digital and digital-to-analog converter components, caught fire in October 2020. Another Japanese factory, owned by Renesas Electronics which supplies 30% of the global market for microcontroller units used in cars, caught fire in March 2021. After the fire, the factory could only operate at 10% of its original capacity and Renesas said it would take at least 100 days to get back to normal production. However, normal production levels took much longer than expected and are still not up to expected standards. In January 2022, a fire at the Berlin plant of ASML affected the production of EUV lithography equipment used in semiconductor chip production.
Shoring up against tidal wave of demand
In 2020 the demand for advanced semiconductors increased by 6,5%, mostly because of rising demand in automotive, space, defence, smart device and computer markets. In 2021 the global demand for semiconductors grew by an estimated 8,4%, as reported by the Semiconductor Industry Association, to approximately $433 billion. A very big contributor was the mobile phone market catering for 5G handsets and infrastructure.
With the annual growth in demand for semiconductors expected to increase again in 2022 due to more industry sectors undergoing digital transformation and the increase in IoT systems, several large chip manufacturers and governments have committed to invest large sums of money to build more capacity in the semiconductor manufacturing environment.
According to Data Center Dynamics, an international industry content publishing house, the government of South Korea and domestic semiconductor manufacturers like Samsung and SK Hynix have committed to invest around $451 billion to increase capacity and by doing so, the country will become a world leader in this field. Samsung said it would invest $151 billion through 2030 in its System LSI and foundry businesses. The South Korean government also pledged to educate 36 000 new semiconductor experts at an estimated cost of $1,3 billion.
According to Taiwan Semiconductor Manufacturing Company (TSMC), one of the leading chip manufacturers and the world’s most valuable semiconductor company, it will invest an estimated $100 billion over the next three years to increase its capacity. TSMC is already the world’s largest dedicated independent semiconductor foundry company.
Investing in geographic diversification
However, despite these massive investments, there has been a recognition for the need to diversify the component supply chain to circumvent the reliance on Taiwan and South Korea.
In the USA, the ‘Build Back Better Plan’, a legislative framework proposed by President Joe Biden ahead of his inauguration, has pledged support for the American semiconductor sector with a massive tech funding bill introduced in June 2021 that saw $52 billion earmarked for American chip production expansion for companies like Intel, which is planning to build a new mega factory in Ohio to the value of $100 billion. This spending will secure the US market’s access to semiconductors and also aid in normalising the semiconductor shortages. This investment will also help the US electronics market to break free from its reliance on semiconductors from the Far East.
In the European Union, plans to step up component manufacturing capacity across the region are also gaining momentum. The German federal government has pledged to provide 4,5 billion Euros in state aid and total investments of 15 billion Euros for microelectronics and communication technologies.
Prognosis for recovery
According to Pedestal Research, the semiconductor shortages will continue through 2022 and deep into 2023. By this time some of the investments in factory upgrades and infrastructure should be producing dividends and the shortage should become less of a problem for the consumers of these semiconductor products. It is expected that the challenges of rebalancing the semiconductor devices market and getting parts into customers’ hands will take much longer to settle, although some relief will start to become evident.
One other drawback we find at Conical Technologies, working in the supply of components on a daily basis, is getting customers to plan ahead and manage expectations. Our experience shows that forward planning has an impact on the cash flow of customers, making such planning more difficult.
As a distributor of RF, microwave and power supply solutions, Conical Technologies has seen an increase in delays procuring parts from its suppliers. Parts that used to be in stock now have long lead times and parts that used to have lead times now have very long lead times. Some of our power solution suppliers now have lead times of 32 weeks. This makes it very challenging in the South African electronics industry.
The best solution for the next two to three years is for programme managers to plan much further ahead and for stock buyers to ensure orders are placed well in advance. We have seen customers asking for quotes for parts and then only placing orders four or even six weeks later. By that time, delivery of the parts has been delayed again, putting strain on relationships between customers, manufacturers and part suppliers.
Planning will be key for the South African electronics industry to survive these difficult times.
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