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Semiconductor shortages caused by the pandemic

Strategy

How a semiconductor shortage was a surprise late entry to the pandemic chaos

Published 23 March 2021 in Strategy • 4 min read

At the height of the supply chain disruptions caused by COVID-19, the focus was on consumer goods like milk, eggs and toilet paper. Now, as the world begins to slowly rebalance, a surprising consequence of the pandemic has emerged: semiconductors.

There is currently a shortage of semiconductors; it is a story that acts as a very useful example of the difficulties of macro-demand planning and limited supply chain surplus capacity. But what do we mean by this?

Semiconductors: small and significant

Semiconductors are small chips used in electronic circuits: computers, smartphones, televisions, and increasingly in appliances and automobiles. As the Internet of Things has transformed every device into a ‘smart’ one, semiconductors have become integral building blocks of the Internet of Things.

The manufacturing of semiconductors is capital intensive, highly automated and multi-step, with production concentrated in a handful of suppliers concentrated in Taiwan, in addition to some vertically integrated companies like Intel. Lead times are long for semiconductors, at up to four to five months.

But here’s the issue: semiconductors are in short supply everywhere. And, given their wide-ranging demand, the impacts are being felt everywhere. Automobile manufacturers are slashing production – some companies by as much as 20% – for lack of chips.

There are many root causes that have converged to make fertile ground for the current shortage. During the height of the pandemic, lockdowns came into full force and purchases of computers, video-game consoles, headphones and other equipment that was needed for people to muddle through and be productive at home skyrocketed. It could never have been predicted through demand planning.

The events only added to already growing demand from 5G technology and from stockpiling in the semiconductor space, which was brought about by the trade-tension dynamics that led Chinese electronics companies to hoard chips, and their competitors to follow suit.

The small number of semiconductor manufacturers were also impacted by global lockdowns, forced to slow or even stop production for several weeks.

With semiconductors now so critical to so many different product categories, it is no surprise that the situation is getting a great deal of attention from both the media and national governments.
Ralf Seifert & Richard Markoff

Meanwhile, most automobile manufacturers had to cut production in the face of plummeting levels of demand, which has only ramped back up again in recent months. Though still below 2019 levels, it seems that the increase in demand was not captured in their demand-planning process.

The result? A supply chain perfect storm, with something for everyone: a concentrated, constrained supply combined with growing underlying demand, stockpiling and unforeseen spot demand peaks. 

With semiconductors now so critical to so many different product categories, it is no surprise that the situation is getting a great deal of attention from both the media and national governments.

Could semiconductors trigger wider supply chain configuration?

As supply chains were disrupted in 2020, there was much discussion about companies reshoring or reconfiguring them to be more resilient. However, there is reason to be skeptical that this will occur in the absence of tangible incentives. After all, these supply chains have become highly extended and concentrated, through market forces of cost optimization and at the expense of agility and resiliency.

But here’s the twist: the ongoing semiconductor shortage might be the first prominent example of a post-pandemic major supply chain reconfiguration happening in front of our eyes.

Prompted in large part by the current situation, President Biden signed an executive order to conduct a review on what the US administration deems ‘critical supply chains’. It includes pharmaceuticals, rare earth minerals and semiconductors. Currently, only about 12% of semiconductor manufacturing occurs in the US.

What comes from the semiconductor shortage and executive order could have significant impacts on those future supply chains that the US has deemed ‘critical’. Any significant change to supply chain configurations would have to come with enough incentives to overcome cost motivations, and these could come in the form of grants, favorable tax treatments or other such measures.

A possible inflection point

There is a willingness to embrace new supply chain models. According to Gartner, 87% of supply chain executives are interested in investing in resiliency, with 30% of respondents reporting plans to shift to more regionalized supply chains.

But importantly, Gartner notes that any incremental costs will have to come out of existing supply chain budgets.

Companies already struggle to identify the costs of inflexibility and long, extended supply chains, particularly when compared against tangible, measurable purchase costs. Any successful change in the existing paradigm will have to come with either strong external incentives, be it tax incentives, grants or a third option – or a change in thinking.

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Authors

Ralf Seifert - IMD Professor

Ralf W. Seifert

Professor of Operations Management at IMD

Ralf W. Seifert is Professor of Operations Management at IMD. He directs IMD’s new Digital Supply Chain Management program, which addresses both traditional supply chain strategy and implementation issues as well as digitalization trends and new technologies.

Richard Markoff

Richard Markoff

Supply chain researcher, consultant, coach and lecturer

Richard Markoff is a supply chain researcher, consultant, coach and lecturer. He has worked in supply chain for L’Oréal for 22 years, in Canada, the US and France, spanning the entire value chain from manufacturing to customer collaboration. He is also co-founder and Operating Partner of the Venture Capital firm Innovobot. 

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