Managing the chip shortage

The global chip shortage is no longer limited to the automotive industry. It is spilling over to other industries too. Self reliance is a way forward. But it is easier said than done, with significant investments required for factories, infrastructure and skilled workforce. Is there a middle path? This blog is curated from what several experts have spoken about how to handle the chip shortage.

As if in answer to how each country should go independent with its own foundries, this is what TSMC (Taiwan Semiconductor Manufacturing Company) founder Morris Chang said recently. He warned that efforts by governments around the world to build domestic chip supply chains could push up costs and yet still fail to achieve self-sufficiency. According to him, free trade over the past few decades has boosted the development of?#semiconductor?technology. TSMC has a share of more than 50% of the worldwide revenue from semiconductor foundries.

“It is prudent to have a domestic, self-sufficient chip?#supplychain?for some national-security applications. However, for the massive demand in the private sector, it is best to maintain a chip supply chain based on the free-trade system” – Morris Chang, TSMC

If countries can go for their own foundries for applications of national security, how can they make a start? Rajeev Khushu, chairman of the India Electronics and Semiconductor Association (IESA), believes that the country should take the first step towards manufacturing semiconductors by setting up ATMPs (assembly, testing, marking and packaging) and then get into specialty fabs.

“ATMPs as the first step would be ideal for India. This gives some presence in the semiconductor ecosystem and they require much less investments and generate more employment,” says Khushu.

Such a step of starting with ATMPs is applicable not just for India but for other countries too. While focusing on chips, the focus on other passive electronic components required to work along with the chips should not be forgotten.?

According to Financial Times, South-east Asia is a significant player in terms of its role in making passive components, which include the resistors and capacitors used in smartphones and other products. About 15 to 20 % of global passive components are made in the region, according to JP Morgan. COVID pandemic related shutdowns threaten the supply of such components. Business leaders cannot afford to take their eye away from such components.

The chip shortage is not a result of only the supply constraints due to lockdowns with growing demand. Amplification of information of the wrong kind is also a reason – the bullwhip effect. When players across the value chain starting from retailers, wholesalers, distributors, product designers and makers and chip designers overestimate the demand for chips, they create a bubble effect. Some hoard chips to stock them for future needs. The World Economic Forum suggested measures such as curbing panic buying by imposing caps, improvement in the accuracy of forecasting and cooperation. Nissan partners with its suppliers for coming out with new components and to share the risk.

Companies and even countries need to do a stress test to check how resilient their supply chains are. MIT Professor David Simchi-Levi wrote about a stress test for critical industries like?pharms?and medical supplies. If the ‘time to recover’ from a disruption like COVID is more than the ‘time to survive’, the supply chain will not be able to meet its demand and will need strengthening. A test of resilience will be a step required by each organization to understand how weak or strong its supply chain is.

Temporary measures taken by some companies may help them in the short term. Such steps include postponement to decide and make the final product based on what is available on hand, stocking of critical parts like chips. But these steps will not work in the long run. Supply chain visibility will help know the current situation on hand and plan accordingly.

Each country needs to take its stand on becoming self-reliant, partially if not entirely. Turkey claims to have reached such a level of self sufficiency for its automotive industry, with its consortiums to design and make all necessary components. Can other countries reach a level of self sufficiency? The steps they take today will decide the situation in future.