The Risks Associated with the Semiconductor Industry

Being a resident of Arizona, this topic is very important as the semiconductor industry is a critical sector to the AZ economy. Further, every electronic device uses a chip, so the demand is great. From cell phones to the increasing demand for ML models, chips are critical to our lives and have been named the "new oil". Further, the lessons learned during COVID where the world experienced widespread disruption due to lack of chips, it is evident that these risks must be addressed proactively and strategically.

In this article, I would like to discuss key risks associated with the semi-conductor industry. We are all already familiar with the impacts of chip shortages but where are the other key vulnerabilities and most importantly, how can they be mitigated?

Key Risks

• Supply chain: The industry is highly concentrated, with a small number of companies controlling most of the production. This concentration risk makes the industry more vulnerable to supply chain disruptions.
• Technological/Cyber: The semiconductor industry is dynamic, and companies constantly need to develop more advanced chips. This rapid pace to produce such chips could cause a rise in defects. Potential cyber- attacks on manufacturing facilities are another threat.
• ESG: The semiconductor industry is a major consumer of water and energy, and it also produces hazardous waste. How will their role impact climate change? Not addressing these factors can result in lawsuits and fines impacting both reputation in addition to the bottom line. Regulatory challenges are also on the rise.
• Geopolitical risks: To me, this is the biggest risk because it is not as predictable. The industry has a huge presence in Asia, with Taiwan and China being the two largest producers. Trade wars and potential threats of military action are often in the news.

Other notable challenges impacting the risk profile:

• The increasing cost of manufacturing chips (Financial Risk): The cost of manufacturing chips has been increasing in recent years, due to factors such as inflation and the cost of component parts.
• The shortage of skilled workers (Human Capital Risk): This is a highly specialized industry, and the talent pool is small.
• The rise of counterfeiting (Reputational and Financial Risk): The semiconductor industry is facing a rise in counterfeiting resulting in loss of revenue and damage to brand.

So how can these risks be mitigated?

The semiconductor industry will need to continue to innovate and adapt. Companies will need to find ways to reduce the cost of manufacturing chips, train more skilled workers, increase cyber security posture, "green" the manufacturing process and combat counterfeiting. Governments can also help play a vital role in investing in research and development and by providing tax incentives, The State of AZ has been very visible in this area as well as the US Government with the CHIPS Act. Investments in STEM educational programs are pivotal to offsetting the labor shortages.

Technology chaos is a reality of the 21st century and if the semiconductor industry addresses these challenges with proactive risk management programs, investments in risk mitigation strategies, the sector can be resilient in the face of a rapidly changing, interconnected and complex world.