Supply chain management concept vector illustration
Image: Visual Generation/Adobe Stock

Industry experts are projecting that the global microchip shortage – which has been hampering supply chains in several industries – will not improve before 2023. Last year, experts projected  that there would be some relief in the second half of 2022.

The semiconductor shortage first hit the automotive industry during the COVID-19 pandemic in 2020, when overall consumer demand for cars declined during the lockdown. This had a cascading effect that led to “labor shortages, lack of raw materials, trade tensions and the growth of 5G electronics, which require more chips than previous generations of devices,’’ according to an article in the MIT Sloan School of Management.

There will be “a better supply-demand balance” in the second half of 2022, according to Gaurav Gupta, vice president of semiconductors and electronics at Gartner. Some devices will still have long lead times, like automotive chips, Gupta added.

Gartner is projecting the semiconductor supply chain will “step into the normal zone by 3Q22, with normal inventory across major chip categories expected by 2Q23.”

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Paul Silverglate, a leader in Deloitte’s U.S. technology sector, agreed, saying that the “sentiment among leaders in the technology industry does seem to suggest that the semi supply chain challenges could start to get better toward the latter part of calendar ‘23 – versus a feeling of things continually getting worse.”

This is based on Deloitte research that shows a “potential softening of consumer demand, more capacity eventually getting online and companies doing a better job of implementing systems and processes for providing better variability to their supplier ecosystem and thus managing their supply chain better,’’ Silverglate said.

The nonprofit World Semiconductor Trade Statistics is projecting the global semiconductor market will increase slightly over 16% in 2022 and continue to grow by 5% in 2023.

However, Silverglate noted that two prominent executives, Intel CEO Pat Gelsinger and U.S. Commerce Secretary Gina Raimondo, are projecting that the chip shortage will extend into 2024.

“Part of the reason that we believe the overall semiconductor shortage will now drift into 2024, from our earlier estimates in 2023, is just because the shortages have now hit equipment and some of those factory ramps will be more challenged,” Gelsinger explained in an April interview with CNBC.

Following meetings with several CEOs of chipmaking companies during a visit in May to South Korea to discuss ways to overcome the crisis, Raimondo cautioned that she does not “see the chip shortage abating in any meaningful way anytime in the next year.” She added that it would be “deep into 2023, possibly early ’24 before we see any real relief.”

With the possibility of a recession looming, there is some indication of a potential softening, observed Jennifer Strawn, Americas and EMEA head of sourcing and sales for Rand Technology, a global supply chain solutions company.

“The current demand underlines the importance of building out technology at a pace that we have not thought possible,’’ Strawn said. “We are defining what the new normal for the supply chain will be over the next few years.”

Auto companies continue to face supply chain issues

The chip shortage has been exacerbated in the automotive industry due to a rise in smart cars, which rely more on electronics. Automakers have had to adjust accordingly. In May, BMW shipped vehicles to customers without Android Auto and CarPlay functionality as well as built-in Wi-Fi in select countries. The German automaker said it was also forced to change chip suppliers due to the semiconductor crunch.

Toyota cut its July ‘22 global production plan by 50,000 vehicles, citing semiconductor shortages and parts supply disruption. The automaker held to its annual global production target of 9.7 million vehicles but said supply chain disruptions could impact that target. Toyota also expanded production halts in Japan at several plants.

New fabrication facilities in the U.S.

To help re-shore chip manufacturing, construction is underway on at least three new fabrication plants in the U.S., including the TSMC fab in Arizona, which may be production-ready in 2024 and Texas Instruments, which has broken ground on a fab facility in Texas.

In 2021, Samsung also announced it is investing in a new fab facility also in Texas.

Intel announced plans to build two leading-edge logic fabs in Ohio at a cost of $20 billion with construction set to start in 2022, and production expected to begin in 2025.

While geopolitics continues to create the need for transformation in manufacturing and the supply chain, both Strawn and Silverglate said that in the meantime, not much sourcing has moved back into the U.S.

“Because risk mitigation and supply assurance are at the forefront of every company’s initiatives, and OEMs are determining how much control of their supply chain they need to regain … we see many companies repositioning where they manufacture to create more flexibility,’’ Strawn said. “While there is a focus to bring some of this manufacturing back to the U.S., this is not an immediate solution, as it takes time to build these fabrication facilities and get them online.”

Could artificial intelligence help?

It’s still too early to see  AI alleviating supply chain challenges, but experts agree that the technology will be very useful.

“Like with any technology, it takes time for companies not just to implement but to learn how to use it effectively in augmenting how they currently manage their business,” Silverglate said.

Companies are trying to use all latest tools and technology for streamlining, optimizing and making use of analytics in the supply chain practice, said Gupta. While this will help alleviate supply chain and chip shortages, “systems take time to evolve — in the long-run, this will help.”

Strawn echoed that as well, saying it will take time to harness AI and other technologies for maximum impact.

“As an agility partner who participates in the circular ecosystem of our customers, at Rand, we see predictive analytics playing a crucial role to help companies navigate and alleviate supply chain issues,’’ she said.

Predictive analytics can be used to identify market shifts, spot gaps before products go into production and understand trends and signals that are important to drive transformation and the strategies of how customers protect their supply chain.

How companies should respond

As supply chain issues continue, Strawn offers a few best practices for companies to consider:

  • Re-evaluate long-term business plans with a keen eye towards risk mitigation and supply assurance.
  • Build into their plans the expectation that there will most likely be conditions that create shutdowns and logistics and production problems for the foreseeable future.
  • Recognize the desire for just-in-time manufacturing may lead to procurement delays and consider a shift to a more long-term assessment of inventory requirements.
  • Inventory needs must be clearly forecasted not just for the short term and communicated internally and importantly with suppliers.
  • Consider creating and holding a buffer or work with a company that will do so for them.

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