Global chip shortage extends to more sectors, to last till 2022: Bain & Company

The Covid-19 pandemic had dramatically spurred demand from semiconductor-consuming industries at the same time. PHOTO: AFP

SINGAPORE (THE BUSINESS TIMES) - As the demand for chips continue to outstrip supply, carmakers are no longer the only ones bearing the brunt of the impact. The global chip shortage, which is expected to last till 2022, has now extended to the tech industry, according to partners at Bain & Company in a webinar on Thursday (June 3).

The automotive industry had pulled back orders in the wake of the pandemic while other industries were increasing orders. As such, capacity slots were "reallocated to much higher margin industries", said Mr Tom Wendt, partner at Bain & Company.

Since March and April, the effects have then caught up with the tech industry. Consumer electronics (PCs, smartphones and others) account for some 70 per cent of the semiconductor market versus just 10 per cent from the automotive industry.

Players such as Apple, Sony, Nintendo or Dell - which were initially expected to be better prepared and more advanced in their semiconductor supply chain management - started to see the effects at a production level, said Mr Wendt.

It started impacting almost every other industry from toasters to washing machines to large equipment manufacturers," he added.

This was in part due to the Covid-19 pandemic, which had dramatically spurred demand from semiconductor-consuming industries at the same time. Demand had grown some 30 to 40 per cent - a growth which existing facilities found challenging to keep up with.

Also contributing to the shortage were the highly complex multinational supply chain and long lead times for key activities.

Against this backdrop, the issue is no longer specific to the auto industry and how the sector is vying for a share of chip allocation, said Mr Peter Hanbury, partner at Bain & Company.

There should therefore be a shift in focus towards adding capacity to the industry rather than reallocation of resources, he said.

Indeed, there has been significant efforts from major players to increase capital expenditure in order to boost manufacturing capacity. Taiwan Semiconductor Manufacturing Co, for instance, had in April raised its capital expenditure to US$30 billion (S$39.7 billion). Intel is also spending an estimated US$20 billion to build new wafer fabs in Arizona, US.

"But all those initiatives will not really give us any short-term relief because it takes months and years to add capacity to an existing fab or build a new fab entirely," said Mr Wendt.

The building of new fabs could take up to three years or sometimes longer. Even for those with existing facilities, securing equipment has also been a challenge given that equipment makers are also lacking the chips they need to make tools.

"From a geopolitical risk perspective, lots of countries have announced the desire to support their domestic industry but they have also leveraged trade threats and linchpins in the semiconductor supply chain against other countries," said Mr Hanbury.

Meanwhile, supplier and geographical consolidation could also pose operational risks. For instance, natural disasters could have long-lasting and detrimental impact on the entire supply chain.

In the short term, players are figuring out where their shortages are, finding ways to ramp up supply chain, engaging in less disruptive research and development testing in order to get "a couple of extra chips" on items facing critical shortages, said Mr Hanbury.

Others are working with original equipment manufacturers, who control the end-product, to make adjustments to the requirements.

In the long run, however, players should consider making structural changes to their supply chain, said Mr Hanbury.

This includes taking on a "tech approach" to collaborative supply planning. This can be done through designing a flexible ecosystem of suppliers and partners and enhancing supply chain collaboration to share risks and coordinate inventory and capacity buffers.

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