Global Supply Chain Crisis

The worldwide semiconductor shortage will persist through 2021, and is expected to recover
to normal levels by the second quarter of 2022, according to Gartner, Inc. “The
semiconductor shortage will severely disrupt the supply chain and will constrain the
production of many electronic equipment types in 2021. Foundries are increasing wafer
prices, and in turn, chip companies are increasing device prices,” said Kanishka Chauhan,
principal research analyst at Gartner.

The chip shortage started primarily with devices, such as power management, display devices
and microcontrollers, fabricated on legacy nodes at 8-inch foundry fabs, which have a limited
supply. The shortage has now extended to other devices, and there are capacity constraints
and shortages for substrates, wire bonding, passives, materials, and testing, all of which are
parts of the supply chain beyond chip fabs. These are highly commoditized industries with
minimal flexibility/capacity to invest aggressively on a short notice.
Across most categories, device shortages are expected to be pushed out until the second
quarter of 2022 (see Figure 1), while substrate capacity constraints could potentially extend to
fourth quarter of 2022. 

Figure 1. Gartner Index of Inventory Semiconductor Supply Chain Tracking - Projected

Worldwide Semiconductor Inventory Index Movement, 2021-2022
Note: 1Q21 is a modelled estimate and is subject to change based on actual financials
reported by vendors in 2Q21. The index bar for 2Q21 to 4Q22 is only a directional estimate.
Source: Gartner (May 2021)

The global semiconductor shortage is hitting the Indian mobiles, consumer electronics and
automotive sectors hard in the midst of the festive season when sales usually peak, with
the automobile industry understood to have piled up around 5 lakh pending orders.

While customers usually get bargain deals or handsome festive discounts during this period,
this time they are paying higher for a host of items ranging from mobile handsets and TVs to
cars due to the chip shortage. Freebies have vanished from most of the automotive
showrooms as manufacturers struggle to meet demand.

History repeats itself! More than a decade ago, as the global economy was resurrecting itself
from the clutches of the financial crisis and the Fukushima earthquake, the auto and
technology sectors faced severe shortage of semiconductors and other high-tech components.
The sector’s manufacturing capacity contracted substantially with closure of older fabrication
facilities (FABs) and slower than expected ramp-up of new ones, resulting in a record
reduction of total wafer capacity and silicon allocation.

Fast forward to 2021, and we seem to find ourselves in a similar situation. As the pandemic
moved from China to other parts of the world, the sector issue went from one of limited sales
capacity for chip-dependent industries to one of halted demand. This supply chain shock
came at the back of auto manufacturers underestimating the upsurge in demand amid the
pandemic. Add to that, while the wafer foundries were fully booked, they couldn’t scale up
production quick enough, given the long lead times required to add wafer capacity.

So, what’s causing the shortage?

While production seems to be back to pre-pandemic levels, the crisis point is characterised by
a new surge in demand, driven by changing habits, emerging from the pandemic. Car
manufacturers have gone full throttle, investing in tech-heavy electric vehicles. Add to this,
the upsurge in sales of TVs, laptops, PCs, games consoles and 5G-enabled mobile phones,
which have all added to the skyrocketing demand jamboree.

As expected, this shortage of chips has created ripple effects across the board, with several
companies revisiting their plans and profits. If reports are to be believed, leading U.S.-based
electronics manufacturers may face production issues due to an impact on production of
Organic Light Emitting Diode (OLED) displays. In the auto world, a U.S.-based automaker
giant has cancelled shifts at two car plants, taking more than a billion-dollar profit hit, this
year. Far east, and perhaps the most telling stories seem to come from a company – one of the
world’s largest sellers and consumers of chips – that finds itself in a rather precarious
situation of having to delay the launch of one of its own products. Indian industries too are
reeling under this shock, with several automakers facing the heat. 

Mahindra & Mahindra has said it is factoring in some delays in the launch of its flagship
Mahindra XUV500 and its new Scorpio, with the company flagging concerns over seamless
availability of raw materials, especially semiconductors. “Anything around semiconductors is
the primary supply chain constraint at the moment,” Rajesh Jejurikar, Executive Director,
Auto & Farm Sectors, M&M said during a virtual media meet earlier this year. Supply
constraints are learnt to have caused some output issues at Tata Motors Commercial Vehicles.
At Bajaj Auto, production of premium motorcycles has been hit, with senior executives
pointing to production losses in its KTM range of bikes because of shortage of
semiconductors and ABS parts from Bosch. Ford Motor, the American carmaker, in a
statement earlier this year, said that both of its plants in Chennai and Gujarat are facing
supply issues, and they expect shortage to continue through at least the first half of 2021.

In addition to delaying vehicle deliveries, some companies have reportedly started discarding
features and high-end electronic capabilities on a temporary basis to deal with the chip
shortage. Japanese carmaker Nissan is said to be leaving navigation systems out of thousands
of vehicles, while French company Renault has stopped offering a larger digital screen
behind the steering wheel on its Arkana SUV. Amsterdam-headquartered Stellantis has
modified its Ram 1500 pickup vehicle so that the digital rear-view mirror that usually comes
standard is now available only as an upgrade option, Bloomberg reported.

India’s tryst with semiconductors

The semiconductor consumption in India is growing at the rate of 15 per cent at the back of
the country’s burgeoning electronics manufacturing industry. Electronics production, which
stood at around USD70 billion in 2018-19, is expected to grow at the rate of 30 per cent
annually until 2025. This projected growth further amplifies the domestic semiconductor
market’s potential, both from a sourcing and global manufacturing perspective. Although the
semiconductor demand trajectory in India is no different from what is seen globally, its
manufacturing footprint has long been negligible.
Of the two broad aspects of chip system domain – chip designing and chip manufacturing –
India has developed expertise in the former. The country has world-class chip design talent in
areas including microprocessors, memory subsystems and analog chip design. Over the past
couple of decades, many foreign semiconductor companies have set up design and software
development infrastructure in the country. Although the country has made some progress in
creating a homegrown semiconductor design ecosystem, it still lacks fabrication facilities
(FAB) that could manufacture chips locally.

While India has tried to setup fabrication units in the past, the initiatives failed to see the light
of the day due to numerous roadblocks, including the huge set-up cost. To put things into
perspective, setting up a display fabrication unit needs an initial investment of around
USD2.5 billion, while setting up a semiconductor digital fab (wafer size of 300mm) requires
an investment in the range of USD6-8 billion, depending on the technology nodes.

Why let a crisis go waste?

The expected stabilisation in this sector over the course of the next few months, will likely
focus on onshoring greater chipmaking capacity. Efforts could be underway with
governments doling out grants and tax incentives to encourage global chipmakers to increase
domestic capacity. Closer home, the Atmanirbhar Bharat Abhiyan lays down the
government’s clear intent of revamping the manufacturing sector as part of the post COVID-
19 narrative. The recently announced Scheme for Promotion of Manufacturing of Electronic
Components and Semiconductors (SPECS) and Production Linked Incentive (PLI) schemes
are a shot in the arm to help improve manufacturing competitiveness. In December 2020, the
government released an Expression of Interest for setting up/expansion of existing
semiconductor wafer/device fab facilities locally or through overseas acquisition, to reduce
import dependencies.

While these efforts are in the right direction, to expedite the process, the government can look
at acquiring existing foundries, which could jumpstart semiconductor manufacturing and lay
the foundation for subsequent fab facilities in the country. In addition, the government could
explore the possibility of setting up compound semiconductor fabs. Though not widely used,
compound semiconductors are less capital intensive and expected to witness a surge in
demand with new emerging technologies.

As global companies are evaluating supply chain alternatives as part of their regionalisation
and replication strategies, the time is right for the Government of India to work alongside the
private sector in building the manufacturing sector. It will have to play a much larger role in
spearheading the manufacturing journey through co-investment by setting up facilities that
will go a long way in boosting investor confidence, both locally and globally. This
collaboration model has been successful in countries like Taiwan and South Korea and the
results are there for us to see!

The chip shortage makes it essential for supply chain leaders to extend the supply chain
visibility beyond the supplier to the silicon level, which will be critical in projecting supply
constraints and bottlenecks and eventually, projecting when the crisis situation will
improve. OEMs with smaller and critical component requirements must look to partner with
similar entities and approach chip foundries and/or OSAT players as a combined entity to
gain some leverage. Additionally, if scale allows, reinvesting in a commoditized part of the
chip supply chain and/or foundries, could guarantee the company a long-term supply.
While no relevant parameter by itself will project how the shortage situation will evolve, a
combination of relevant parameters can help guide organizations in the right direction.
“Since the current chip shortage is a dynamic situation, it is essential to understand how it
changes on a continuous basis. Tracking leading indicators, such as capital investments,
inventory index and semiconductor industry revenue growth projections as an early indicator
of inventory situations, can help organizations stay updated on the issue and see how the
overall industry is growing,” said Gaurav Gupta, research vice president at Gartner.

Qualifying a different source of chips and/or OSAT partner will require additional work and
investment, but it would go a long way in reducing risk. Additionally, creating strategic and
tight relationships with distributors, resellers and traders can help with finding the small
volume for urgent components.