With the U.S. economy expected to gather steam, one of the biggest cautions to consider is whether supply chains will be able to keep up with growing demand.
To make sure the supply chains are problem free in the post pandemic world, the Biden administration has ordered a review of critical areas.
A major example is semiconductors. Lead times for many semiconductors are one year out right now, and these devices are in just about everything we use. Business and financial media have detailed how the shortage of semiconductors has caused production cutbacks in the automotive industry: Ford, Toyota, Nissan, VW, and Fiat Chrysler Automobiles are among global car makers that have scaled back output. Other car makers have announced they’ll likely miss their 2021 targets. And it’s not just car makers that are in trouble. The chip shortages are expected to cause widespread shortages of everything, from electronics to medical devices to technology and networking equipment.
As recently reported by Reuters, car makers and medical devices manufacturers have asked the Biden administration to subsidize construction of new U.S. semiconductor manufacturing capacity. And in response to the shortage, Taiwan Semiconductor Manufacturing Company, or TSMC, the world’s largest semiconductor manufacturer, has increased its 2021 capital spending budget to $28 billion. But funding and building a new semiconductor fab is at least a five-year process.
To a great extent, the chip shortage has been a ticking time bomb, building since late last year due to a few supply-chain disruptions.
When the COVID pandemic caused a precipitous drop in vehicle sales in spring 2020, car makers cut their orders of all parts and materials – including the chips needed for functions ranging from touchscreen displays to collision-avoidance systems. Then in the 3rd quarter, when demand for passenger vehicles rebounded, chip manufacturers were already committed to supplying their big customers in consumer electronics and IT.
Geopolitical factors also played a role, specifically when the Trump administration began tightly regulating sales of semiconductors to Huawei Technologies, ZTE, and other Chinese firms. Those companies began stockpiling chips essential to 5G smartphones and other products. At the same time, American firms were cut off from chips made by China’s Semiconductor Manufacturing International Corporation after the federal government blacklisted the firm.
Japan also takes part of blame. In July, a fire at a Japanese factory cut off supplies of special fiberglass used to print circuit boards. Then in October, a fire at a Japanese plant belonging to Asahi Kasei Microdevices took advanced sensing devices used in automotive and other industries out of circulation. As of late February, the plant was still down.
As if all these disruptions weren’t enough, there have also been constraints in the global transportation system. According to Clear Metal, which monitors over 90% of ocean freight, nealy 7% of ocean freight is not making it out of China ports this quarter. Shortages of shipping containers resulted in companies having to pay premiums for shipping and drove demand towards airfreight. But the airfreight system has been experiencing higher demand due to global shipments of the COVID vaccine even as its capacity has been reduced due to the pandemic-related drop in passenger travel, which has meant that there are fewer passenger planes available to carry freight. In fact, global air-cargo capacity in the first quarter of 2021 is 25% less than last year. The grounding of the Boeing 777 fleet with Pratt & Whitney engines following the failure of an engine on a plane over Colorado has further exacerbated capacity constraints.
No one likes to hear “I told you so,” but organizations could have done a better jon planning for these shortages. Instead, poor decision-making prevailed. For example, aggressive lean inventory practices left many manufacturers vulnerable. As vehicle sales began to rebound in the 3rd quarter, automakers were slow to order more semiconductors and then lost out to more nimble electronics manufacturers that had visibility into the bigger picture and longstanding relationships with semiconductor manufacturers. The electronics manufacturers planned accordingly and secured their supply lines prior to November 2020.
Now the automotive industry is experiencing another critical market shift that has important supply chain implications: As car makers increasingly prioritize electric vehicles, cars are becoming electronic devices. This means the automotive industry now must face the competing demands of all other industries, including those in electronics and those adding internet connectivity to their products.
As a summary, the root cause for this global semiconductor shortage is a mix of many factors, with slow decision making processes and a surge demand from the automotive industry being the major ones. And this shortage is likely to persist into 2022.