Published Thursday 8th April 2021

The modern world runs on semiconductors; everything from mobile phones to washing machines depends on these tiny microchips. However, the global semiconductor supply chain is facing its biggest challenge in years.

Key Issues

  • The prices of semiconductors are expected to rise due to shortages in production capacity when compared to their demand.
  • A circa 20% increase in commodity prices will feed through Q1 2021.
  • It’s forecast that supply will only start to meet demand in Q4 2021.
  • With a combination of semiconductor supply chain problems and price hikes in steel and copper, SME’s maintenance and manufacturing budgets will come under extreme pressure throughout 2021.

What has gone wrong?

Like so many commodities that have had recent price increases, the problem stems from the first Coronavirus lockdown last spring. Like other basic commodities, initially, the virus obliterated demand then super-charged it as economies emerged from this enforced hibernation. However, the semiconductor problems have been exacerbated by the huge increase in internet and mobile computing. The about-face in demand laid the seeds for potentially the most serious semiconductor shortage in years – a shortage in a commodity that now lies at the heart of everything we rely on in the modern world.

The most visible impact of this shortage has been in the auto industry. Many of the world’s largest car makers are running assembly lines at a fraction of their potential due to a shortage of semiconductors. This is obviously feeding down the supply chain to first and second-tier suppliers and leading national governments to get involved in trying to solve the supply chain issues.

Whilst this is clearly impacting big business, what will this mean for small to medium-sized manufacturing companies?

  • Semiconductor manufacturers like Global Foundries are reportedly operating all of its fabrication capacity at near 100% capacity. The South Korean tech giant Samsung is also in a similar position at the moment. So, the shortages are not likely to reduce until manufacturing capacity can keep pace with demand.
  • The world’s largest contract chip maker TSMC, recently reversed its price cut policy for its major customers due to the higher demands.
  • Other chipmakers have hiked prices by as much as 20%.
  • The shortages of supply in the semiconductor market are expected to cause a rise in memory prices as well.
  • So, instrumentation and control devices are set to increase in price. Couple that with price hikes in steel and copper, and maintenance budgets will come under strain, assuming you can source the items you need.
  • This problem will not be limited to a few specialist control devices. This shortage will increase the prices of anything with a microchip or any form of memory, including everything from CCTV to desk phones.

So, when will the shortage be resolved?

Carmakers and their suppliers, look away now – the problem is not going away soon

  • Pre-Covid 19 semiconductor plants were not operating at full capacity, leading to some capacity to be mothballed.
  • As demand started to spike, it was not easy for the major manufacturers to increase output quickly.
  • Demand has outstripped supply since Q2 2020.
  • Production will likely be slow through Q1 2021 at least.
  • Semiconductor factories – which are largely based in Asia – are in the process of increasing production capacity but have warned that any increase will not be instant.
  • The chips are themselves incredibly complex and can take up to 26 weeks to produce.
  • There are also geopolitical factors at work, such as trade barriers between producer countries and end users.
  • The forecast is that supply will only start to overtake demand in Q4 2021. By then, price rises will be baked into ongoing costs.

About the Author: Bob Johnson, has wide experience in all indirect procurement categories with key expertise in the procurement fields of Capex (Procurement and installation), MRO (Eng consumables, stores management, PPE, etc), Facilities Management (Hard, soft and professional services), Logistics (Transport, freight and warehousing) and Utilities.