A Site Selector’s View on the Global Semiconductor Shortage Crisis
This article originally featured in Trade & Industry Development’s 2021 Q4 issue.
The Semiconductor Crisis: An Economic “Achilles Heel”
by
Gary Yates
The global semiconductor shortage has cost businesses billions in unrealized revenue and the end is nowhere in sight. Overseas shipping ports continue to experience quarantine related shutdowns. Truck drivers can’t keep up with demand when products do arrive, and the variance of chip types needed per industry have created the “perfect storm” for a semiconductor chip crisis.
It isn’t just manufacturers and business-side end-users feeling the effects. Our new normal means a higher percentage of people are working and attending school remotely. Our new normal means additional PC’s and laptops are necessary for society to function efficiently, let alone prosper and grow. Without the chips, these critical technologies are not coming off process lines.
As always, a sudden, unexpected, and dramatic rise in demand resulted in low supply, high inflation, and economies scrambling to catch up. Businesses and consumers are feeling the effects, and neither can find the resources needed to thrive in our new normal.
Amid all the challenges we’re facing, there are lessons being learned along the way. By utilizing effective government support policies, supply chain network optimization and contingency planning, and proven, empirically driven labor analytics, businesses can try to mitigate the hurdles today and prepare for the future.
Hard Hit Industries
The automotive industry is set to miss out on around $110 billion in revenue before supply recovers, according to AlixPartners Consulting. Chevrolet and Ford cut production long ago, while other automakers are leaving out digital options like smart rear-view mirrors to keep cars coming off the line.
Toyota, the last auto manufacturer to feel the semiconductor squeeze is now set to reduce production by 40% in September 2021. The only reason Toyota has made it this long without major interruptions is due to their experience with the 2011 earthquake and subsequent tsunami, which devastated part of coastal Japan. Chip making facilities were rendered useless and production came to an immediate halt, causing supply chain disruption. Toyota leadership made stockpiling chips for any such reoccurrence a priority moving forward, proving even the most prepared organizations are no match for the pandemic’s unparalleled economic effects.
As global travel subsided, rental car companies sold off a larger share of their fleet than normal because demand was so diminished. Now that people are itching to travel, they want more cars and can’t find them. That shortsighted decision intended to help their “bottom line” in the near-term, lead to even greater revenue loss in the long run.
Computer manufacturers have lost millions in unrealized revenue, as well. PC and laptop supply indexes at a heavier weight of importance than the auto industry right now, as transportation is less vital to society when we have access to a high level of advanced, remote connectivity.
There have been worse health and war driven shock felt by “modern” society in the past, but this is the first time our globally connected economy has been so severely disrupted, for so long.
Inflation
Rental car companies have been on a roller coaster ride for the past two years. Travel, along with their revenue stream, came to a dead stop once lockdown was announced. Selling off masses of fleet vehicles seemed to be a wise adjustment. Afterall, rental car companies buying new cars and selling their old ones is an annual occurrence. No one saw the chip shortage and the coinciding new car shortage coming.
A year or so after quarantine was first enacted, travel restrictions began to diminish and the hunger for travel emerged just as fast as it disappeared. The lack of semiconductor chips meant there were no new cars to buy for the fleet. Rental companies had no choice but to inflate rates for a chance at holding on to enough supply to earn a profit.
As rental car companies are now buying used cars at auction to replenish their fleet, those vehicles are not entering the consumer market, driving the price for used cars up alongside new models.
Meanwhile, the demand for laptops not only increased significantly, the unexpected surge also came outside of the normal sales cycle. Manufacturers are setup to meet high demand cycles during the holiday season and late summer period ahead of students returning to school. Lockdown and the need for adults and kids to connect from home daily happened in early spring and the supply chain simply wasn’t ready.
Computer purchases went up 13% from 2019 to 2020, which was the highest since 2014, according to International Data Corp. It isn’t just computers that cost more of course - even a $55 webcam is now selling for around $100.
The Law of Supply and Demand leaves no room for manufacturers. Prices must be raised until supply rebalances with the ever-growing demand for chip-based products. The ripple effects from this crisis have reverberated deep into major consumer sectors and will take years to recover. As the supply chains continues to recalibrate, inflation continues to spread.
Supply Chain Disruptions
As shipping ports continue to experience shutdowns and delays, now heightened more due to the Delta variant, availability of chips is only half the battle. Importers now have a 40% chance of getting a freight order on time, down from 80% a year ago, according to Biesterfeld of C.H. Robinson. Even if an overseas manufacturer can fill a one million chip order, there is currently no good way to import the shipment.
China recently closed three major ports due to an outbreak, so nothing is flowing in or out. The full impact of these supply chain delays won’t be felt until three months from now when the ships were supposed to arrive stateside. They haven’t left the port in China, yet. From shipping containers, chips, and even people to drive the trucks of goods once it does arrive in the U.S., the supply chain is depleted.
The supply chain is complex and convoluted. Clients are now reevaluating supply chain and manufacturing locations. Adding warehouses and distributions hubs, not just for an “Amazon” to deliver the product, but for companies to maintain their supply chain by increasing warehouse storage capabilities.
“Just in time” isn’t the same as it was, we no longer view logistics this way. We are working with clients to realize and strategically plan for this new future, including assessing both centralized and decentralized fulfillment and logistics strategies.
Government Actions
The U.S. global share of chip manufacturing has dropped from 37% in 1990 to 12% today, according to the Semiconductor Industry Association. We were aware of chips having the potential to be an “Achilles Heel,” but were slow to act compared to other countries who have long supported this dynamic industry, particularly by offering vast incentive programs.
The U.S. is now determined to support American chip production, for example the federal government’s aid and mobilization for the development of domestic energy sources. A key step in that direction took place when domestic chip production was officially recognized as a military defense issue in 2021, as Congress enacted the CHIPS for America Act, which received strong bipartisan support.
Aiming to provide direct funding and incentive domestic chip production, in June 2021, the U.S. Senate passed the U.S. Innovation and Competition Act. This piece of legislation offers $52 billion for domestic research, design, and production of chips. The act must now pass a House vote and be signed into law by the President.
Finding the Right Location and Site Due Diligence
Even with robust support from the government, businesses seeking to expand chip production in the U.S. will need to overcome real estate hurdles. Industrial real estate vacancy rates are at an unprecedented low of less than four percent in many markets. Competition for shovel ready sites is fierce, if available at all in the desired markets. Investors now face extended periods before being operational (this does not include additional construction delays).
When searching for the optimal site, companies must adhere to a strict site due diligence process to ensure utility and labor requirements are met now and in the future. Further, machines that build chips are expensive and sensitive to vibration. Seismic conditions, a less known concern that exists for chip plants, must be virtually nonexistent. Airtight clean rooms also must remain in a static position to ensure a contamination free zone.
Water and Power
Water, or a lack of it, had already contributed to chip shortages in Taiwan before the pandemic. Drought conditions continue to be more prevalent due to global warming and the American west is experiencing record low water levels. With that mind, why did Taiwanese chip manufacturer, TSMC, decide to build a fabrication plant in Arizona, all while Intel is building two more?
Interestingly, Arizona has a long history in chip production. Intel has called Arizona home to one of its manufacturing plants for nearly forty years. The global giant is now expanding their existing footprint by investing $20 billion on two new sites. TSMC had initially announced a $12 billion investment for their new mega site, which is now reportedly growing threefold.
Intel tackled any potential water issues long ago with their own treatment plant in Chandler, which recycles 95% of all water used. This number is even more significant when you consider that about 6% of Arizona’s water is used for industrial activities today.
Power requirements are another major utility issue for chip fabrication plants. Leading environmentalists estimated that 4% of Taiwan’s energy usage can be attributed to semiconductor manufacturing plants. That number will climb to 7.2% once new fabrication plants are fully operational. Energy and water consumption are expected to increase as the chips become more advanced and complex over time. Chip manufacturers must plan far into the future as they determine new fabrication locations, which should be core to their larger location strategy.
People
The power of people is a driving force behind TSMC and Intel choosing Arizona for their chip fabrication plants. Arizona’s growth rate has exploded over the past two decades, a state that has been adamant about investing in sustaining growth. Building for the future means Intel and TSMC are entering a market with the required infrastructure, housing, and a sustainable workforce. All these factors, plus local universities and the state’s overall business-friendly environment, makes Arizona’s Phoenix area a prime economic ecosystem.
The new TSMC investment will be the largest in the U.S., with a multiplier impact of 10,000s of jobs and billions in economic spend. Additionally, the Taiwanese company plans to move hundreds of current employees from Taiwan for the new plant, which will create an ever more diverse economic landscape for the area.
Engineering talent will be the greatest workforce challenge for any new fabrication plant. For example, clean room environments require specialty skills plus hardware engineers, which may overlap with current and future data center talent pools in the state.
Engineers were hard to find before pandemic. Today, the search is even more difficult. Chip fabrication businesses need to leverage labor analytics to prove out the right people are there today and will continue to be there in the future.
Considerations
As an example of the challenges we’re still facing, even a year and a half into the pandemic, there are a record high forty-four cargo ships stuck off the California coast waiting to unload at the start of September 2021. No business should assume a return to how things were. Smart companies need to adapt with our new normal by collecting data, analyzing it with proper indexing of importance, and making the best possible decision right now.
Strategizing for the future is at the forefront of top executives “to do” list as their companies navigate an uncertain, dynamic road ahead. While the chip fabrication market is growing, not all chips are the same and only the most profitable types of chips will get priority by private business. The government’s funding and incentives legislation will certainly help companies meet domestic demand, but where to target those dollars and how to plan for the future will require expert insight and analysis, especially finding the optimal location for tomorrow.
View the original posting of this article on Trade & Industry Development, here.