Analysis Of Global Semiconductor Shortage: Reasons And Effects

Analysis of the supply problem and sector

Semiconductors are essential components for electric devices. Today, almost every industry relies on electric devices to run its operations. Therefore, when the semiconductors supply chain is affected, the impact on the global economy is significant. Examples of sectors that use semiconductors in large volumes include communication, transportation, clean energy, and healthcare, amongst others (Semiconductor Industry Association, 2020). Electric devices sizes have changed substantially courtesy of semiconductor evolution (Semiconductor Industry Association, 2020). This report analyses the current global semiconductor shortage to ensure continuity of supply for the coming year. The report first explores the reason behind the reported shortage and examines its impact on Apple, a company operating in the mobile phone industry in the United Kingdom and has a market share of 50.16% (Dash, 2021).

Non-covid related causes

The current semiconductor shortage originated from more than one cause. Historically, the investors in the industry have been reluctant to invest a significant amount of capital because they anticipate that as technological advancements continue, there are possibilities that the use of semiconductors will reduce drastically (Allan, 2022). Since investors are cautious about incurring losses, the underinvestment means that when demands are high, the existing manufacturing companies do not have the production potential to support that demand. As a result, shortages affect the companies’ operations that use the product in the short-run, as there are fears that if investors decide to invest today, the opportunity that exists will have gone by the time the new firms operate profitably (Allan, 2022).

Korea and Taiwan account for more than 80% of semiconductor production globally (Allan, 2022). Therefore, if there is a major disaster in these countries, which could affect the production of semiconductors materially, shortages in the global market will be inevitable. Unfortunately, both Korea and Taiwan experienced external interferences affecting their production capacities. Taiwan is still recovering from the worst drought in the past 50 years, and Korean factories’ fires have affected its output (Allan, 2022). Besides, Korea and Taiwan, major Chip producers in the United States operating from Texas, closed operations in 2021 due to heavy storms (Allan, 2022).

Historically, the demand for semiconductors has been volatile, as informed by demand (Allan, 2022). The existing plants had been able to meet the demand in the past and had not contemplated a strategy that could aid revamp operations if demand increased exponentially. Besides, the uncertainty introduced by the variation in demand discouraged investment in the semiconductor industry (Allan, 2022). It is estimated that it takes about 2 years to build a semiconductor manufacturing plant. Therefore, the current shortage will take time to resolve because setting up a plant to address the shortages is time-consuming. Though Sony and Taiwan Semiconductor Manufacturing plants had promised to invest $7billion to set up a new manufacturing plant in 2022, the benefits of that investment cannot be realized until 2024 (Semiconductor Industry Association, 2020).

Figure 1 shows that the demand for semiconductors varies yearly. Therefore, there is a risk that committing significant investments in the semiconductor industry would increase investors’ risks. Uncertainties in demand affect the quantities of products that the manufacturing plants produce. When the demand is low, the production is low, and the production increases when the demand is high. However, when uncertainties exist, the manufacturers cannot determine how the demand will be in the coming years.

Semiconductor supply problem

Figure 1: Chip supply cycle 

 Source: https://www.wired.com/story/why-chip-shortage-drags-on/

Semiconductor products are not produced equally (Allan, 2022). The manufacturer produces them based on their intended use. For instance, mobile phones and computers use different semiconductors though they are closely related devices (Knight, 2021). The mass production of one semiconductor element only satisfies the demand of a specific industry. As the manufacturers strive to meet the demand, the competition triggers a price rise, making the final products from semiconductors expensive (Knight, 2021). For instance, (Knight, 2021) notes that Josh Pucci, a vice-president at Sourceability, noted that a power controlling device used in many products used to cost $1 some time back. However, the product retails at $150, as the lead time for these components increased from 4-8 weeks to 24-52 weeks (Knight, 2021). Such an increase in the lead times is likely to trigger a huge supply gap amid the overall high demand.

Besides Korea and Taiwan’s challenges, the Covid-19 pandemic also compounded the semiconductor supply problems. Factories closed operations because border closures in many countries affected the supply chains networks. Within the country, lockdowns affected mobility, and the fear by drivers that as they moved from one location to the other, they could get affected by covid-19 reduced the supply.

At the same time, many corporate entities opted to work from home, creating an increasing surge in demand for personal computers, smartphones, and electronic devices like printers. These devices require semiconductors to make them. The higher demand for semiconductors in making computers, mobile phones, and peripheral devices further led to shortages of semiconductor chips.

The fluctuation in demand for semiconductor chips in the automobile industry sent incorrect demand signals to the manufacturing plants in 2020 (Aboagye, et al., 2022). When vehicle sales decreased, the automotive manufacturers reduced the number of semiconductor chips ordered because their orders depended on the market’s demand. After massive campaigns on Covid-19 vaccinations, the risk of the disease spread reduced, prompting the automotive industry to resume operation. However, since semiconductors products are industry-specific, the manufacturers had already shifted their attention to other appliances and abandoned producing automotive-related semiconductors (Aboagye, et al., 2022).

Allan (2022) notes that mobility is a significant part of the supply chain. A firm cannot purport to be in business if it manufactures a product and fails to deliver it to the market. Consequently, the distribution channels play an essential role in delivering the products produced from the manufacturing plants to their final consumer. Allan (2022) notes that the blocking of the Suez Canal partially contributed to the shortage in East Europe for six days. Manufacturers in Europe had to stop their operations because they needed the semiconductors to continue production.

The observations cited by Allan (2022) are critical for any supply chain industry. While production is informed mainly by the demand, a low production capacity or inability to produce because of internal factors or external factors eventually affects a product’s supply chain. Even if the transport network exists and the delivery means are in plenty, shortages in the production plants cannot be addressed in any other way other than by increasing the production capacity. Overreliance on supply from Korea and Taiwan is also a major factor that the semiconductor consumers should anticipate resolving in the coming years. When two countries produce over 80% of a product used in many industries, that is risky. Investors should open semiconductor manufacturing plants in many locations globally to mitigate the adverse effects of shortages or external factors affecting productivity in a specific part of the world.

Covid-19 Pandemic impact on Semiconductors shortage

Analysis of monthly semiconductor revenues between January 2018 and December 2021 in excel

In order to get a clearer picture of the semiconductor’s possible causes, it is prudent to explore the revenues that companies operating in the industry generated between 2018 and 2021. The duration was considered appropriate because it captured the demand in pre-covid 19 and during covid-19. The expected revenue from semiconductors sales in 2022 will be estimated using linear regression analysis and decomposition forecasting techniques. The analysis uses semiconductors sales data obtained in from statisita.com.

Source : Statista.com: https://www.statista.com/statistics/277404/global-semiconductor-sales-by-month/

A regression function applies when an assumption is made that there is a linear relationship between the dependent and independent variables. The dependent variable is the revenue, and the independent variable is time in months. As a sourcing strategist, I would like to predict the expected semiconductors sales in 2022. Using the regression model will help determine the quantity that should be produced monthly in 2022. No quantity data were available on the number of semiconductors sold in the years. However, after determining the projected revenues, it is possible to calculate the quantity by dividing the revenue by the prevailing market prices.

The linear regression is of the form y=a+bx, where a is the y-intercept value, also known as the mean value, and the b is the slope of the regression line. Using the excel data analytics tool, the regression results are as shown below.

 From the above analysis the r-squared valued shows that the change in time from one month to the other only explains 31.0% changes in sales. That is a relatively weaker relationship between sales and change in time. However the linear model is suitable for forecasting future semiconductors sales as shown by an F-statistic of 20.68, which is significant at 5% level of significance. Both the intercept and the slope of the graph are significant in estimating future sales because their p-values are 0.000, which is smaller than 0.05, level of significance. Based on these findings, the linear regression model would be appropriate for estimating the monthly revenue anticipated in 2022. The line of best fit is y= 34.0934+ 0.1917X. The period from January 2022 to December 2022 will be 49,50,…, 60, and the estimated sales are as shown in table 2 below.

Chart 1 shows that the general trend is that global semiconductors revenues have been increasing between January 2018 and December 2022. Revenues increase significantly during the covid-19 period, as shown by increasing sales from April 2020 to December 2021. Higher revenues indicate high demand. An increase in monthly sales by more than $15 billion was witnessed between April 2020 and December 2021. This is a significant growth, which explains why there is a shortage as the manufacturing plant’s capacity could not fulfill the overall market demand.

Chart 1 shows a possible cycle in semiconductor revenues. In order to remove the seasonality and irregular elements, a decomposition method was deemed appropriate. The procedure entailed the calculation of a 4point moving average and centering the results. After that, the seasonal and the irregular components were calculated by dividing the actual revenue by the centered revenue values. The next step was calculating seasonal components, which entailed taking the average of the seasonal and irregular components observed in each month, as shown in the table below.

Analysis and forecasting

The last step entailed calculating the trend component using the linear regression method and multiplying the results by the seasonal components. The outcome were as shown in appendix 1, in the forecast column.

The revenue forecast using the decomposition method was as shown in the chart below

The chart shows that once the seasonality and irregular components are adjusted, the forecast revenue trend line captures the cycle present in monthly semiconductor sales.

Apple designs, markets, and manufactures electronic devices, including personal computers, tablets, wearables, and accessories. Common brands include iPhones, iPad, Mac, and home and accessories. These devices use semiconductor chips. Computers use them to store data and programs (Wahab, 2022). Storage devices like hard discs use semiconductors to store data (Semiconductor Industry Association, 2020). In mobile phones, components like diodes, integrated chips, and transistors are built from silicon, a semiconductor (Wahab, 2022).

Wahab (2022) shows that semiconductors are at the heart of Apple’s operations. Each of the electronic devices that the company makes must have a semiconductor. When its shortage increased, Apple’s operations were affected significantly. In 2021, it was estimated that the company lost $6billion in sales from chips shortages (Rosenbaum, 2021). This was a significant loss for Apple incorporation.

The economic competitiveness of chips and its demand in various industries is likely to complicate Apple’s operational effectiveness in the coming years. Ouster, an American company, buys and sells a significant amount of products in China. However, the straining business relationship between China and the US is likely to interfere with the cordial business relationship between the two countries, straining the availability of chips in the US market (Rosenbaum, 2021). That will worsen the shortage experienced currently, making it difficult for Apple to access the chips.

Apple does not have a manufacturing plant in the UK (Minasians, 2017). Therefore, it relies on manufacturing plants’ distribution in other countries. Apple’s management established the manufacturing plants in countries with a cheap labor force. Examples of those countries are China, Taiwan, Thailand, the Philippines, Malaysia, and Indonesia (The Ohio State University , 2020). The manufacturing plants located outside the UK satisfy the demand for Apple’s products. If internal and external factors affect productivity in these countries, Apple will experience it in its supply chain.

The global chip shortage was likely going to affect iPhone production (Business Standard, 2021). In addition, Apple expected that the revenue growth would slow down (Business Standard, 2021). A report by the company’s executives indicated that the revenue in the fourth quarter would grow by double digits. It will be below the 36.4% witnessed in the third quarter (Business Standard, 2021). The fourth quarter would experience more severe chip shortages than the third quarter, affecting iPhone production (Business Standard, 2021). Apple’s CEO, Tim Cook, stated that the chips whose shortage is expected in the fourth quarter are those manufactured using the old technology and are vital in supporting the production of iPhones.

Root (2021) noted that the global semiconductor shortage would affect Apple’s production capacity. Root noted that Apple anticipated reducing its production targets for iPhone 13 from 90 million to 80 million units. Though that would fail to satisfy the consumer’s demand, the company had no options because the chips are key components of iPhone mobile phones models. Following the disclosure of this information, Apple’s stock fell by 3% (Root, 2021).

Conclusion 

The current semi-conductor shortage was not occasioned only the Covid-19 pandemic. Historically, the semiconductor production sector has experienced underinvestment because of the instability in demand. Investors speculates that after the investing significant amounts, the demand may decreasing resulting in lower returns for their investment. Japan and Taiwan produces more than 80% of Semiconductor, which results in acute shortages when either one or both countries experiences a catastrophic event. The Covid-19 complicated the semiconductor supply chain because the measures required to contain it led to stoppage in production of the product and distorted the supply chain network. When that happened working from home led to an increase in demand for personal computers and smart phones, products that requires semiconductors when manufacturing them. Moreover, as the economy opened-up, the demand in the transport industry and other sectors was already skyrocketing, as companies strived making products to fulfil the demand. The demand exceed supply leading to increase in lead time and price of commodities that requires semiconductors to make. Since it takes about 2 years to construct a functional semiconductor plant, it was not possible to address the demand with the urgency required. The combination of these factors results in the current shortage in supply of semiconductor.

References

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https://www.weforum.org/agenda/2022/02/semiconductor-chip-shortage-supply-chain/
[Accessed 12 April 2022].

Allan, M., 2022. Why is there a chip shortage? Global semiconductor supply crisis explained – and impact on car manufacturers. [Online]
Available at:

https://www.nationalworld.com/lifestyle/cars/why-is-there-a-chip-shortage-global-semiconductor-supply-crisis-explained-and-impact-on-car-manufacturers-3550244
[Accessed 7 April 2022].

Business Standard, 2021. Apple says semiconductor shortage may impact iPhone production: Report. [Online]
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https://www.business-standard.com/article/technology/apple-says-semiconductor-shortage-may-impact-iphone-production-report-121073000655_1.html
[Accessed 9 April 2022].

Dash, S., 2021. Top 10 Mobile Phone Brands in UK. [Online]
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https://www.mobilecellphonerepairing.com/top-10-mobile-phone-brands-in-uk.html
[Accessed 6 April 2022].

Knight, W., 2021. Why the Chip Shortage Drags On and On … and On. [Online]
Available at: https://www.wired.com/story/why-chip-shortage-drags-on/
[Accessed 7 April 2022].

Minasians, C., 2017. Where are Apple products made?. [Online]
Available at:

https://www.macworld.co.uk/feature/where-are-apple-products-made-3633832/
[Accessed 9 April 2022].

Root, A., 2021. The Chip Shortage Could Be Spreading to iPhones. [Online]
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https://www.barrons.com/articles/apple-stock-chip-shortage-iphones-51638543940
[Accessed 8 April 2022].

Rosenbaum, E., 2021. CNBC. [Online]
Available at: https://www.cnbc.com/2021/10/29/apple-chip-woes-will-end-but-us-china-supply-chain-war-just-starting-.htm
[Accessed 9 April 2022].

Semiconductor Industry Association, 2020. Semiconductors are the Brains of Modern Electronics. [Online]
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https://www.semiconductors.org/semiconductors-101/what-is-a-semiconductor
[Accessed 7 April 2022].

The Ohio State University , 2020. MAKING OF THE IPHONE. [Online]
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[Accessed 5 April 2022].

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https://science4fun.info/semiconductors/
[Accessed 16 April 2022].

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