The global semiconductor market has seen substantial growth in recent years - 5.1% over 2019^[1]. But the events of 2020 have presented multiple challenges that exposed risks and weaknesses in the supply chain. At the same time, new technologies and geopolitical changes are transforming the market.

If you’re a purchasing manager who needs to secure high volumes of the right devices, and to keep lead times under control, then you need to understand and mitigate these issues in 2021 and beyond.

In this article, we’ll look at how a digitalized supply chain can help counter the market uncertainty, by using real-time, global data.

Challenges in sourcing semiconductors

Looking beyond 2020, the Semiconductor Industry Association (SIA) is predicting that year-on-year growth in the semiconductor market will accelerate, reaching 8.4% in 2021^[2]. As we leave the disruption of COVID-19 behind, there is the potential for strongly growing demand in some areas to test the resources of suppliers, with ballooning lead times and component shortages a risk.

Semiconductor buyers have already endured a year of interruptions, which are due to the pandemic’s impact. Manufacturing has been halted or delayed, often with minimal advance warning, and lead times have become, at worst, works of fiction. Sourcing the right components at the right time has required the ability to track down suitable alternatives, and to secure agreements with new suppliers, wherever they may be.

This has not been helped by the traditional leanness of the semiconductor supply chain, with specialized technologies such as memory chips often concentrated in specific geographical locations, or a small number of manufacturers. This has created risk for OEMs, who are vulnerable to outside issues, or the changing decisions of a few suppliers.

For example, Taiwan has suffered from multiple earthquakes^[3] in the last few years. While businesses have recovered quickly, there have been inevitable constraints in supply, as well as short-term price increases – with a cost to the industry of an estimated $40 million. Everyday Taiwan’s fabs are offline.^[4]

Geographical manufacturing trends

While the USA has traditionally been seen as the world’s leading semiconductor supplier, the centre of gravity has shifted to Asia in recent years. In fact, if we look specifically at chip production, then the USA only accounts for 12% of worldwide capacity^[5]. Of course, many American companies have outsourced some or all of their production to China, Taiwan, and elsewhere.

In terms of its domestic market, China consumes 50% of semiconductors, making it the biggest single-country market. The nation buys 36% of all US chip sales. However, China currently only meets 30% of this demand with its own chip production,^[6] and is investing heavily to increase its output.

Taiwan is also growing its semiconductor industry, with advanced manufacturing processes helping to drive demand. And, of course, fabless semiconductor vendors add another dimension to global sourcing considerations and can help increase demand for new markets and vendors.

On top of this, the immense investment required for the latest chip production facilities make it more difficult for manufacturers to predict and respond to shifts in their customers’ requirements. In particular, the drive towards ever-smaller geometries demands huge financial resources, with 5nm chips starting volume production in 2020, and both 3nm and 2nm processes on the way within a few years.

Technology innovations

Naturally, technology is not standing still, and new materials and processes are affecting the semiconductor supply chain. While this increases the options open to purchasers, it does add an extra level of complexity to consider in selecting components.

For example, silicon carbide (SiC) is increasingly replacing silicon (Si) in some semiconductor applications, such as high-power use in renewables and automotive. With rapid growth in the electric vehicle and solar power sectors, this has helped the SiC market grow by more than 16% annually, with further acceleration expected, although much of this growth is also due to increased use of SiC in steel production^[7]. Another material with a growing market share is gallium nitride (GaN), which can provide a cost-effective alternative in power transistors and LEDs.

The growth of these relatively new semiconductor technologies means that OEMs are increasingly designing in components that might once have been considered bleeding edge, and that innovations are making their way from the R&D lab to mass adoption at an unrelenting pace. Good for customers, interesting for design engineers – but potentially another headache for buyers.

Why purchasers need a Plan B

With so much change in the semiconductor market, purchasers need to prioritize how they can reduce risk. COVID-19 has shown us that an unexpected event can make us all rip up our plans, however carefully they were considered.

Buyers need to ensure they are not over-reliant on just one or two suppliers for large orders and critical components and need to evaluate the impact of geopolitical issues and technology changes.

Simply avoiding single-sourcing is not enough, and purchasers should make sure they maintain continuity, flexibility, and sustainability in their supply network.

That’s easier said than done, of course. This increased complexity can bring extra costs, management complications, and more chance of getting things wrong, as well as countless hours of drudgery finding suppliers and comparing deals.

An alternative is to move to a digitalized supply chains that can collate the necessary data and provide an efficient way of working with multiple suppliers to minimize risk – as well as finding new or alternative suppliers.

One example is the work we’ve been doing at Sourceability, to create advanced digital tools that simplify how buyers can deal with a global network of pre-vetted suppliers. This includes our Sourcengine marketplace, which provides access to more than 3,600 traceable suppliers – all in one place, and all available through one transaction and a single purchase order.

If we are to learn one lesson from 2020, it’s that we must expect the unexpected. Big things can and will happen without warning, and it’s not enough to pick up the pieces afterwards. By taking advantage of the right digital tools, purchasers can make sure they’re ready for whatever is coming up next – with the resilience and efficiency their businesses need.