As chip shortages linger, and predictions of when they will end lengthen, some in the semiconductor industry already may be looking toward the next crisis–the potential for the industry to have too much capacity on its hands as new foundries and manufacturing sites come online
Syed Alam, global lead of the semiconductor practice at Accenture, acknowledged in an interview with Fierce Electronics that this is a growing concern, but questioned the ability for “over capacity” to become a major problem.
“People are nervous that with the building of capacity that pretty soon in late 2023 or 2024, there could be an over capacity concern,” he said. “I'm not sure if there is because I think this is a complicated topic. It's not like there is one bucket of supply capacity out there because there are different technologies involved, different chips involved, different materials.”
Semiconductor companies are gradually learning to live in a world where demand is constant and coming from multiple directions, while supply is constantly challenged, with chip firms having to monitor and manage the fill-levels of an array of materials buckets, each one of which on its own could lead to a chip shortage in a particular market segment if the fill-level gets too low.
“You could have sufficient supply for one item, but for another technology could still be constrained,” Alam said. “So, there is not an easy way to make a blanket statement that everything is in a shortage, or that there will be too much capacity. The industry shipped 1.1 trillion chips last year, but there was still a shortage in some places. I think the general feeling is these shortages will ease in the next year.”
Rationalizing demand
But demand is not proving easy to get a handle on either. Chips are going into more devices, and there is demand for computing chips, memory and more, but the shortage has led to some new business practices in which each company in the supply chain is asking its vendors for more supply than it needs. As we have seen, the situation can be further exacerbated by unforeseen events like the pandemic-related lockdown, and perhaps the Russia-Ukraine war could cause another spike.
The intense demand, combined with unexpected societal events affecting the market, can quickly ripple through the entire supply chain. Alam explained, “What’s happening is I give a number to my supplier, saying I have ‘this much’ demand. My supplier says, ‘Oh, you know, I need to ask for a little bit more from my own just in case other people come in and want this. And then at each stage of the supply chain, there is some padding, and then and then when the demand gets to the foundry players, or the manufacturers, they see the demand is pretty huge.”
This makes it difficult to understand what the real levels of demand are, which could factor into eventually creating over-capacity. “There needs to be more rationalization of what the real needs are,” Alam said.
Being able to accurately assess demand is so important because it directly fuels new capacity investments. Alam said semiconductor companies historically have been “super disciplined” about adding capacity to make sure they do not end up with multi-billion assets that are under-used. “Generally speaking, they do not build the capacity as ‘just in case’ kind of thing,” he said. “They try to match it to the demand,”
If semiconductor companies start to find that demand isn’t what it seemed to be when they announced their capacity expansions, Alam said he wouldn’t be surprised to see some capacity additions “dialed back a bit.”
Long-term planning
Overall, firms affected by the chip shortage of the last two years have started to become more rational about how to deal with a changing marketplace and ecosystem. In 2020, they expressed to folks like Alam a sense of urgency about what they could do immediately to respond to the shortage. Now, as Alam meets with clients at Mobile World Congress (MWC) in Barcelona this week, he sees those same companies taking more of a longer term view. “They’re thinking about ‘How do I prepare for a different kind of market scenario?’ The tone of the discussions have changed, and I think the tone of the discussions this year at MWC will be ‘How do I build a resilient supply chain going forward? What are the long term steps I need to make?”
For the biggest companies, this could mean forging creative, long-term agreements that guarantee supply of certain chips, or at least a guarantee to not slip below a certain percentage of their stated demand, giving suppliers some flexibility to to deliver, for example, 80% of what a buyer says it needs, but no lower than that. It could also mean diversifying suppliers so long as these big companies don’t lose advantages of being large-volume buyers.
For smaller companies, it could mean banding together in buying consortium to create big enough orders and gain better pricing from suppliers that may not have been returning their phone calls over the last two years (a real-world problem some small buyers have faced, Alam said.)
Aside from that, smaller buyers individually need to look at ways to increase their own order volume, Alam said. “If you have five product lines don't use five different kinds of power management chips. What happened is companies have different views, different engineering groups and want chips that fit their team’s design, but you now need to tell your engineers to work toward creating more common platforms.”
Making long-term plans for supply chain resiliency also means recognizing the fact that there will be no such thing as buying cycles anymore–no peaks of purchasing activity followed by periods of lower demand during which the supply chain can focus on replenishment. Demand for more chips from more buyers from many more industries is now constant.
“It used to be in the 1990s and the early part of the 2000s that there were big buying cycles, peaks and then deep valleys, Alam said. “But it's started to get a little bit smoother. There are two reasons for that. The industry is learning to optimize investments to manage supply and build new capacity to match demand. And the other is that the demand is coming from all different angles all the time.”
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