Global Semi-Conductor Crisis
China and other South East Asian countries were the major exporters of semiconductors and largest market in the world which supply semiconductors to US, Australia at very cheap rate. The global semiconductor market size stood around $513 Billion. With the onset of era of Internet of things and Artificial development the need of variable sizes of semiconductors are imported at a very large scale from South East Asian Countries at a very cheap rate. The sudden outbreak of Covid-19 in October-November in Wuhan whole industry faced a sudden contraction due to disturbed supply chain activities. The United Nations Conference on Trade and Development had estimated around 2% reduction in the exports from China to other automotive countries in leading countries which contracted revenue by 6%. And total industry got contracted by $55 Billion as compared to the forecasted revenue. But with the conditional reopening of lockdowns, product deliveries and markets the annual growth rate which was around 12.5% was reduced to 0.9%.
What is the crisis about?
Majorly all the gadgets we are using today are controlled and equipped with semiconductors, and these are the main components of every daily gadget used in logistics, computers, mobiles, communication devices etc. With the onset of Covid-19 whole supply chain was interrupted which cause restrictions on imports and exports from other countries and majorly from China and its adjacent countries. With the imposing of lockdown there was a surge in the demand of personal computers that was required for working remotely but due to incapability of supplying the essential semiconductor chips, the demand was not fulfilled hence there was drop in the sales of servers, storage devices, communication devices like routers, etc.
Factors leading to the crisis?
First and foremost, all European nations, US, Australia are developing nations are mostly research and development nations which require a large amount of chips and mostly dependent on China and other South Asian Countries.
From the reports of 2018, from $92.2 Billion of exports from South Asian countries only $29.9 Billion of semiconductors was exported by China only followed with Hong Kong, Malaysia, Singapore to Europe and US majorly. These reports can be superimposed on 2019 and 2020 also from which we can see that how much crisis is critical and how much depending on these set of countries for development.
With the onset of conditions after the opening of lockdowns and the use of facilities and workers were also one the major factors. Since the capacity to for production is reduced, which impacted the supply chain on suppliers and procurement side.
COVID-19 is having a large impact on both people and companies. As of mid-February, millions of people are under some degree of travel restriction across world. In addition, critical electronics manufacturing hubs were temporarily idled to limit COVID-19’s spread. This confluence of events is hitting the global supply chain, impacting both suppliers — via shortages of materials, components, and finished goods — and consumers — by creating reduced spending in Chinese products as their trust was uprooted hence impacting on semiconductor-dependent products.
Additional tincture of US-China trade war which imposed many tariffs on the import and export of semiconductors from/into US and China. Five years ago, before the recent U.S.-China trade war, the country set goals of hitting 40% self-sufficiency in semiconductors by 2020 and 70% by 2025, which shows that US is mostly dependent on China for the semiconductors and low cost chips.
What is the global impact?
Demand disruption, surge in the demand of cloud and data centers so that work from home during Covid-19 can be done seamlessly and surge in the demand of gadgets which were not fulfilled due to idled manufacturing plants and export import restrictions. The impact of restrictions can be seen on China exports as slowdown can be seen easily on the exports.
Short and long terms impacts:-
- Slowdown in production of Auto OEMs, reduction in the supply of gadgets
- Logistics delay and challenges to transport the goods
- Lower expectations on the international suppliers
What is the impact to India?
Due to short supply even in India, it is affected adversely as government shut down all the mobile manufacturing plants and stopped sale of online as well as cross borders sale. The products which were ordered were restrained from movement since there was inter-state lockdown. Due to supply chain disruption development in data-centers, 5G infrastructure, IOT and Industry 4.0 soar by around 5–20%.
Sectors which are mostly affected are Information Technology services as it is mostly dependent on semiconductors and it includes data centers, communication technology and many more, Telecommunication sector which is working and developing at a great pace to implement better services by importing more advanced gadgets.
When is the crisis likely to settle?
This crisis is totally dependent on Operational and Managerial strategies which are followed and implemented by the organization. During the recession of 2009, most companies try to use vertical integration this same strategy is going to be applied again as semiconductor industry is very much price sensitive. This can be achieved by placing the plant manufacturing plant in the region or country where labor and material cost is low to fulfill the demand of nearby countries as well. Placing the plants in the nearby countries or adjacent countries like Vietnam, India, Sri Lanka, Bangladesh, Arizona to fulfill the supply of nearby organizations and manufacturers. More over finding the right partner or supplier for the semiconductor which will lead for Just In Time strategy to stop the losses as well.
What actions being taken by companies to overcome the same?
Many companies are following various actions to overcome the situation in future:-
- Just In Time strategy to reduce the risk of outdated and holding some safety stock.
- Investment in digital supply chain, informing and adequate transparency between the suppliers.
- Expanding vertically to merge the companies and going into long term partnerships.
- One of the largest chip makers in the world, Taiwan Semiconductor Manufacturing Corporation (TSMC) recently announced setting up a US$ 12 billion semiconductor plant in Arizona, USA. Countries like India and Vietnam also provide attractive alternatives.
