Despite commitments from governments and funding to support the semiconductor sector, the ongoing chip crisis is not going away any time soon. The European Commission (EC) has proposed a European Chips Act to encourage the development of a thriving semiconductor sector from research to production and a resilient supply chain, and in the UK the Foreign Affairs Committee has begun a new inquiry assessing skills, security and end-to-end semiconductor supply chain concerns
McKinsey recently forecast that the global semiconductor industry would be worth $1tn by the end of the decade. Its assumption is based on average price increases of about 2% a year and a return to balanced supply and demand after current volatility.
However, the authors of a recent McKinsey article warn that the supply shortages have led to bottlenecks in the production of everything from cars to computers, highlighting how tiny silicon chips are critical to the smooth functioning of the global economy. “In many ways, our world is ‘built’ on semiconductors,” they noted.
And with chip demand set to rise over the coming decade, the authors of the paper urged semiconductor manufacturing and design companies to focus on understanding where the market is heading and what will drive demand over the long term.
One of the paper’s authors, Ondrej Burkacky, a senior partner at McKinsey, spoke to Computer Weekly recently about the difficulties in resolving the semiconductor supply chain crisis.
Looking at the rise in demand for semiconductors, he said: “I think that, given the pandemic, we saw a real boom in demand for semiconductors. People started working from home and needed additional computer equipment. We also watched more movies online and cloud services boomed.” These are among the factors that have driven up demand for semiconductors.
Yet, two years since the Covid-19 pandemic began, Burkacky said there remains more demand for semiconductors than supply can handle. “The automotive industry is particularly hit by the shortage situation,” he said. “Car makers have lost quite significant sales during the pandemic as nobody was buying cars. When the economy kicked back in, demand for cars increased. There was already a shortage order on semiconductors, and with that, they are getting less share of semiconductors.”
According to Burkacky, the challenge for the automotive sector, and other industries that require semiconductors, is that the industry is far more focused on meeting the demand of the IT sector and mobile phone industry.
Gartner’s latest device forecast shows that in 2022, worldwide 5G phone shipments are expected to total 710 million units. Although this is an increase of 29% from 2021, it is down on previous expectations. However, the demand for 5G phones is expected to pick up at a faster pace in 2023.
But device sales have also been hit by supply chain issues, along with the changing macro-economic climate, according to Ranjit Atwal, senior director analyst at Gartner. “A perfect storm of geopolitics upheaval, high inflation, currency fluctuations and supply chain disruptions have lowered business and consumer demand for devices across the world and this is set to impact the PC market the hardest in 2022,” said Atwal. “Consumer PC demand is on pace to decline 13.1% in 2022 and will plummet much faster than business PC demand, which is expected to decline 7.2% year on year.”
Given that automotive accounts for only 8% of sales of semiconductors, Burkacky said car makers are in a weaker position than computer manufacturers in their negotiations to make long-term commitments to secure volume shipments of chips. Another factor is that outside the high-tech sector, car makers and other manufacturers developing “smart” technologies often do not need the latest semiconductor developments.
As Burkacky points out, about 80% of the demand for automotive chips actually comes for so-called “mature” or feature nodes. These tend to be based on older 50-nanometre technology. It is demand for these chips, based on older technology, where supply issues are most acute.
Because current mainstream chips are fabricated using 10- or 14-nanometre technology, said Burkacky, serving customers who require chips based on 50-nanometre or even older technology is not the core focus in the expansion plans of major semiconductor players such as TSMC, Intel and Samsung. So, just because semiconductor factories are going to be built in Europe does little to resolve the chip supply chain crisis.
For a start, said Burkacky, even in the most optimal conditions, it takes a minimum of three years for a chip fabrication plant (fab) to start producing semiconductors. “A more realistic estimate is that it takes four to five years before it reaches a certain production level,” he said.
But conditions are far from optimal. The control systems used in the fab require the same “old chip technology” that is experiencing supply issues. This may mean that the chipmakers themselves could find supply issues with the essential equipment they require to build new semiconductors.
Return on investment is another factor holding back the supply of chips. As Burkacky points out, subsidies and grants for research and development tend to focus on new tech, which means there is little financial incentive for chipmakers to build new fabs for older chips.
“When you do the overall business case from the perspective of a semiconductor manufacturer focusing on technologies for the automotive sector, you basically end up having to look at less subsidies and a customer industry that is typically very price-sensitive,” he said. “So a simple price increase might not be very well received.”
Circular economy of chips fails
There is also the question of whether these old chips can be recycled so they can be reused in other devices. The challenge here, said Burkacky, is that because these semiconductors typically cost $0.50 or less, it becomes hard to justify the recycling costs.
Then there is the question of reliability. If a chip is recycled from, say, a washing machine and is then used in a safety-critical system, there will always be a question over its reliability and, said Burkacky, the washing machine may have been left outside, open to the elements, which puts a question mark over the state of the control board and chips.
However, if production of something like a washing machine is disrupted by the chip supply issue, Burkacky believes manufacturers may be forced to look into alternative ways of sourcing these components through the circular economy. But this is a short-term measure that is likely to last only until the chip crisis is resolved.
For all the latest Technology News Click Here
For the latest news and updates, follow us on Google News.