Why Is There a Global Semiconductor Shortage?

[Music] to discuss the impact of the global semiconductor shortage i'm joined by suresh acharya he is professor of practice in the robert h smith school of business at the university of maryland hello suresh how are you today i'm doing well bob good to good to see you and good for thank you very much for joining us again just to start out with this whole issue of the semiconductor shortage uh explain to me what the situation is as it currently stands sure thing sure thing so you know there's a lot of um you know news around it but before we talk about the problem and where we might go with this let's actually understand the lay of the land because it's an industry that that is relatively opaque to a lot of people um you know we go buy potato chips we don't necessarily go buy computer chips and so um so while we consume it directly or indirectly through computers and through other devices it's an it's an industry that that you know um the general population is not quite aware of so if you kind of break it up break it out break it down into the supply side and the demand side the supply side first which is the one that that's a bit more opaque you have um you know fabulous semiconductor companies that really focus on and that have you know greatly specialized on the design of semiconductors so these are the qualcomm's the nvidia's the broadcom of the of the world they don't necessarily manufacture their chips over time they have chosen to design and to really uh push out the manufacturing to you know companies like tsmcs in taiwan and these are pure play foundries the foundry is just a term for semiconductor plants and what these companies do is they they take in orders from all of these um fabulous companies and others and then produce the chips themselves so you know tsmc um is is the um is the you know the big elephant in this space um one thing to note is that you know over 90 of the chips manufactured in the world comes out of asia so you know keep that keep that in mind so any little hiccup that happens from that side of the world whether it is driven by natural disasters or by you know things like the pandemic or um you know national um issues can have an impact here right so those um so we talked about the um the pure play the tsm sees the um design only and then there are companies like intel and samsung that that are idms they they they design and they manufacture but increasingly you know at least um you know what their share is is not as large okay so that's a that's a good succinct description of the supply chain as as it exists yeah so uh you mentioned the possibility of a hiccup is that indeed what has happened why are we in this shortage situation right now well because on the on the on the demand side you know the folks who actually order these semi-semiconductors or these chips they've had an impact due to due to covid so let me just walk you through the demand scenario and then where this has arisen right so you know we understand the apples of the world because you know that we all buy the smartphones and so they are a consumer of it you know microsoft and um sony because of the gaming devices you know consumer electronics medical devices wireless all of those digital devices and increasingly now and this is where this whole issue um you know comes to the fore is that the auto industry is now increasingly reliant on semiconductors and in fact the way to think about cars now is really that it's a smart device on wheels because you know it has so many of these sensors and these and these chips and so now now the now the question is okay so all of that makes sense but let's certainly understand the supply understand the demand but what what really happened even pre-pandemic because of the previous administration's um stance against china we had already started to see some impact on this particular industry and and it was you know very much in flux but once the pandemic hit what what happened was some of the supply side players started to uh have supply challenges they were managing that because like i said 90 of it comes out of asia but when when when the pandemic came home uh the the the demand patterns fundamentally changed and in particular the auto industry was very hard hit um people were not buying cars and as a result the auto industry decided to you know pull back its orders of semi semiconductors a lot of other companies did that as well however their demand patterns ended up being the reverse with people staying at home gaming devices consoles had a had a spike in demand with uh kids staying at home and zooming if you will there was a higher demand for laptops now and so these consumer electronic companies started to fill in the void that auto that the auto industry left um by canceling their orders and they ordered more and more chips now more than filled in the void then right exactly because because their demand was high now you know it's not necessarily exactly the same chips but you know these foundries needed needed to change the semiconductors from what the auto industry needs to what these other industries needs so fast forward from q1 of last year to q3 of last year 2020 when all of a sudden now people started seeing the end of the pandemic at least you know in terms of the vaccine arriving the stimulus checked checks started to come and now the auto industry really saw a an uptick a you know a um considerable surge in in their demand and when they went back to the um semiconductor company saying hey give me some give me the chips that i need they said oh we're already tapped out yeah uh oh because the gamers aren't the game industry's not going away at that point to make room for the auto industry to come back in exactly yeah exactly and so now what has happened is that the that you know these um semiconductor companies they are they are very capacitated in that they run they need to run in full utilization and they are running in full utilization it's just that the mix has now changed a lot more to the consumer electronics laptops gaming and less than planned for the auto industry and now that's what we hear but in addition to the types of demand shifting that you just described were there also actual disruptions in the supply of chips at all because of this temporary closure of factories in china and elsewhere did that not contribute to the problem as well yes it did so so on the supply side um we we talk about just the manufacturers but but remember there needs to be raw materials that needs to go into producing these so some of the earthquakes in japan had an impact some of the closures in china like you said had an impact what also happened bob as a result of the previous administration's stance on china is that a lot of chinese companies started to stockpile because they knew that there was an imminent shortage and so that has um added to this shortage as well just like you know we we saw you know end consumers go and buy a toilet paper at the beginning of pen of the pandemic um companies also stockpile or they hoard and that then adds to the already delicate supply balance issue of computer chips got it okay so we've been up to this point we've been talking about the market and market disruptions along comes the biden administration with an executive order targeting several critical supply chains for review one of which is semiconductors what actions could the biden administration take in the wake of such a review to address this specific problem and and does this issue and solve the problem well um in the in the near term i would say very little bob because this industry isn't one where you can just quickly um build a foundry you know there are intel has decided to you know invest in the building more even tsmc has and so yes it can it can nudge it can encourage these things to happen but it's not an it's not an industry where these companies just mushroom um overnight and so if it really is more of a reallocation rebalancing than than it is anything else in in the long run i do not think it is healthy for 90 of the semiconductor the manufacturing to happen um you know overseas some of that needs to come where the demand is remember near close to 50 of the demand is here in north america only 12 percent of the manufacturing happens here well is it economically feasible to do that to reshore a substantial portion of production back to the united states well so therein lies one of the challenges that lean manufacturing has um brought upon us you know so lean manufacturing makes all the sense you know all the sense in the world in in normal times but increasingly um you know supply chain experts are saying look it's more important to diversify and to be resilient so that you are not prone to a single point of failure that might happen in certain geographies of the world and and that should that happen you are better prepared and so that is one of the mitigating factors that it's increasingly discussed to not have a single points of failure which you know um lean manufacturing has brought upon us okay so some aspect of domestic some contingent of domestic production is probably necessary going forward but as you point out that's going to take a long time to build up that capacity do we have any short-term solves for this problem or we just have to wait it out and let it kind of settle well if you if you see what's happening the um auto industry is already cutting cutting back production right so they've got cars but they don't have the smarts in them and so um i i i don't see this you know this issue going away right away however you know there will be a new the balance that will that will emerge um some of the some of the companies that have stockpiled will obviously stop ordering as much that will free up some some much needed capacity but um you know this is a very cyclical um industry bob this is not the first time that we've seen semiconductors have an imbalance in supply and demand it happens all the time it happened in 2018 with a lot more demand than supply then in 2019 there's a lot more supply than there was demand so it happens all the time given given the nature of it but this this particular issue around auto industry having issues i think it will stabilize a bit but we won't um see the end of it until at least um end of the year well not the most promising message but some hope maybe in the future especially as a pandemic abates and things get back to some semblance of normal if we can use that word anymore in any case suresh acharya good to have you back thank you sarah very much for helping to cast some light on this critical topic thank you for being with me today appreciate it sure thing bob thank you you

Channel: SupplyChainBrain

Views: 8,649

Keywords: semiconductor shortage, chip shortage, global chip shortage, supply and demand, supply chain manufacturing, supply chain technology, asian manufacturing, Sourcing/Procurement/SRM, coronavirus and the supply chain, Supply Chain Visibility, apple, iPhone, Sony, consumer electronics, digital supply chain, automotive industry, automotive shortage, Healthcare, Coronavirus, global trade, electronic shortage, semiconductors, university of maryland, supply chain solutions

Id: 0KMtuhw5tjs

Length: 12min 11sec (731 seconds)

Published: Tue Apr 13 2021