Just about every industry has had to deal with some sort of supply chain challenge throughout 2020 to 2022. The supply chain issues created by wholesale economic shutdowns in 2020, massive spikes in consumer demand in 2021, and finally geopolitical challenges in 2022, have continued to push back what would objectively be called a “normal” sourcing and procurement environment. For the electronics industry, the bottleneck continues to be high demand and low supply of semiconductors, and the industry continues to observe a very slow recovery of the semiconductor supply chain.
Supply chain observers and analysts expect some return to normalcy around 2023, or possibly 2024, depending on who you ask. Looking from the macroeconomic perspective, rollover in consumer demand and commodities demand suggests that supply of semiconductors, both in terms of allocation and distributor inventories, has a chance to recover. In this article, we’ll look at some of the main drivers of supply-demand imbalance, and what they tell us about the semiconductor supply chain recovery.
The Gap Between Supply and Demand is Closing
Shortages, high prices, record high profits from some of the biggest names in the semiconductor industry, and new investment in production capacity are all interrelated and are driven by an imbalance in supply and demand. Of course, the supply chain situation is much more complex than what you would find from an Econ 101 analysis, but this is a good place to start to understand the current supply chain situation in the semiconductor industry.
For anyone who has paid attention to the news in 2022, we have two major headlines that stand out:
- Major investments in new semiconductor manufacturing capacity are being planned or actively constructed, with investments by major companies reaching into the billions of dollars.
- Consumer demand, which drives much of the overall demand across the supply chain, has decreased over 2022, reaching a point where many are predicting a recession in 2023 or 2024.
Semiconductor manufacturing facilities don’t come online overnight, they take some time to build, equip, staff, and bring online. With demand falling in the meantime, and existing capacity being thoroughly utilized, it’s fair to ask: why have we not seen faster recovery in supply? The reason has to do with capacity utilization within the industry prior to 2020. According to data from the Federal Reserve Board of Governors, utilization was dropping in the first half of the 2010s, and later only reached 80% by 2020.
Semiconductor manufacturing capacity over time. Source: Federal Reserve Board of Governors.
Data from the Semiconductor Industry Association and the World Semiconductor Trade Statistics (WSTS) organization does an excellent job of capturing the demand picture. When we look at month-to-month sales data starting in 2022, we see a further a clear reduction in demand since the peak in January 2022, roughly coinciding with a peak in sales in the post-COVID period. While it’s sometimes hard to pinpoint specific causes of changes in supply and demand in every case, the drop clearly coincides with the beginning of interest rate hikes implemented by central banks across the globe.
Semiconductor revenues as of August 2022. All-time peak revenue was observed at the end of 2021 and has been decreasing each month.
One could argue that one of the factors causing semiconductor demand to decline much slower than other commodities is new spending on capital equipment. Reshoring, new industrial production capacity, a labor shortage, and renewed defense spending in Western nations has driven demand for capital equipment to a two-decade high. All of the capital equipment implemented in these industries, as well as the products they tend to make, require semiconductors. The massive amount of investment will eventually drive inventories higher as new semiconductor production capacity comes online, but new capacity comes with an approximately 18-24 month lead time.
The new investments in semiconductor production capacity from some of the industry’s biggest names will not cause inventories to recover quick enough to get the industry back to a place of normalcy observed in the late 2010s. If we look at the data and draw trendlines across capacity utilization and demand, we might expect demand to return to historical levels just at the time new manufacturing capacity comes online, or some time in late 2023 or 2024.
Lessons Learned From Shortages and Inflation
The challenge with the slow recovery of semiconductor supply chains is one brutal fact about shortages: you never know a shortage has happened until it begins. Companies that took a proactive approach to design and sourcing since mid-2020 were more likely to maintain sustainable production and, ultimately, greater market share for their products. Three major sourcing strategies for navigating an ongoing shortage are:
- Identify parts with few alternates and swapping
- Securing multiple sources for each alternate
- Creating variant designs with alternate parts
Design teams and procurement managers have taken some of these lessons to heart and have begun to implement a new, more sustainable strategy: just-in-case supply chain management. The central idea in a just-in-time supply chain is simple: don’t be afraid to hold excess inventories.
During prototyping, this means procuring some extra parts and holding them for future runs. The additional sunk cost is minimal, but it gives you the freedom to run extra spins if needed without incurring additional design work if a risky part goes out of stock. When transitioning to production, the up-front work of securing multiple parts for variant designs allows production to adjust between variants as needed.
The approach outlined here keeps companies competitive: if you can get to production before the competition, then you will win market share over competitors. An important part of ensuring sustainable production is not just procurement of important components, it’s also about creatively implementing and managing design variants to ensure your company can react to supply chain challenges.
Design teams that want to ensure they can maintain sustainable supply chains can implement the design strategies outlined here with OrCAD from Cadence. OrCAD includes the industry’s best PCB design and analysis software with a complete set of PCB project management tools for managing design data. OrCAD users can access a complete set of schematic capture features, mixed-signal simulations in PSpice, and powerful CAD features, and much more.
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