The Biggest Challenge Impacting the Semiconductor Industry Today: Supply Chain Disruptions

We live in an era when technology is the backbone of virtually every industry. The electronic components industry is at the forefront, driving innovation with new processes and designs that fuel disruptive technologies like artificial intelligence (AI) and virtual reality (VR). It is difficult to find any semiconductor-free industry today, as these chips are critical in everything from smartphones to renewable energy to medical devices.

With this pivotal role, maintaining a secure electronic components supply chain is essential at both the corporate and global economy level. Most modern-day economies rely on the availability of electronic components, specifically semiconductors. Without access, companies and countries alike can quickly fall behind the competition.

In a recent poll, Sourceability surveyed customers to ask what they believe to be the biggest challenge impacting the industry today. Respondents chose between sustainability impacts (10%), workforce shortages (21%), regulatory and trade issues (28%), and supply chain disruptions (41%).

The electronic components supply chain is highly complex and prone to instability. Due to the widespread production process of a typical semiconductor, it is particularly vulnerable to all kinds of disruptions. Since semiconductors play such a significant role, supply chain disruptions threaten the stability and growth of the semiconductor industry and the very companies and countries that depend on it to function.  

Understanding the Semiconductor Supply Chain

It’s essential to understand the complexity of the semiconductor supply chain to understand the gravity of supply chain disruptions. The production of semiconductors involves multiple steps, including design, fabrication, assembly, testing, and packaging. Each stage is highly specialized and often distributed across different world regions. For instance:

• Design: Semiconductor design is predominantly led by companies in the United States and Europe. Companies, including Nvidia and Arm, are leaders in their respective spheres of the industry, with Nvidia dominating AI and Arm chips being inside almost every electronic product available.  

• Fabrication: Regarding fabrication, Taiwan’s TSMC is the dominant force in semiconductor manufacturing. TSMC fabricates 60% of the world’s chips and 90% of advanced semiconductors. Most of Southeast Asia is also vital in this sector, with South Korea being a driving force in memory component supply.

• Assembly, Testing, and Packaging: In the same geopolitical area as most fabrication, many countries, including China, Japan, and South Korea. Currently, TSMC is taking the lead in advanced packaging capabilities, almost entirely booked out by Nvidia and Apple, two U.S. giants.

The lack of geopolitical diversity has left the semiconductor supply chain far more vulnerable to disruptions. With too much uniformity in one location, these disruptions are more likely to impact numerous manufacturers and production lines. As the world evolves, the types of factors contributing to supply chain disruptions only grow.

Factors Contributing to Supply Chain Disruptions

A myriad of circumstances can be attributed to supply chain disruptions. Different factors can often coincide, extending the time for the supply chain to restabilize. A prime example of multiple disruptions exacerbating each other occurred during the global semiconductor shortage. The Covid-19 pandemic was the catalyst that caused facility lockdowns, disrupting supply chain operations, which was later compounded by skyrocketing demand for consumer electronics and severe weather events.

Many different types of specific disruptions can occur, as each situation is inherently unique. However, most disruptions typically fall into five specific categories.  

1. Geopolitical Volatility
Recently, one of the most significant factors contributing to supply chain disruptions is geopolitical tension. The ongoing trade war between the United States and China has led to increased tariffs, export controls, and sanctions. These measures have created uncertainties and bottlenecks, particularly affecting Chinese companies that rely heavily on imported advanced semiconductors and lithography equipment to manufacture such chips.  

Likewise, the Red Sea Crisis and the Ukraine-Russia conflict contributed to logistics challenges, which affected lead times regarding the former and an energy crisis combined with a shortage of neon gas used in semiconductor fabrication with the latter.  

2. Natural Disasters
Natural disasters like earthquakes, floods, and tsunamis have historically impacted the semiconductor supply chain. For example, Japan's 2011 earthquake and tsunami severely affected semiconductor production. The recent earthquakes that rocked Japan and Taiwan in early 2024 thankfully only saw limited damages to earthquake fabrication sites but impacted them all the same.  

Similarly, the Covid-19 pandemic disrupted global logistics and manufacturing operations, leading to significant delays and shortages. Lockdown orders saw fabrication plants across APAC completely shut down for weeks, significantly impacting availability. During the pandemic, severe winter storms in Texas exacerbated the limited inventory produced.  

3. Supply-Demand Imbalance
While supply-demand imbalances can occur independently, the Covid-19 pandemic also triggered an unprecedented surge in demand for electronics as people shifted to remote work and online learning. This sudden increase in demand, coupled with existing supply constraints, resulted in a significant supply-demand imbalance. During the pandemic, chipmakers had such limited capacity that they had to choose which lines to prioritize, mainly advanced semiconductors.

As a result, automotive, medical, aerospace, and defense manufacturers faced extensive shortages, with automakers in particular encountering forced production halts and delays.

4. Raw Material Shortages
Semiconductor production relies on critical raw materials, including silicon, germanium, copper, gallium, and various chemicals and elements such as neon gas. Shortages or delays in the supply of these materials can severely impact production timelines. For instance, during both the Annexation of Crimea and the Ukraine-Russia conflict, neon gas availability became scarcer. Ukraine produces 45%-50% of the world’s supply of neon gas, which is crucial for the etching process in semiconductor fabrication. Unable to provide regular exports due to conflicts, there have been bottlenecks in the last several years.

Similarly, the ongoing trade war between the U.S. and China, a significant silicon exporter, could impose sanctions and other tariffs on essential raw materials that could hamper U.S. domestic production. China has already done so with gallium and germanium, of which it has a large portion of the world’s market share. Doing so with silicon would drastically impact semiconductor fabrication availability in countries that don’t have the same number of natural resources.

5. Obsolescence or EOL
Every electronic component eventually reaches end-of-life (EOL) and becomes obsolete. When this occurs, organizations must find a new part to use in production, whether a direct replacement (DIR), form-fit-function (FFF), or functional equivalent. For industries with strict premarket approval processes, finding an alternate is not simple, as recertification will be necessary for the product to go to market. To avoid running out, many companies participate in large last-time buys (LTBs) of EOL components until their product is phased out.

There has been an uptick in instant obsolescence, meaning that components do not enter EOL but become obsolete and unavailable without warning, leaving organizations without the option of making an LTB.

The Impact of Supply Chain Disruptions

The severity of the disruption will usually determine how greatly the supply chain is affected. However, the ripple effects of supply chain disruptions in the semiconductor industry are far-reaching and multifaceted. As seen during the global semiconductor shortage, lockdowns in APAC during 2020 saw semiconductor availability plummet for most of the worldwide supply chain.  

Even now, countries and companies are still recovering from the massive impact of the global semiconductor shortage. A return to “normal” is still a year away as original component manufacturers (OCMs) balance strategic production cuts and capacity as uneven market demand moves toward stabilization. Some of the most significant impacts supply chain disruptions have on the industry are still present:

Economic Impact: Supply chain disruptions can lead to significant financial losses. Companies face increased costs due to delays, stock unavailability, production shutdowns, and excess inventory, which can translate into higher consumer prices. The global semiconductor shortage cost the automotive industry $500 billion worldwide in everything from production delays and orders.  

National Security Concerns: Semiconductors are critical to a country’s economy and national security, as overreliance on foreign suppliers can put countries at greater risk of sanctions and geopolitical conflicts. Similarly, desperation can allow counterfeiters to slip suspect goods into a supply chain, which can be implemented in critical safety equipment, heightening the risk of malperformance or loss of state secrets.  

Increase in Obsolescence: When massive disruptions occur, OCMs often have limited capacity as demand is high. Growing concerns over the lack of skilled labor in the industry have led to OCMs prioritizing more lucrative, which are often advanced chips. Many high-reliability industries use legacy chips or components that use 28nm processes or above. Without the financial feasibility to keep lines operational or capacity, OCMs shut down production lines without the intention of returning them online, leading to instant obsolescence for many products. This has left many industries scrambling for solutions.  

3 Steps to Mitigate the Effects of Supply Chain Disruptions

Supply chain disruptions can have a massive impact on organizations, ranging from increased costs to the likelihood of obtaining counterfeit components. To avoid these problems, companies are encouraged to take proactive steps to mitigate or eliminate these challenges.

1. Diversification of Supply Chains
Companies must diversify their supply chains to reduce reliance on specific regions or suppliers. Greater diversification can be accomplished through multiple sourcing options or procuring from regional manufacturing hubs. These options have become more available since the end of the global shortage as OCMs expand their global presence. Businesses are encouraged to work with various suppliers and those with different geopolitical fabrication plants to circumvent most disruptions.

2. Investment in Domestic Manufacturing
After the global semiconductor shortage, governments and companies increasingly invest in domestic manufacturing to enhance resilience. For example, the U.S. CHIPS Act and EU Chips Act have helped increase investments by OCMs in new domestic locations. Similarly, China and India have passed subsidy programs to boost domestic semiconductor production. By creating a domestic supply chain, companies can have greater availability of products and reduced lead times.  

3. Using Advanced Technology
Modern organizations must utilize advanced technology such as artificial intelligence (AI) or market intelligence. Data-driven insights can help improve operational efficiency and notify companies of vulnerabilities in their supply chain long before disruptions occur—this way. Businesses can proactively find new suppliers or solutions, saving on cost and quality. Digital tools can also schedule deliveries, ensuring organizations always have a stable inventory flow and further stability in the face of unpredictability.

Working Together to Create a Stable Supply Chain in the Face of Uncertainty

Respondents say supply chain disruptions represent the semiconductor industry's most significant challenge today. The complex, global nature of the semiconductor supply chain makes it particularly vulnerable to a range of disruptions, from geopolitical volatility to natural disasters. Through strategic diversification of suppliers, investment in domestic supply chains, and the adoption of advanced technology, the electronic components industry can build resiliency against even the worst disruption.  

To build a more reliable supply chain, working alongside a global electronic component distributor that partners with franchised, authorized, and qualified third parties is pertinent to deliver top-quality components fast. Similarly, sourcing parts from a distributor that leverages a top-notch global team of experts with deep industry knowledge of market trends and data-driven insights will help ensure longevity for any business.

Sourceability has all these facets, with the additional benefit of franchise partnerships that can provide design expertise on best utilizing their products. The world continues to grapple with new challenges, ranging from global pandemics to geopolitical conflicts impacting canal transportation. Obtaining a solid supply of components to keep your production lines moving and remain competitive is key to success. Our team can help you get there.