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The Semiconductor Industry

The driving force behind many different modern technologies and autonomous systems, semiconductors are critical to the effective performance of everything from phones to cars, appliances, and tech. Despite the essential nature of semiconductors, their manufacture and supply remain highly variable and, at times, problematic.

Here we take a look at what a semiconductor is, its main applications, and where most of the semiconductors used in US manufacturing come from. We also consider the reasons why semiconductor supplies have been sporadic in recent months, as well as some potential solutions to this problem moving forward.

What is a Semiconductor?

At its most basic, a semiconductor is simply a material that can act as both an electrical insulator and a conductor. It forms the basis of transistors – devices that can switch or amplify an electric current. A semiconductor chip is a complex combination of wiring and transistors, stamped onto a tiny silicon chip. 

Semiconductors are used to form integrated circuits (IC) – these are tiny, complex circuits that can perform the same function as a larger circuit made from a number of components.

Semiconductor Applications

Semiconductors control the flow of electricity in order to produce a specific result. They can be used in numerous ways. If you use an appliance or gadget powered by electricity, it’s likely that it will contain a semiconductor that controls some aspect of its operation.

Semiconductors can be found in:

  • Motor vehicles. They play a key role in autonomous driving systems.
  • Kitchen appliances, such as ‘fridges and washing machines.
  • Televisions and computers.
  • Cell phones.
  • HVAC systems (controlling temperature).
  • LED bulbs
  • Medical technologies

Given their widespread use, ensuring a constant, sufficient supply of semiconductors is critical to a large number of manufacturers. Unfortunately, recent disruptions to supply have had a knock-on effect on several industries, with automotive manufacturers being particularly badly hit.

Where do our Semiconductors Come From?

The US is responsible for about half of the global semiconductor industry. Semiconductors are one of the US’s top exports. As well as being a prolific semiconductor exporter, the US also imports around $58 billion of semiconductors from overseas for use in domestic manufacturing.

Reasons for Recent Semiconductor Supply Issues

A Mismatch Between Domestic Supply and Demand

Although at face value the figures suggest that the US produces sufficient semiconductors to meet the needs of domestic industry, in reality, the picture is far more complex. 

Whilst the US manufactures a high number of more basic semiconductor chips, there are only a handful of companies that have the infrastructure necessary to create more sophisticated chips. The high cost of producing these chips domestically results in many manufacturers reaching out to foreign fabricators to create their semiconductors. This means that many domestic industries are dependent on an international supply chain to provide the semiconductors they need.

The Semiconductor Industry is More Than Chips

Whilst around a 50% share of the global semiconductor industry sounds like a healthy figure, it masks the fact that the industry isn’t confined to the production of semiconductor chips. 

The semiconductor industry consists of three main types of company: those that design and fabricate their chips, those that design their own chips but have them fabricated elsewhere, and those who don’t actually create semiconductors at all but do create the plant, tools, and other infrastructure needed for semiconductor fabrication and/or design outfit to operate effectively.

Recent figures show that the percentage of semiconductors that are fabricated in the US has fallen dramatically – from a high of 37% of all semiconductors manufactured globally in the 1990s, today the US is responsible for just 12% of global semiconductor fabrication. 

The largest part of the US semiconductor industry is related to the manufacture of machinery, tools, and equipment for manufacturing semiconductors elsewhere, rather than semiconductors themselves.

Semiconductor

Over-reliance on Foreign Imports

As already indicated, domestic manufacturers are looking overseas to source their semiconductors. The vast majority of semiconductors that end up in US appliances and gadgets are imported. Apple, for example, sources the semiconductors for its phones from Taiwan Semiconductor Manufacturing Company (TSMC).

TSMC dominates the chip fabrication sector, particularly when it comes to more sophisticated and complex chips. It is these high-grade semiconductor chips that are vital to the auto industry and to enable premium gadgets to operate successfully.  Research shows that TSMC controls around half of the global foundry capacity – the facilities necessary to create semiconductors successfully.

Other key areas of the world that have a high concentration of foundries include China (estimated as having about 15% of global foundry capacity) and South Korea. 

Given the delicate political situation in Taiwan, where China continues to assert ownership of the island, whilst Taiwan maintains that it’s an independent country, it’s clear that the US is in a vulnerable position with respect to its semiconductor supply chain.

A Relatively Small Sector

Making semiconductors is a highly specialist process. It’s also time-consuming, expensive, and arduous. The high initial cost of the infrastructure necessary to create semiconductors, along with the specialist skill set that workers require, means that it’s not initially an attractive business proposition. This has meant that there are relatively few semiconductor foundries in operation globally.

As a result, failure in production at any foundry for any reason has a global knock-on effect. For example, a major fire at the Renesas semiconductor factory in Japan recently resulted in a significant shortage of semiconductors for Japanese car manufacturers, including Toyota and Honda. This had knock-on implications for the US car market, as new models from these popular brands became increasingly scarce.

With so few semiconductor fabricators in operation, the supply chain remains perilous and vulnerable.

Repurposing During the Pandemic

During the initial days of the Covid-19 pandemic, the demand for semiconductors from the car industry and several other industries dropped sharply – people in lockdown weren’t investing in new cars, so sales plummeted. In addition, several car manufacturers shut or significantly reduced production, due to a combination of labor shortages, supply and demand factors.

This resulted in a lack of demand for semiconductors from sectors that had traditionally required large numbers. At the same time, demand for semiconductors for medical equipment, laptops, and other virtual communication devices soared, in response to pandemic requirements. 

The semiconductor fabricators responded by switching production to accommodate these new demands. As many countries, including the US, have begun to reopen following the lifting of lockdown restrictions, demand for cars has increased significantly. Unfortunately, capacity within the semiconductor fabrication sector hasn’t increased. Demand for pandemic-related products that require semiconductors remains buoyant, leaving limited capacity for the foundries to meet the needs of their previous customers. Inevitably this leads to significant delays in US manufacturing, as semiconductor chips become increasingly scarce.

A Slow Moving Industry

The semiconductor industry is not one that lends itself readily to fast adaptation. Each semiconductor takes anything from two to three months to make. The hefty investment in infrastructure that’s needed if a different type of chip needs to be created, or production increased, means that the industry is inevitably slow to respond to changes in demand.

Foundries operate in a sellers’ market! They can command a good price for their products, due to their scarcity. There is little incentive to increase production, or open new production lines when the existing foundries dominate the global market.

Domestic Responses to Semiconductor Supply Issues

The current semiconductor supply crisis has prompted the federal government to consider ways in which domestic fabrication can be facilitated, to sure up the US against future semiconductor shortages.

Currently, foundries setting up in China and South Korea enjoy a number of tax breaks and financial incentives from their respective governments. They are also relatively free of regulatory constraints around issues such as health & safety, and pollution. These factors combine to create an environment that’s conducive to investment in new fabrication foundries.

The US government is considering putting together a similar package of financial inducements to encourage domestic investors to consider opening and operating a semiconductor fabrication plant. The high initial costs associated with creating a foundry that’s capable of producing the high-spec semiconductors that the domestic market needs will likely only be met through a public/private sector partnership. It looks increasingly likely that public investment will be critical to increased capacity for semiconductor fabrication.

Whilst US production is likely to be more costly, the benefits of being able to guarantee a domestic supply of semiconductors can’t be overestimated. 

Some US companies already have plans to increase their domestic production. Intel, for example, is planning to open two new foundries in the next few years – one in Nevada and one in New Mexico.

The current difficulties in ensuring that domestic manufacturers have access to adequate stocks of semiconductors illustrate the vital importance of dependable supply lines.

Get in touch with OGLWW to discover how our global logistics and innovative end-to-end supply chain service could enhance your operation.

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