How the Pandemic has Exposed the Vulnerabilities of the Global Supply Chain
Posted on October 11, 2022
The pandemic has exposed the vulnerabilities of the global supply chain, highlighting the need for domestic semiconductor manufacturing. And the government and industry have taken heed, paving the way for chip fabs to be set up in the USA.
But factories don’t spring up overnight, and it will be a while before this new manufacturing capability comes into play. For the next few years, we must still rely on shipments, and the situation isn’t looking too good on that front.
How the Pandemic Threw Supply Chains Out of Gear
Many people expect things to return to normal now that the pandemic is (mostly) over. But it’s not that simple. The problem is the enormous backlog of orders. Even though Taiwan Semiconductor Manufacturing Company (TSMC) is back in business, it is still fulfilling old orders, creating longer lead times.
Many industries also ended up placing bulk orders during the pandemic, creating an artificially inflated demand that is putting further pressure on production. Rising oil prices don’t help either, driving up the costs of shipping.
The Glut of NCNR Orders
NCNR or non-cancellable, non-reschedulable orders are preferred by many suppliers as it guarantees prioritized delivery. But it also locks them into orders they may no longer need, creating excess stock. Many firms ended up placing large NCNR orders at the height of the pandemic, and then buying chips from the open market anyway because of delayed deliveries. Now they are dealing with overflowing inventories as the NCNR orders finally start rolling in.
Many of these chips will make their way back to the open market as newer models come out, easing prices somewhat. For now, though, this has adversely affected the availability of chips.
Another Crisis on the Horizon
The Russian invasion of Ukraine has led to a shortage of many resources that originated from the two countries. And while chip manufacturing is not affected by rising prices of wheat or oil, the lack of Neon poses a challenge. Many may not know this, but Ukraine was the world’s leading supplier of Neon, responsible for a whopping 70% of global Neon production. As a result, Neon prices have jumped by 600%, creating a new crisis for the already beleaguered chip industry.
The good news is that Neon is not a direct ingredient in chip manufacturing, and most companies have sufficient buffer stock to tide them over the next few months. The bad news is that the laser etching machines responsible for fabricating chips need Neon to function, and will start shutting down unless the shortage is resolved in a year.
The US CHIPS Act
The importance of an uninterrupted supply of computer chips in today’s society cannot be downplayed. Increasing digitization and automation have made semiconductors essential components of virtually every major device. And the ongoing supply woes have made it clear that we cannot continue to rely solely on offshore manufacturers for such a critical resource. We need to ramp up domestic production of semiconductors.
That’s where the US CHIPS Act 2022 comes in. It paves the way for research grants and tax credits for chip manufacturing facilities. Intel is already spending over $40 billion on setting up four chip fabs in the US, with other leading manufacturers chipping in with significant investments as well.
The Rocky Road Ahead
In the long term, the chip situation in the US is set to improve. Once the new chip fabs go online, we will be able to meet at least a part of the domestic demand internally. That being said, it is going to take a few years before the new facilities start producing. And the looming Neon crisis is going to further exacerbate the current chip shortage.
As a result, expect to see lead times in excess of 52 weeks in the foreseeable future. At Global American, we are delivering systems to our clients as soon as possible, making sure that their operations are not affected by the chip shortage.