No Match Found
Secular growth has combined with cyclical factors to create extraordinary demand for chips — while semiconductor companies’ own supply chains are struggling to keep up. A flexible, tech-enabled approach can help address supply chain challenges today and set companies up for more sustainable, less volatile growth tomorrow.
Semiconductor vendors, designers, manufacturers and the companies that supply them are facing extraordinary circumstances. The industry is used to sharp changes in demand, but the current surge has been extreme. This time, the sector’s own supply chains face unusual and systemic difficulties.
As the leaders of semiconductor companies plot their path forward, they should consider not only the challenges of meeting demand right now, but a significant future risk: If you invest heavily in capacity to meet shortages today, will you find yourself selling into a glut tomorrow? The risk is longstanding in this historically cyclical industry. But the intensity of today’s supply shortfall, and the high costs that may be needed to address it, make it imperative to chart a careful course.
Part of today’s story is a familiar, but cyclical one. When the pandemic triggered a recession, many industry players expected a collapse in demand and cut supply accordingly. But even at the pandemic’s height, demand never really vanished. It migrated. As more people stayed at home, for example, demand surged for PCs, webcams and other technologies that rely on semiconductors. Secular growth continued, too, with semiconductors critical to ever larger swathes of the economy. When the global economic recovery came faster than expected, that new demand caught much of the industry unprepared.
Many semiconductor companies have sought to increase production, only to encounter bottlenecks in their own supply chains. Components, such as wafers and substrates, and facilities, ranging from foundries to back-end processing centers, are in short supply. New facilities will likely take years to stand up. Meanwhile, a talent shortage continues to hold companies back, and political and economic pressures to reduce reliance on overseas suppliers are further increasing costs and uncertainty.
It’s an unprecedented set of challenges — but it’s possible to adapt in ways that help reduce both the risk of overinvestment and the risk of missing out.
The unusual mix of demand and supply challenges, combined with greater-than-usual uncertainty about the future, make thoughtful strategic choices critical. Here are six measures you can take to both address today’s concerns and better position your company for more sustainable, less volatile growth tomorrow.
It’s long been a challenge in the semiconductor industry: Many customers view you merely as a vendor, not a business ally. They issue purchase orders they don’t intend to keep, cancel them with little warning, and surprise you with new requests. But it may be possible to replace an often rocky relationship with a mutually beneficial relationship. Such a relationship may include long-term agreements or non-cancellable orders — but other forms of collaboration can also help you reduce volatility.
Consider working with key customers on forecasts for demand and supply. Share your expectations and roadmaps and ask to see theirs. Together, you can work out ways to share both the opportunities and risks of future marketplace scenarios. Such deeper collaboration may also allow you to encourage customers to include your next generation of chips in their next generation of products. When the current supply shortage corrects (or overcorrects) it may be valuable to have customers used to working closely with you and your products.
Just as you may wish to deepen relationships with customers, consider the same with key suppliers. One option is direct involvement. Prepayments, long-term agreements, loans, equipment purchases and joint ventures are options that many semiconductor companies are already taking. But be sure to consider the financial impact. Under certain conditions, for example, paying for a supplier’s equipment may be considered a lease, even without a lease agreement. If you loan a supplier money to buy equipment, different ways of structuring the loan will have different financial impacts.
As is the case with customers, more informal collaboration may be attractive as well. Mutual data sharing can help reduce both your risk of lacking key supplies — and your suppliers’ risks of producing more than the market can use. Within such collaborative relationships, your vendors may also help you fill other supply needs. If, for example, you’re having trouble sourcing components, a contract manufacturer with whom you have a deeper relationship may be able to tap its own suppliers to help you fill the gap.
Detailed, prompt insights into conditions at your facilities and those of key suppliers can help you improve your production and supply chain. Control tower technology can help deliver those insights, potentially offering a dashboard for a unified view of your supply chain, with visibility into current and incipient problems. Some control tower tech can do more than alert you to issues. It can also contain algorithms to resolve or propose solutions to certain problems autonomously.
Consider, too, artificial intelligence (AI) systems to support digital twins and other models that help forecast marketplace demand, maintenance needs and supplies, including potential disruptions and price changes. AI can present you with a range of scenarios, along with their probabilities and second-order impacts, to enhance operational planning. Other AI systems (often drawing on the same data) can support “intelligent price engines” to help improve your prices too.
Tech-enabled insights and forecasts can help predict supply chain disruptions. But you may need other, concrete preparations to avoid these disruptions and mitigate their impact. That may be true not just for integrated device manufacturers (IDMs), but also for fabless semiconductor companies. You won’t be able to meet your customers’ demand if your chosen foundries and back-end processors can’t meet yours.
If you do own capital equipment, consider tech-enabled capital planning to help craft an integrated strategy for buying, upgrading and retiring equipment throughout your global operations. Companies may wish to identify supply chain components that depend on a single source. Consider looking for backup sources or alternate components if only a single source is available. You may also want to enhance the velocity and predictability of your R&D. If your suppliers can rely on your forecasts for when you’ll need components, they can better plan to deliver them. Leading practices here include cross-functional teams to allocate budget, technology resources and people, as well as a structured development process with clearly defined reviews, milestones and accountability.
Given the severity of today’s talent shortage, it may be time to do more than recruiting at the usual universities and writing ever bigger checks. To improve retention, it may help to review performance management. Have you updated salary and incentives for today’s labor market and your current objectives? Consider your employee value proposition (EVP). Does it include options for flexible and remote work, attractive upskilling opportunities and a differentiated corporate purpose? Many employees tell us they want more than a web page with a few generic lines on “authenticity” and “mission.” They want to work for companies with values that set them apart.
It may be useful to work with educational institutions beyond the traditional ones. Community colleges and other universities, perhaps located near your own facilities, likely have talented, diverse students. But these institutions and students may need you to make long-term investments in them, so graduates will have the right skills and be eager to work for your company.
R&D tax credits and other incentives — state, federal and global — may be able to help pay for technology upgrades, but this opportunity is often underutilized. Only 38% of CFOs, for example, say that they’re very confident that they’re taking full advantage of R&D tax credits for cloud investments. Many semiconductor companies, with operations that cross borders and major R&D budgets, may be among those leaving money on the table by not taking full advantage of tax opportunities.
As you consider expanding production, investing in new designs, upgrading your tech for better supply chain insights, improving market forecasts and pricing, or investing in suppliers, give your tax team a seat at the table early on. They may be able to offer significant value — in some cases, enough to make projects financially feasible when they otherwise wouldn’t be. The R&D credit against federal and state income taxes, for example, can lead to a dollar-for-dollar reduction against cash tax outlays.
As you navigate today’s pressures and opportunities, it’s important not to overinvest or chase fleeting trends. Fortunately, measures centered on deeper relationships with customers and suppliers, better supply chain insights and resilience, enhanced talent recruitment and retention, and fully utilized tax incentives can help you meet today’s challenges while better positioning you for sustainable growth tomorrow.