Chip Shortage May Be Around For Awhile

A global semiconductor shortage is battering numerous industries as products and processes go without needed parts. And the pain isn’t over yet. Gartner predicts that the shortage will persist through 2021 and not recover to normal levels until the second quarter of 2022.

“The semiconductor shortage will severely disrupt the supply chain and will constrain the production of many electronic equipment types in 2021. Foundries are increasing wafer prices, and in turn, chip companies are increasing device prices,” says Kanishka Chauhan, principal research analyst at Gartner.

The chip shortage started primarily with devices, such as power management, display devices and microcontrollers, fabricated on legacy nodes at eight-inch foundry fabs, which have a limited supply. The shortage has now extended to other devices, and there are capacity constraints and shortages for substrates, wire-bonding, passives, materials and testing, all of which are parts of the supply chain beyond chip fabs. These are highly commoditized industries with minimal flexibility/capacity to invest aggressively on a short notice.

Gartner expects that across most categories, device shortages will be pushed out until the second quarter of 2022, while substrate capacity constraints could potentially extend to fourth quarter of 2022.

Manufacturers dependent, directly or indirectly, on semiconductors can take certain actions to mitigate risk and revenue loss during the global chip shortage. The chip shortage makes it essential for supply chain leaders to extend the supply chain visibility beyond the supplier to the silicon level, which will be critical in projecting supply constraints and bottlenecks and eventually, projecting when the crisis situation will improve.

Gartner also suggests that manufacturers with smaller and critical component requirements look to partner with similar entities and approach chip foundries and/or other providers as a combined entity to gain some leverage. Additionally, if scale allows, pre-investing in a commoditized part of the chip supply chain and/or foundries, could guarantee the company a long-term supply. Companies can also track leading indicators, as while no relevant parameter by itself will project how the shortage situation will evolve, a combination of relevant parameters can help guide organizations in the right direction.

“Since the current chip shortage is a dynamic situation, it is essential to understand how it changes on a continuous basis. Tracking leading indicators, such as capital investments, inventory index and semiconductor industry revenue growth projections as an early indicator of inventory situations, can help organizations stay updated on the issue and see how the overall industry is growing,” says Gaurav Gupta, research vice president at Gartner.

Businesses can also diversify their supplier base. Qualifying a different source of chips will require additional work and investment, Gartner notes, but it would go a long way in reducing risk. Additionally, creating strategic and tight relationships with distributors, resellers and traders can help with finding the small volume for urgent components.

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