With no end in sight for the global shortage of semi-conductors, the need to focus on building supply chain resilience and developing effective business continuity plans has never been as critical.
Of all the global shortages experienced over the last two years – from fuels to foodstuff – the semi-conductor supply crunch has been one of the most high-profile. The disruption is testament to the role chips play in the manufacture of a huge range of goods from cars, to smartphones, medical equipment and household appliances – even an electronic toothbrush can’t scale and polish without semi-conductors. So integral are they to today’s global economy it comes as no surprise that global revenue from the semi-conductor industry approached US$600 billion in 2021.
Given their importance, the impact of global shortages can have far reaching consequences, including for the insurance sector says Andrew Kyle – Product Recall Underwriter for Crisis Management Hiscox London Market. “It’s a shortage that could have implications from a product recall perspective for both users of semi-conductors, as well as the businesses who supply chip manufacturers. It is also a powerful reminder of the need for every business that uses semi-conductors to test the resilience of their supply chains when it comes to business continuity planning.”
“It’s a shortage that could have implications from a product recall perspective for both users of semi-conductors, as well as the businesses who supply chip manufacturers. It is also a powerful reminder of the need for every business that uses semi-conductors to test the resilience of their supply chains when it comes to business continuity planning.”
Semi-conductor crunch
According to the US Department of Commerce, today’s semi-conductor supply crunch centres around “a major supply and demand mismatch”. While the pandemic initially created a drop in manufacturing as orders were cancelled, a huge surge in demand for IT equipment as workforces re-tooled for home working pushed up the need for semi-conductors. There has also been an increase in demand for semi-conductors from the auto industry where chip usage has grown exponentially in the last few years; in a conventionally fuelled car there might be 150 semi-conductors, but in an electric vehicle there could be anything up to 3,000.
Trying to keep up with this demand has not been easy for chip manufacturers who have faced their own supply chain challenges in terms of getting hold of the materials and products they need over the last two years, while also suffering from a number of manufacturing site specific problems like fires, bad weather and energy problems.
US$10 billion price tag
Demand outstripping supply? No problem, just build more factories and make more chips. Not so fast. Anyone who fancies their chances of meeting the supply crunch will need to shell out US$10 billion just for the machinery needed, and get proficient at the 700 processing steps. Consider the complications of a chip which might have more than 100 layers – each often just an atom in width – where manufacturing, according to Bloomberg, “typically takes more than three months and involves giant factories, dust-free rooms, multi-million-dollar machines, molten tin and lasers”.
Recognising the over reliance on just a few semi-conductor manufacturers in Asia, which produces around 75% of global semi-conductors, plans are in the pipeline to boost production elsewhere including in the US with a ‘Chips Act’ currently journeying through Congress, which aims to invest US$52 billion in subsidies to help develop the domestic chip market. However, that does little to alleviate the short-term chip shortage which has entered a critical stage. According to recent figures from the US Department of Commerce, “The median inventory of semiconductor products highlighted by buyers has fallen from 40 days in 2019 to less than 5 days in 2021.”
Recall issues
Given it will take some time for this global shortage to be addressed, manufacturers are likely to face supply problems at least over the next 12 months which means there could be product recall issues, says Kyle. “If a manufacturer recalls a product because of a problem in its hardware or design say, they might struggle to find the necessary semi-conductors needed to develop and produce a replacement product. There is also a risk of using alternative chip providers – not that there are many to choose from – where a generic chip could lead to a business falling foul of contractual requirements if the subsequent product doesn’t perform as required.”
Similarly, there could be problems for the suppliers of the materials that chip manufacturers need. “There is intense pressure on their manufacturing and quality assurance to get their product specifications right. They also need to be sure that their own suppliers of the materials they need can also step up to the mark and ensure less reliance on single sourcing,” says Kyle.
“There is intense pressure on their manufacturing and quality assurance to get their product specifications right. They also need to be sure that their own suppliers of the materials they need can also step up to the mark and ensure less reliance on single sourcing"
Business continuity focus
Most of all perhaps, the semi-conductor shortage exposes supply chain and business continuity shortcomings for businesses reliant on chips. “Having effective and robust business continuity plans in place are an essential part of managing this global shortage,” says Kyle. “All our Product Recall policies come with access to Control Risks who have a great depth of experience and expertise in how to plan for and respond to crises. They can help businesses with supply chain risk assessments and business continuity preparedness on a holistic level or with more specific issues. The last thing a business wants to be doing in a time of crisis is having to dip into the spot purchasing market; far better to have pre-planned contingencies already in place and agreed with customers.”
