1 .Unprecedented Global Semiconductor Shortages
As highlighted in the previous chapter, semiconductor supply chains are highly interconnected with many actors across the globe and numerous choke points which can impact production. Over the past 2 years, Europe and other regions of the world have witnessed disruptions in the supply of chips, causing shortages across multiple economic sectors with potentially serious societal and economic consequences.
In a nutshell, the disruptions resulted from multiple factors, including the acceleration of digital transformation in industry leading to an increased demand in a large number of semiconductor components and devices; heightened demand for computers, electronics and technology products as lockdowns related to the COVID-19 pandemic led to a surge in remote working, home schooling and digital entertainment; COVID-19-related closures of key fabs; dislocations in global logistics and transportation networks coupled with shortages of raw materials, key components and intermediary products.
The shortage of chips has impacted downstream sectors such as automotive, energy, communications and health, as well as defence, security and space, forcing delays in production and factory closures
across the world. The impact was severe and in the automotive sector, for instance, production in some European Member States decreased by one third in 202123.
2 Why has the supply chain become so fragile?
Since the turn of the century, the semiconductor industry has responded to market difficulties through consolidation and outsourcing to the Far East, particularly concerning production, and assembly and testing. While this appears to have led to better utilisation of existing capacity, however it has reduced available spare capacity. Thus, given the high capital expenditure and time required to set up new manufacturing facilities, there appears to be limited possibility to increase production if demand goes up considerably as it did from early 2020.
At the same time, the drive towards zero inventory approaches by some end user industries has led to a situation where in case of a sudden increase in demand for chips, there is very limited available inventory buffer to source from, until production can catch up. The result of this is a high susceptibility across the supply chain to surges in demand. A key problem is that once demand exceeds supply it takes at least 2-3 years to recover as there is a need for significant investment to increase capacity and inventory with a resulting long lead time for components.
In recent years, geopolitical tensions have been simmering. China depends on US-origin technology and imports of chips from Taiwan. With the “Made in China 2025” plan launched in 2015, China set itself the ambition of reaching 70% autonomy in chip-making by 2025 and to this end earmarked USD 150 billion to build up semiconductor design and manufacturing capacity. The creation of this fund has been linked to the growth in pace of cross-border acquisitions in the sector since 2015.
The U.S. government has responded to this “concerted push by China to reshape the market in its favour”25. In 2019, the US Department of Commerce broadened the application of its Export Administration Rules (EAR) to curb the technological advance of certain Chinese companies by cutting them off from critical US-origin technology. Because of Europe’s strong dependence on US-origin technology for chip design however, these measures have impacted European chipmakers trading with China.
The shortages over the past two years have exposed structural vulnerabilities in highly interdependent and global value chains already weakened by lean production strategies and geopolitical frictions pre-
dating the pandemic. They have furthermore served to highlight Europe’s dependency on supply from a limited number of companies and geographies.
3. Impact of shortages
The impact of these shortages of components has been dramatic with implications in a number of critical areas such as supply of medical devices, devices for broadband communications and components for the automotive sector, just to mention a few. This includes shortages of microcontrollers (40, 90, 150,180, and 250 nm nodes), analogue chips (40, 130, 160, 180, and 800 nm nodes) and optoelectronic chips (65, 110, and 180 nm nodes).
Goldman Sachs estimates that around 169 industry sectors globally have been impacted. Within Europe, the
automotive sector is a significant market (accounting for 37% of the semiconductor demand) as well as industrial manufacturing (accounting for 25% of semiconductor demand).
Other important European semiconductor end-use sectors include communications (15%) and consumer electronics (7%)28. The shortages have led to European companies struggling to source chips for cars and medical devices such as ultrasound equipment, pacemakers, ventilators, etc.
The production of medical equipment has suffered chip supply disruptions resulting in a volume decrease for some medical systems of more than 70%.
A survey conducted by the European Commission has shown that the vast majority of responding businesses reported being either directly or indirectly adversely affected by the current shortage in chips.
