The outbreak of the COVID-19 pandemic has demonstrated that turning one specific country or region into the ‘factory of the world’ was bad planning. In the semiconductor segment alone, which is overly dependent on the Far East, disrupted supply chains have paralysed electronics manufacturing across the globe. It is time for the sector to think differently, post COVID-19.
By Rituparna Mandal
As the COVID-19 pandemic forced the world’s workforce to shift from offices to homes, companies both small and big talked about how digitisation has leapfrogged within a short span of time. Microsoft CEO Satya Nadella said in April that the company saw two years’ worth of digital transformation in just two months! Such has been the unimaginable and disruptive impact of the pandemic that distinct eras seem to have emerged—pre- and post-COVID 19. The rules of business and engagement are changing fast even as people adjust to working remotely, in isolation, and become overly dependent on their smart devices to stay connected—to work, entertain or to play. And companies across industries are accelerating their efforts to become more digital, save costs and grow in these very challenging times.
A key to all this digital adoption is the semiconductor. At the heart of all computing and smart devices — smartphones, washing machines, computers, connected cars and smart TVs, to name a few – are semiconductors, and this sector is set to capitalise on the increasingly digitised and connected world. Yet the virus has also exposed the chinks in the armour of semiconductor supply chains. Much of the world’s chip production is concentrated in a few pockets in Asia, notably China. In a KPMG and Global Semiconductor Alliance survey (‘The impact of COVID-19 on the semiconductor industry’), 63 per cent of the respondents reported some degree of supply chain related shortages as a result of COVID-19.
According to a McKinsey report, in the short to medium term, the semiconductor market is expected to show a decline from 2019. The consulting major estimates the decline will be anywhere between 5 and 20 per cent in 2020. However, the impact will vary across segments. While automotive will see a steep decline as users stay and work at home, the decline in consumer electronics will be just moderate, even as purchases are limited to new users rather than upgrades. On the other hand, demand for data centres and automated systems will soar. Of course, 5G infrastructure, Industry 4.0 and AI will also create more demand for semiconductors, which is all the more reason to re-look at semiconductor supply chains.
Companies have traditionally concentrated their operations at particular geographic locations to leverage economies of scale, favourable business conditions, tax incentives and so on. For semiconductors, this translated to a concentration of manufacturing in China. While the benefits of this move have been clearly visible in the past, the unprecedented pandemic has exposed the risks associated with such a strategy.
According to a Deloitte report (‘COVID-19: A Black Swan Event for the Semiconductor Industry’), in 2019, China accounted for over half of the worldwide semiconductor consumption. The dependence on China is hitting global supply chains as COVID-19 has impacted both people and companies. Travel is restricted and factories can’t resume full operations because of the still raging pandemic, exposing the high risks of depending on a single location for such a critical product like semiconductors.
The focus should be on making supply chain networks agile, reducing production cycles and accelerating time to market. This will ensure that such an unpredictable situation like a pandemic does not disrupt global businesses in the future.
One of the largest chip makers in the world, Taiwan Semiconductor Manufacturing Corporation (TSMC) recently announced setting up a US$ 12 billion semiconductor plant in Arizona, USA. Countries like India and Vietnam also provide attractive alternatives.
In recent years, India has built capabilities in smartphone assembly and is also the world’s second largest market for handsets. Apple maker, Foxconn, has several factories in India. Consumer durables giant Haier is expanding manufacturing in India, and South Korean giant Samsung has opened a large handset making unit in India recently. This, along with growing local consumption, creates a fertile ground to attract chip makers.
The Ministry of Electronics and IT (MeitY) recently announced the Production-Linked Incentive Scheme (PLI), the Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) and the Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme, which augur well for expanding the electronics and semiconductor manufacturing ecosystem in India.
The future for semiconductor manufacturing is to create agile, flexible supply networks which remove the single point of failure. The long-term strategy should be to think differently—instead of a country-specific strategy for making semiconductors, it should be regional (covering a few countries) to cushion future shocks to supply chains. When consumer markets are so widely spread out, why put all eggs in one basket? The pandemic is teaching us some hard lessons, so it’s best to learn quickly and adapt for a more safe, secure world.
The author is a general manager at Mediatek.
