Semiconductors: What Is the Supply Chain? Why Is it Important?

What Are Semiconductors?

Semiconductors are critical components found in modern electronics. They are used in a wide range of products, from smartphones and laptops to automobiles and medical devices. These include the microprocessors, memory modules, and integrated circuits found in these and other devices.

The semiconductor supply chain refers to the network of companies involved in their design, manufacturing, testing, packaging, and distribution. The supply chain is complex, involving the coordination of a number of different stages, from sourcing parts and materials to the sale to the final end user.

One of the primary reasons why there has been a recent shortage of semiconductors has been snags in the supply chain caused by the COVID-19 pandemic, which disrupted production and shipping around the world. Lockdowns and other restrictions forced many workers to stay at home and semiconductor manufacturers to reduce their capacity or temporarily shut down production lines, while staffing shortages, quarantines, and port closures caused shipping delays that have slowed the distribution of chips.

The Importance of Semiconductors 

Semiconductors, also known as “semis,” or chips, are ubiquitous in modern technology and are used in a wide range of products such as computers, smartphones, cars, household appliances, gaming systems, and medical equipment. As a result, semiconductors are incredibly important for today’s economy, as they drive innovation and productivity in many industries.

The technical definition of a semiconductor is a material (usually composed of silicon), which conducts electricity more than an insulator, such as glass, but less than a pure conductor, such as copper or aluminum. Their conductivity and other properties can be altered with the introduction of specific impurities, called doping, to meet the particular needs of the electronic component in which it resides.

The global semiconductor industry is a large and growing market, generating revenues of $574.1 billion in 2022. The industry is also a major employer, with hundreds of thousands of people working in the design, manufacturing, and distribution of semiconductors worldwide. Given their importance to the economy, semiconductors have become a key strategic industry sector for many countries, with governments and companies alike investing heavily in research and development to maintain competitiveness and innovate.

Overview of the Semiconductors Supply Chain

The semiconductor supply chain involves a complex network of companies, organizations, and individuals involved in the design, manufacturing, testing, packaging, and distribution of semiconductors. The semiconductor supply chain typically involves several stages, which will often include:

1. Design and development: Semiconductor companies, also referred to as “fabless” companies, design and develop new chips, either in house or through collaborations with other companies. They are called fabless because they do not themselves fabricate the chips that they design and market.
2. Fabrication: The actual manufacturing of the semiconductor chips is done by specialized factories called foundries. The foundries receive chip designs from the fabless companies, and they use custom equipment to create and etch chips onto a silicon wafer.
3. Testing and assembly: After the chips are manufactured, they need to be tested to ensure that they are functioning properly. This is typically carried out by separate companies that specialize in testing and assembly. Once the chips have passed the requisite tests, they are assembled into products that can be used in electronics and other devices.
4. Distribution: The packaged chips are then distributed to the companies that will either sell them to end users or incorporate them into their products, either directly or through distributors.

In addition to these main stages, the semiconductor supply chain may also include intellectual property (IP) licensing, and disposal and recycling.

All of these stages require logistics and supply chain management, which also includes inventory management, order fulfillment, and transportation logistics. Efficient logistics and supply chain management are critical to ensure that the chips are delivered to the end users on time and in good condition.

Semiconductor Supply Chain Vulnerabilities

The semiconductor supply chain has become increasingly complex over the past several decades. This complexity has also made the supply chain vulnerable to disruptions, as issues or bottlenecks at one stage of the chain can have ripple effects through the entire system. These can include natural disasters; for example, in 2011, a major earthquake and tsunami in Japan disrupted the global supply chain for semiconductors, leading to shortages and sharp price increases.

One of the most significant disruptions to the semiconductor supply chain in recent years was the COVID-19 pandemic that struck in early 2020, which caused widespread lockdowns and disruptions to global shipping and logistics. Lockdowns caused worker shortages, and companies at all stages were forced to reduce capacity or temporarily shut down. This led to shortages of chips in many industries. Car manufacturers were particularly hurt by these disruptions, which had the knock-on effect of creating a shortage of new cars, which drove up the prices of used cars to record levels.

Another factor contributing to the vulnerability of the semiconductor supply chain is the concentration of manufacturing in a few key regions, particularly in Asia. This concentration has made the supply chain susceptible to geopolitical tensions and trade disputes, which can disrupt the flow of materials and components. For example, the United States has recently placed trade restrictions on Chinese semiconductor companies to prevent them from stealing the designs of the West’s most advanced chips, which have extensive military and advanced artificial intelligence applications.

In addition to these external factors, the semiconductor supply chain has also experienced shortages due to internal factors, such as manufacturing capacity constraints and changes in demand, as the industry is characterized by long lead times and high capital investments. When demand exceeds supply, it can take months or even years for semiconductor manufacturers to build new foundries and ramp up production to meet the increased demand.

Dealing with Semiconductor Supply Disruptions 

To better deal with supply chain disruptions, several steps can be undertaken, but they are neither particularly easy to implement nor inexpensive. For instance, increasing production capacity and diversifying the available suppliers to reduce reliance on any one company or region requires careful planning and coordination—along with billions of dollars of investment. Likewise, companies could invest more heavily in research and development (R&D) to develop new technologies and processes to make chips quicker and more efficiently, but this would also take a great deal of time and money.

Because of this, governments can help defray some of those costs by offering incentives and tax breaks, and can help coordinate the establishment of new domestic production facilities. Since 2021, the Biden administration has hosted semiconductor industry gatherings to spur collaboration and has created the Supply Chain Disruptions Task Force to mitigate semiconductor supply chain disruptions.

These efforts seem to be working. Intel broke ground in 2021 on two new foundries in Chandler, Ariz.—a $20 billion investment—along with an advanced packaging facility in New Mexico. Micron, another large chip maker, has also invested $15 billion to add memory chip fabrication facilities to its headquarters in Boise, Idaho. GlobalFoundries, Samsung Foundry, Texas Instruments, and Taiwan Semiconductor are all building new fabs in the U.S. due to these efforts.

In addition to these efforts, consulting firm Deloitte warns that by the year 2030, more than one million additional skilled workers will be needed to meet demand in the semiconductor industry. To preempt a supply chain disruption caused by a talent shortfall, they advocate building new talent pools in new locations and leveraging educational and community partnerships as never before.

The Bottom Line

Semiconductors are critical components used in modern electronics, and the semiconductor supply chain involves a complex network of companies involved in their design, manufacturing, testing, packaging, and distribution. The supply chain is vulnerable to disruptions caused by internal factors such as manufacturing capacity constraints and external factors such as natural disasters, international trade disputes, and pandemics.

In response to recent disruptions, governments and companies are taking steps to increase supply chain resilience through diversification of suppliers, improving supply chain visibility and coordination, and investing in new technologies and processes.