By Rob Moore, Sales Director at Electronics Manufacturing Solutions

Thanks to the rapid development of AI, 5G and electric vehicles, demand for semiconductor microchips continues to rise despite virtually non-existent supply. Currently, the average lead time for the production of chips is only getting longer, and just two manufacturers in the world can make the products required at scale.

A GLOBAL ISSUE

As it stands, lead times for semiconductors, or ‘chips’, are roughly one year out from where they should be, with lead times sitting at between 16 to 50 weeks. Chips form the base of all electronics — from medical devices and networking equipment to large machinery and even cars.

While the shortage initially began due to unmatched supply and demand, the issue was exacerbated by COVID-19 when demand skyrocketed for electronic devices such as PCs and gaming consoles, coupled with the quadrupling of silicon metal prices.

We’re also facing a shortage of raw materials required to make PCBs, such as copper-clad laminate and copper foil — both of which are in incredibly high demand.

However, the engineering, energy and construction industries have felt the heat the most. Despite the increased demand for new vehicles of all shapes and sizes, the lack of chips means manufacturers are struggling to keep up.

The increasing lead times apply to both onshore and offshore manufacturing. With a substantial proportion of electronics manufactured in China, the Chinese economy is still recovering from the damage of COVID-19. In the Far East, demand massively outpaces capacity — meaning more builds are being pushed into Europe and the UK.

This unprecedented demand is no longer the only cause for concern as power shortages in China and droughts in Taiwan slow production even further. 

The chip shortage has caused mass disruption to car production in the automotive sector, with notable industry players such as Ford, Volkswagen and Toyota all reporting they’ve had to scale back output. Other manufacturers have already advised that it’s likely they’ll fall short of their 2021 targets. Many assembly lines that were shut over the pandemic were unprepared for the strong demand for new cars in the final quarter of 2020.

The outbreak of COVID-19 caused rifts and set back production in nearly every industry. However, unrelated supply-chain disruptions in 2020 meant that the shortage was inevitable, and the pandemic was merely a catalyst. Transportation has also contributed to the deficit. With added constraints on travel, shipping freights are running at a reduced rate, and the airfreight system is experiencing exceptional demand due to global shipments of the COVID-19 vaccine.

The surge in demand for consumer electronics has been the primary driver behind the shortage. Electronics manufacturers have been working at full capacity to produce sufficient chips for PCs, servers and other consumer electronics to meet the staggering demand. Now that demand for new cars is on the rise again, the facilities are simply unable to cope.

What’s more, new cars are increasingly resembling electronic devices as carmakers prioritise electric vehicles. As such, the automotive industry is facing the demand of all other sectors.

So, what issues need to be addressed to ensure the industry isn’t faced with this kind of dilemma again?

A SERIES OF SETBACKS IN SOUTHEAST ASIA

Factories across China have been forced to shut down in the wake of a lack of power due to tight coal supplies and clamping down on emissions. After only 10 of 30 mainland regions in China achieved their climate goals in the first half of 2021, authorities have stepped in and mandated a severe reduction in emissions. The power restrictions have disrupted dozens of Chinese and Taiwan-listed companies, many of which have had to stop work to comply with the power limits. In fact, up to 44% of China’s industrial activity has been affected, contributing to even further extended lead times.

But it’s no surprise that all industries are feeling the impact, with particular concerns raised over the possible shortage of goods over Christmas, such as smartphones and laptops.

Taiwan — home to the world’s largest chipmakers — is also still in recovery mode after an uphill battle with mass COVID-19 outbreaks in May 2021 while experiencing its worst drought in 50 years. However, the Japanese Government is considering funding the construction of a new microchip factory to cope with the unabating shortage.

THE ROOT OF THE PROBLEM

The severe lead times can be attributed partly to the manufacturing sector’s lack of diversity. The world lacks major manufacturing centres for components. The larger facilities are inundated with demand, that of which smaller centres would be unable to meet. As a result, companies relying on a centralised manufacturing base can’t procure the components they need in the event of world-scale supply chain disruptions.

Additionally, electronic products have shorter lifecycles than ever before. Rapid advances in technology and regular shifts in consumer behaviour mean manufacturers are hesitant to invest in longer-lasting products.

Today’s global supply chain is a double-edged sword for electronics manufacturers. On the one hand, it’s easier than ever to find cost-effective components from emerging suppliers. On the other hand, maintaining a complex web of suppliers puts manufacturers at greater risk of experiencing shipping delays and tariff challenges—forcing them to scramble to find essential components to avoid production delays.

The UK electronics manufacturing industry is facing an unprecedented situation. While the supply chain stabilises, forward orders will be critical for securing sufficient product for the rest of 2021 and into 2022.