Strengthening the Semiconductor Supply Chain

Current state of the semiconductor industry

The semiconductor industry is the backbone of modern technology, with semiconductors found in everything from smartphones to automobiles. It's experiencing a major shift with the growth of AI and the rise in demand for data centers, which is only made possible (and scalable) by high-powered chips.

This industry—on track to be worth $1 trillion by 2030—is crucial for global economic activity. However, its complexity and interdependencies make it vulnerable to various disruptions.

Understanding the semiconductor supply chain

Key components of the semiconductor value chain

• Chip design and tapeout: The creation of semiconductor blueprints using electronic design automation (EDA) software. The US leads this segment with more than 40% of the global market share.

The tapeout process is pivotal step in the production of integrated circuits (ICs), marking the shift from design to production. This is where the final design data of the IC is shared with a semiconductor foundry for fabrication. It's essential to identify and resolve any design errors beforehand, as post-tapeout changes can be both expensive and time-intensive.

• Manufacturing: After tapeout is completed, design data is shared with the fabrication process to initiate the manufacturing process into a physical IC on a silicon wafer. The fabrication process involves over 500 stages, including wafer fabrication, lithography, etching, and packaging, and spans several months, underscoring the complexity of production.
• Sale: Once manufactured, chips are sold to various industries, forming a critical part of their products.
• Final Products: Semiconductors power diverse applications from consumer electronics to military systems.

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Key players in the semiconductor value chain

The semiconductor industry is a complex ecosystem where different players bring specialized capabilities to bring technology to life. Each category plays a crucial role, and their collaboration ensures the industry’s functionality and innovation. Below is a detailed breakdown of the key players in the semiconductor value chain:

1. Chip designers

Chip designers are responsible for creating the architecture and layout of semiconductors. They define how a chip operates, focusing on innovation, efficiency, and performance. Using electronic design automation (EDA) tools, these experts translate ideas into detailed designs, tailoring chips to unique applications from mobile devices to artificial intelligence.

Examples: NVIDIA, Broadcom, Qualcomm, and AMD

Roles and contributions:

• Innovating new chip designs for emerging technologies like AI and 5G
• Driving the performance of devices through custom-designed semiconductors
• Collaborating with fabless companies and foundries to ensure manufacturability

2. Fabless companies

Fabless companies focus on designing semiconductors but outsource their manufacturing to specialized foundries. By separating design from production, they reduce capital investments and focus on creating cutting-edge designs.

Examples: NVIDIA, Broadcom, Qualcomm, AMD

Roles and contributions:

• Spearhead innovation by creating high-performance and specialized chipsets
• Provide designs for a variety of industries from consumer electronics to automotive applications
• Manage collaboration with foundries for efficient production and scaling

3. Integrated device manufacturers (IDMs)

Integrated device manufacturers handle both the design and manufacturing of semiconductors under one roof. This vertical integration allows for tighter control over the production process, ensuring consistency and security in high-stakes industries.

Examples: Intel, Samsung Semiconductor

Roles and contributions:

• Develop and manufacture chips, ensuring alignment between design and production
• Deliver products to industries like data centers, consumer electronics, and more
• Balance R&D and manufacturing investments to lead technological advancement

4. Foundries

Foundries specialize in manufacturing semiconductors based on client designs. They provide the advanced fabrication technology needed to produce increasingly smaller, more efficient, and powerful chips at scale.

Examples: Taiwan Semiconductor Manufacturing Company (TSMC), GlobalFoundries

Roles and contributions:

• Invest heavily in cutting-edge manufacturing technologies such as 3nm and 2nm processes
• Enable fabless companies to access state-of-the-art manufacturing capabilities
• Drive the global supply chain with large-scale production capacities

5. Equipment and materials suppliers

These companies enable semiconductor manufacturing by providing essential machinery, materials, and tools. Their innovation ensures efficiency and precision in every step of production from wafer preparation to packaging.

Examples: ASML, Applied Materials, Lam Research

Roles and contributions:

• Design advanced lithography machines, like EUV systems, that enable smaller transistors
• Supply materials like silicon wafers and chemicals required for fabrication processes
• Support both foundries and IDMs in maintaining consistent and high-quality production

6. Outsourced semiconductor assembly and test (OSAT)

OSAT providers specialize in packaging and testing semiconductors after they’re manufactured. Their role is critical for ensuring chips are functional and meet quality standards before they move into the market.

Examples: Amkor Technology, ASE Technology Holding

Roles and contributions:

• Conduct final assembly to protect and integrate individual chips into usable components
• Perform rigorous testing to detect and address defects or performance issues
• Enable scalability by handling high volumes of components for end-use deployment

7. End-use customers and OEMs

End-use customers and original equipment manufacturers (OEMs) are the final players in the semiconductor value chain, incorporating the chips into their products. They drive demand in the industry by specifying performance and feature requirements.

Examples: Apple, Samsung Electronics, Tesla

Roles and contributions:

• Integrate semiconductors into finished products such as smartphones, laptops, and EVs
• Define market needs to guide upstream innovation and production
• Push for differentiation through customized chip solutions or exclusive technology partnerships

The interdependence of the semiconductor value chain

The semiconductor value chain functions through the constant interplay between these players. For example, fabless companies depend on foundries like TSMC for production, while foundries rely on equipment providers like ASML for advanced machinery. End-use customers, in turn, influence the entire chain through their requirements for more efficient, powerful, and innovative semiconductor solutions.

This intricate web of relationships fosters collaboration and competition, driving the industry to meet the growing demand for semiconductors in an increasingly high-tech world.

Research and development

R&D is pivotal in the semiconductor industry, driving innovation and ensuring competitive advantage. Companies invest heavily in developing new technologies to meet ever-evolving market demands—Deloitte estimates up to 52% of earnings before interest and taxes). However, this can also lead to challenges in managing R&D processes and costs—and makes component and IP reuse vital to ensure profitability.

To put it in perspective, Moore’s Law predicts that the number of transistors on an integrated circuit will double approximately every two years, while the cost per transistor decreases. For decades, this hypothesis has held true, driving exponential growth in technological capabilities (e.g., AI, which requires significant computational power) and reducing the cost of technology (e.g., the price of computer memory and storage has decreased dramatically over time).

Quality control

Ensuring high-quality products is essential for semiconductor companies to maintain their reputation and meet regulatory requirements. To improve quality, semiconductor companies leverage technologies, like PLM, to manage product complexity, enable real-time data integration and analytics capabilities, and closely monitor production processes. With these tools, potential quality issues can be caught early on, and proactive measures can be taken. This not only ensures customer satisfaction but also reduces the risk of costly product recalls.

Risk management

The semiconductor industry is subject to various risks such as supply chain disruptions, market volatility, and geopolitical issues. Through real-time collaboration, data analysis, and predictive modeling, businesses make informed decisions to reduce risk exposure.

Legacy system obsolescence

Many semiconductor companies struggle with silo systems that add friction to the product development processes. Highly customized, homegrown systems become expensive to maintain and can no longer effectively manage and orchestrate product data in a way that serves the business. The negative impacts can result in disruptions, delays, and higher costs for companies. Leading companies are transforming their operations with a modern PLM strategy.

Manufacturing processes

The manufacturing of semiconductors involves intricate processes, including wafer fabrication and chip assembly. This complexity necessitates precision and advanced equipment.

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 Global semiconductor supply chain landscape

Geographic specialization presents both opportunities and vulnerabilities. Key regions, like Taiwan, Japan, China, and South Korea, dominate various stages of the supply chain. However, while enabling efficiency and expertise, this specialization also creates chokepoints and dependencies that can disrupt the global supply network.

One of the primary vulnerabilities is the concentration of advanced manufacturing capabilities in specific regions, such as Taiwan for semiconductor fabrication. This creates a critical dependency on a single geographic area, making companies highly susceptible to disruptions caused by geopolitical tensions, natural disasters, or local policy changes. For example, political instability or trade restrictions in Taiwan or South Korea could severely impact global supply availability, delaying production timelines and escalating costs.

Additionally, logistic bottlenecks can compound these risks. Supply chain dependencies often involve lengthy transportation routes and complex customs procedures, especially for companies sourcing components from multiple countries with varying regulatory requirements. This logistical complexity increases lead times and the likelihood of delays, further hampering production schedules.

Another critical vulnerability lies in material sourcing and access to rare earth elements, which are heavily concentrated in regions like China. Changes in export policies or global conflicts can lead to sudden material shortages, directly impacting the production of chips and other high-tech components. For companies, these vulnerabilities translate into unpredictability in production, difficulties in meeting customer demands, and challenges in maintaining competitiveness amidst increasing uncertainty.

Top semiconductor supply chain challenges facing the electronics industry

Global semiconductor shortages

Chokepoints in production

The semiconductor supply chain is highly intricate, with components often crossing multiple international borders. This complexity can lead to production bottlenecks.

Dependence on specific regions or countries

Countries like Taiwan and South Korea are pivotal in semiconductor manufacturing. Disruptions in these regions can severely impact global supply.

Geopolitical risks and trade regulations

Trade tensions, particularly between the US and China, have led to export controls and sanctions, affecting the flow of semiconductor technology and materials. Regulatory changes and uncertainty can disrupt the supply chain and increase costs for companies.

Environmental challenges

The electronics industry is facing increasing pressure to reduce its environmental impact. This includes regulations on hazardous materials, as well as sustainability initiatives. Failure to comply with these regulations can result in fines and a damaged reputation.

Impact of the COVID-19 pandemic

The pandemic highlighted vulnerabilities in the semiconductor supply chain, causing labor shortages and halting production in key regions. As a result, electronics companies are now seeking more resilient and flexible supply chain solutions to mitigate future disruptions.

Increasing complexity of the industry

As technology advances, like physical AI, and consumer demands evolve, semiconductors are becoming increasingly complex. This not only poses challenges for production but also requires a more sophisticated supply chain management system. Companies need solutions that can handle diverse product portfolios while maintaining efficiency.

Complexity of a highly specialized supply chain

Cybersecurity risks

The reliance on digital systems increases the risk of cyberattacks, which can disrupt the supply chain. With the growing complexity of electronics and high-tech products, supply chains are becoming more interconnected, creating numerous potential entry points for malicious actors. These attacks can target sensitive intellectual property, compromise production schedules, or even halt operations entirely.

To mitigate these risks, companies must adopt robust cybersecurity strategies, such as implementing end-to-end encryption, multifactor authentication, and continuous network monitoring. Additionally, integrating advanced threat detection systems and partnering with cybersecurity experts can help identify vulnerabilities and ensure supply chain integrity. A secure digital infrastructure is not just an operational necessity—it is a competitive advantage in safeguarding business continuity and fostering trust with partners and customers.

Limited flexibility in supplier networks

Highly specialized supply chains often rely on a narrow network of suppliers that provide unique or niche components. This lack of flexibility can expose companies to significant risks if a key supplier experiences disruptions or fails to meet demand. To address this challenge, businesses must explore strategies, such as supplier diversification, strengthening partnerships, and leveraging advanced forecasting tools, to build more resilient and adaptable supply chains.

Rising demand from emerging technologies

The advent of technologies like AI and IoT has surged demand for advanced semiconductors, straining the supply chain.

This increased demand often outpaces the production capacity of existing facilities, leading to extended lead times and potential shortages. To adapt, companies are investing in expanding manufacturing capabilities and forming strategic alliances to secure long-term supply.

Additionally, the integration of advanced production technologies and greater focus on predictive analytics can help mitigate the risks associated with fluctuating demand. By adopting these measures, businesses can not only meet current market needs but also position themselves for sustainable growth as emerging technologies continue to evolve.

Strategies for building resilience in the supply chain

Enhancing supply chain visibility with PLM

Product lifecycle management (PLM) systems offer real-time data integration, improving supply chain transparency and decision-making. PLM enables seamless connectivity across all stages of the product lifecycle, providing a source of truth for all stakeholders. This integration ensures that teams can access up-to-date information from initial design to production and distribution. Specific capabilities include:

Real-time collaboration across functions:

PLM allows design, engineering, and supply chain teams to collaborate on a unified platform, ensuring synchronized updates and reducing miscommunication.

Supplier integration:

With PLM's supply chain capabilities, businesses can onboard suppliers into the digital thread, enabling them to share accurate design specifications and track progress in real time, reducing errors and improving lead times.

Early risk identification:

By offering comprehensive visibility into product development and sourcing activities, PLM can identify potential bottlenecks or risks early in the process, allowing teams to take proactive measures.

Streamlined change management:

PLM simplifies adaptation to changes like revised regulatory requirements or material substitutions by centralizing and tracking all adjustments, thus minimizing disruptions across the supply chain.

These features empower businesses to enhance operational efficiency, reduce delays, and make more informed decisions—critical steps in building a resilient and agile supply chain.

Leveraging IoT for real-time monitoring

IoT technologies are revolutionizing supply chain management by enabling continuous real-time monitoring of operations. These devices provide instant access to data, allowing companies to identify and respond to disruptions as they occur. By integrating IoT, businesses can improve transparency, reduce downtime, and ensure a smoother flow of goods and services across the supply chain.

Digital twin and simulation for supply chain planning

Digital twins create a virtual replica of the supply chain, enabling companies to simulate different scenarios and outcomes. This technology helps businesses identify vulnerabilities, optimize processes, and improve decision-making. By leveraging digital twins, organizations can minimize risks and develop more resilient supply chain strategies.

AI and machine learning for supply chain optimization

AI and machine learning are powerful tools for analyzing large datasets and uncovering patterns in supply chain operations. These technologies can optimize processes, forecast demand, and reduce inefficiencies, ultimately lowering lead times and costs. By incorporating AI, businesses can make smarter, data-driven decisions to enhance supply chain performance.

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 Future outlook of semiconductor supply chains

Will semiconductor shortages persist?

The semiconductor industry is recovering from the shortages that disrupted global production in recent years. However, factors, such as ongoing geopolitical tensions, including US-China trade restrictions, continue to create supply chain uncertainty. At the same time, the surge in demand for semiconductors in industries like electric vehicles, 5G infrastructure, and consumer electronics is straining existing production capacities. These combined pressures suggest that while improvements are underway, semiconductor shortages may remain a challenge for the foreseeable future.

The impact of sustainable manufacturing

Sustainable manufacturing is shifting from being an option to a necessity as industries face increasing pressure to reduce their environmental footprint. Companies are adopting renewable energy sources, minimizing waste, and investing in technologies like carbon capture to meet stricter regulations and consumer demand for eco-friendly practices. For example, major players in the automotive sector are prioritizing recycled materials in electric vehicle production. By prioritizing sustainability, businesses not only reduce environmental impact but also improve resource efficiency and long-term profitability.

The role of digital transformation in future supply chains

Digital transformation is poised to redefine supply chains, making them more agile and responsive to market dynamics. Technologies such as IoT-enabled sensors, AI-driven demand forecasting, and blockchain for transparent tracking are streamlining operations and improving decision-making. For instance, AI can predict inventory needs more accurately, reducing waste and ensuring timely deliveries. As global markets become more unpredictable, digital tools are essential for building resilient supply chains that can adapt quickly to disruptions.

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