Semiconductor Industry Requires 2023 Retooling

The combined market cap of the top 10 global chip companies is down 34% from $2.9 trillion in November 2021 to $1.9 trillion in November 2022 thanks to a confluence of global economic issues — rising interest rates, high inflation, lower consumer confidence and tech-led stock market retreats.

Deloitte’s 2023 semiconductor industry outlook report also finds the ongoing war in Ukraine has also contributed to economic uncertainty. This is due to disruptions to supply chains, access to important raw materials and energy prices worldwide, and especially in Europe.

The U.S. government’s steps in October 2022 to tighten the rules around the export of advanced semiconductor technologies to China will likely shape the entire industry for 2023, the report said.

In response, many chip companies are cutting costs, reducing employee headcount and pushing out — but not canceling — capital expenditures for additional capacity. Capex spending will still be higher in 2023 than it was in 2020, Deloitte stressed, but it will be lower than previous expectations for the year.

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Considerations for the semiconductor industry

It’s not all doom and gloom. Deloitte anticipates 2023 “could act as the pause that refreshes and allows the semi industry to consider” issues including:

• Bringing manufacturing closer to home with both entirely new fabs and the expansion of existing facilities with extensive use of “friendshoring,” as the industry and governments recognize that no country or region can truly be self-sufficient.
• Managing the diversification risks and challenges that come with localization and friendshoring.
• Digitally transforming and digitizing many parts of the process: Financial planning and operations, order management and the supply chain.

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Onshoring, reshoring, nearshoring and friendshoring

The goal for chipmakers in the U.S. and Europe is to make their domestic industrial capacity more self-sufficient, the Deloitte report said. This is a tall order; there are a variety of different chips manufactured for many different end markets. Each type of chip may require different wafer sizes, process technologies, materials, facilities, equipment, design tools and radiation tolerance, the report observed.

Manufacturing processes are also diverse and require a vast array of fabrication, testing and assembly equipment. Sometimes, there is only a single manufacturer or source for a critical part. This can increase risks because any given plant or cluster can be shut down by drought, earthquake, fire, flood, military conflict, pandemic, power shortage or typhoon.

“Deciding what mix of onshoring, nearshoring and friendshoring … may be best for each manufacturer or country/region will make 2023 an interesting year,’’ the report said. “These decisions could resonate for years to come: New or expanded facilities started in 2023 will likely still be in operation in 2030 and beyond, and so will their supply chain linkages.”

Interestingly, buyers of chips are beginning to express preferences for where chips are made — not just what they do and how much they cost, the report noted.

The U.S. and European chip industries are looking to diversify not only fabrication but all parts of the semiconductor supply chain, including assembly and testing. Both nations would move chipmaking out of the traditional strongholds in the Asia/Pacific region into North America and into both EU and non-EU countries.

“The United States and Europe have set ambitious targets to grow their domestic chip manufacturing capacity: The United States intends to grow its domestic capacity share from 11% in 2020 to 30% in 2030, and Europe is aiming to expand its share from 9% to 20% over the same period,’’ the report said. “Over the same time span, the global chip industry is expected to roughly double in size.”

Digital transformation and data-driven supply chain networks

With the global semiconductor industry expected to grow to $1 trillion in revenues by 2030, this growth is expected to require investments in high-end advanced wafer manufacturing materials, equipment and services, according to the report.

“This is where integrated data platforms, next-generation ERP, planning, and supplier collaboration systems along with artificial intelligence and cognitive technologies are expected to make OSAT processes more efficient and help sense and preemptively plan for future supply chain shocks,’’ the report said.

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But more technology is needed: Data analytics platforms, which are integrated into ERP, planning and procurement systems can help semiconductor companies predict unexpected events that could disrupt the supply chain, such as unexpected weather events, transport bottlenecks, logistics challenges that require re-routing shipments and labor-related issues, the report said.

“Sharing real-time data and intelligence across the ecosystem … is likely essential to build a digitally connected supply chain,’’ the report said. “A connected network of supply chain partners can help allow chip companies to address multiple issues across their sales and partner organizations and proactively manage their logistics and warehouse planning. This can improve working capital management and delivery estimates and even contain operating costs.”

Actions semiconductor companies should take

Deloitte advises adopting industry 4.0 solutions such as digital twins in smart factory operations. This will enable chip manufacturers and foundries to produce electronics parts and components on demand and ship to customers in an agile way.

“This could mitigate disruptions due to supply chain vulnerabilities such as sourcing delays or component shortages,” the report said.

To realize maximum benefit from advanced analytics, AI tech and data-driven solutions, data quality matters, the report stressed. Industry leaders and executives will make crucial decisions on the supply chain and adjustments based on data-based insights and outputs, and data is the building block in those analytics and AI processes.

“In 2023, semiconductor companies need to modernize their ERP systems and integrate diverse data sources such as customer data, manufacturing data, financial and operational data,” Deloitte said.