The supply-chain and raw materials crisis in technology sector

Raw material crisis | Meteca

Welcome back to Meteca’s blog. To support us today is an article published in the Ticino Management magazine in September 2021.

In this week’s blog post we talk about the raw materials crisis, which have become very expensive and often unavailable in recent months.

There are many reasons, but the main one is the pandemic. During the first months of the health emergency, the prices of raw materials fell by 20-30%. China was able to take advantage of the situation to stockpile both, thanks to its planned economy and because it had the advantage of “restarting” several months earlier than other countries.

In a short time, however, prices started to increase uncontrollably. One of the reasons is the simultaneous restart of the economy of all countries, which found themselves with empty warehouses due to the “just in time” organization that is very common around the western world. Of course, the warehouses have to be filled from scratch. At the same time, raw materials have become an excellent investment because they are priced in dollars, a weak currency at the moment: they are therefore convenient for those who buy in euros or other currencies. To all this we must add the enormous increase in shipping and logistics costs that hit supply-chain.

These difficulties have also dramatically involved the semiconductor industry, bringing attention to the extreme dependence on technology that involves all advanced countries and that only China had been able to guess in advance.

Even today, during the era of digitalization, the most ancient of constraints emerges in any phase of technology production: the key dependence of technology on raw materials.  Health emergency certainly fastened this process, but it would most likely only have been a matter of time.

In the electronics sector, those which were already serious problems in the past are now transformed into absolute emergencies. First of all, the lack of fundamental components of every electronic device: semiconductors, that is the materials necessary for the creation of the basic elements of all microchips. Semiconductors are keys to the world of electronics and all its strategic development areas: AI, cloud, IoT, electric vehicles, etc. Since 2001, this market has grown at an annual rate of 6% and is already worth over $ 450 billion globally. Only after the pandemic were the strategic importance and the numerous criticalities of the supply chain truly re-evaluated, which proved to be much less secure than previously thought.

The further acceleration of the “race to the last model”, typical of customers in advanced societies, has long been testing the production chains of many sectors (especially the technological ones) that have in any case been able to absorb numerous temporary crises such as environmental disasters or scarcity of raw materials, but which are showing all their limits in an exceptional situation over time, which has greatly eroded even the potential of the best companies.

Demand for semiconductors is increasing exponentially, the numerous difficulties are instead contracting the supply. At the beginning of the crisis there is an evident imbalance between supply and demand, a fact that should not be surprising.

The semiconductor sector is always in a state of under/over  supply: the increase in demand is usually linear, while supply is not. Developing a state-of-the-art Fab manufacturing site, in addition to taking several years, can cost as much as $ 10 billion, making them particularly rare. It is enough to say that the world’s largest chip maker, Taiwanese Tsmc, with a market share of over 30%, currently has only 12 active Fabs.

There are many reasons behind these difficulties: the main one is, once again, the health emergency – declined in several versions, all relevant. The impossibility to work in presence and the numerous restrictions, generalized lockdowns imposed by governments have caused a significant drop in productivity in many industries, including semiconductors. Such restrictions have also led to an explosion in demand for new and more powerful electronic devices that allow smart working or, in the case of younger people, new game consoles. Translated: an even higher consumption of chips and microchips.

The balance of the system was also affected by further problems: logistics, the lack of containers in Asia as a result of systemic dysfunctions of normal transport flows, accidents involving specific carriers (for example in the Suez Canal). Or the severe drought that is affecting Asia and which is limiting the processing capacity of silicon, as well as the announcement by many car manufacturers of new electric models – which require double to triple the electronic components compared to combustion engines.

The growing scarcity of these elements is pushing large automotive companies (those with significant bargaining power) to increase inventories to continue with production for as long as possible. This is leading to worsening the crisis for most operators, in an increasing number of sectors and markets. It follows the extreme concentration of the semiconductor industry, in the face of all its peculiarities, exposes it to a series of price-independent risks (especially in the short term).

Nevertheless there is also positive news: Europe will present a semiconductor law to prepare to be more independent and the common purpose of the United States and Europe is to ease the dependence on Asian markets and return to producing chips in their own territories.

Thus, while the American administration and the large US companies are working to find alternative solutions, the European institutions are also moving to identify a way forward. It is not a simple and reachable goal (not even for United States, which can count on many more resources than Europe and is investing tens of billions) -but even if it will take several years, perhaps decades it is the right choice to make.

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