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Is Your High-Tech Manufacturing Operation Prepared to Weather the Next Wave of Disruptions?
The Global Semiconductor Supply Chain Dilemma
$2.7 trillion
Semiconductors contribute
“Analysis for CHIPS Act and BA Briefing,” U.S. Department of Commerce, 2022
$240 billion
Experts estimate that in 2021 global semiconductor shortages cost the U.S. GDP
$574 billion
Global semiconductor sales reached a record high in 2022 of
to the global GDP, both directly and indirectly
“Recent Developments in Global Semiconductor Industry,” U.S. International Trade Commission, 2023
4th most-traded product
Semiconductors are the world’s
“Strengthening the Global Semiconductor Value Chain,” SIA, 2021
$1 trillion
Experts project the semiconductor market will nearly double by 2030 to surpass
Any disruption in the complex, interdependent network of the global semiconductor technology supply chain can leave high-tech manufacturers vulnerable. Manufacturers prepared for interruptions may be better positioned for success.
Introduction
The Wider World
+
1https://www.semiconductors.org/wp-content/uploads/2022/11/SIA_State-of-Industry-Report_Nov-2022.pdf 2https://www.usitc.gov/publications/332/executivebriefings/ebot_disruptions_to_global_supply_chains_due_to_the_war_in_ukraine.pdf
$50.2 billion
Countries outside of the major players account for nearly 25% of total global semiconductor consumption.1
Canada Plans to invest heavily in design, manufacturing and critical materials production.1 India Recently passed a $10B semiconductor investment package.1 Mexico Is drafting incentive packages focused on assembly, testing and packaging operations.1 Russia and Ukraine Control large reserves of silicon, cobalt, palladium, specialized gases and other chipmaking materials.2 Thailand Is considering tax incentives to attract chipmaking material and equipment suppliers.1 Vietnam Plans to offer 0% corporate income tax for chipmaking enterprises.1
Many countries contribute to the semiconductor technology value chain in diverse, unique ways. Among those already playing their part or planning to advance their role in the chipmaking industry are:
X
The European Union
1https://www.semiconductors.org/wp-content/uploads/2022/11/SIA_State-of-Industry-Report_Nov-2022.pdf 2https://www.wto.org/english/res_e/booksp_e/07_gvc23_ch4_dev_report_e.pdf 3https://www.mfat.govt.nz/en/trade/mfat-market-reports/the-netherlands-semiconductor-industry-june-2023/
of the global market share for semiconductors is largely produced by the Netherlands-based company ASML3
9%
investment via the EU Chip Act to make the EU’s semiconductor industry more competitive and self-sufficient was approved in 20232
$47B
only to the United States in electronic design automation (EDA) and core IP contributions1
2nd
largest manufacturer of the 50+ types of specialized equipment used to make semiconductors1
3rd
While the EU adds only 10% to the value chain, its contributions in research, design, equipment manufacturing and material production are indispensable to the chipmaking industry.1
East Asia: Japan, South Korea, Malaysia and Singapore
1https://www.semiconductors.org/wp-content/uploads/2022/11/SIA_State-of-Industry-Report_Nov-2022.pdf 2https://crsreports.congress.gov/product/pdf/R/R47558 3https://www.semiconductors.org/wp-content/uploads/2021/03/SIA-BCG_Global-Value-Chain_2-pager.pdf
of the global market share of semiconductor manufacturing equipment was held by Japan in 20212
35%
of the semiconductor industry’s global market share was held by Japan and South Korea in 20211
28%
of global semiconductor manufacturing capacity is concentrated in Asia, including Japan, South Korea and China3
75%
Other East Asian countries contribute a significant portion to the semiconductor industry, particularly through competitive companies housed within their borders.1,2
East Asia: Taiwan
1https://www.semiconductors.org/wp-content/uploads/2022/11/SIA_State-of-Industry-Report_Nov-2022.pdf 2https://www.csis.org/blogs/perspectives-innovation/taiwans-semiconductor-dominance-implications-cross-strait-relations 3https://www.semiconductors.org/wp-content/uploads/2021/03/SIA-BCG_Global-Value-Chain_2-pager.pdf
of the world’s smallest, most advanced chips are produced in Taiwan3
92%
of the global semiconductor market share was singularly controlled by Taiwanese company TSMC in 20202
54%
Taiwan is particularly dominant in advanced chip manufacturing and plays a vital role in the production of semiconductor chips.1
East Asia: China
1https://sciencepolicyreview.org/wp-content/uploads/securepdfs/2023/08/ MITSPR-v4-191618004005.pdf 2https://www.semiconductors.org/wp-content/uploads/2022/11/SIA_State-of-Industry-Report_Nov-2022.pdf https://sciencepolicyreview.org/wp-content/uploads/securepdfs/2023/08/ MITSPR-v4-191618004005.pdf 3https://www.semiconductors.org/study-finds-federal-incentives-for-domestic-semiconductor-manufacturing-would-strengthen- americas-chip-production-economy-national-security-supply-chains/
Year by which experts believe China will take over as the world’s largest producer of semiconductors3
2030
of global semiconductor packaging, assembly and testing operations are concentrated in China2
38%
of critical minerals used in semiconductor manufacturing are refined in China1
58%
In addition to significant contributions to material and silicon wafer production, Chinese manufacturers lead the world’s semiconductor assembly and testing market.1
United States
1https://www.semiconductors.org/wp-content/uploads/2022/11/SIA_State-of-Industry-Report_Nov-2022.pdf 2https://www.whitehouse.gov/briefing-room/statements-releases/2022/ 08/09/fact-sheet-chips-and-science-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/
of the world’s semiconductor design engineers are based in the U.S.1
>50%
U.S. semiconductor industry share of global electronic design automation (EDA) and core intellectual property (IP) activities1
72%
Total R&D investment made by the U.S. semiconductor industry in 2021, with the CHIPS and Science Act of 2022 providing additional federal funding1,2
Semiconductors remain one of America’s top exports, with U.S.-based companies holding the global market share for the industry’s research and design activities.1
Geographic specialization dominates the chipmaking and high-tech manufacturing markets. Extraordinary collaboration between key players is required to ensure that semiconductor technology keeps pace with demand.
Key Players in the Global Semiconductor Technology Value Chain
Thailand Is considering tax incentives to attract chipmaking material and equipment suppliers.1 Vietnam Plans to offer 0% corporate income tax for chipmaking enterprises.1
Canada Plans to invest heavily in design, manufacturing and critical materials production.1 India Recently passed a $10B semiconductor investment package.1 Mexico Is drafting incentive packages focused on assembly, testing and packaging operations.1 Russia and Ukraine Control large reserves of silicon, cobalt, palladium, specialized gases and other chipmaking materials.2
1 https://www.semiconductors.org/wp-content/uploads/2022/11/SIA_State-of-Industry-Report_Nov-2022.pdf 2https://www.wto.org/english/res_e/booksp_e/07_gvc23_ch4_dev_report_e.pdf 3 https://www.mfat.govt.nz/en/trade/mfat-market-reports/the-netherlands-semiconductor-industry-june-2023/
1 https://www.semiconductors.org/wp-content/uploads/2022/11/SIA_State-of-Industry-Report_Nov-2022.pdf 2 https://crsreports.congress.gov/product/pdf/R/R47558 3 https://www.semiconductors.org/wp-content/uploads/2021/03/SIA-BCG_Global-Value-Chain_2-pager.pdf
1 https://www.semiconductors.org/wp-content/uploads/2022/11/SIA_State-of-Industry-Report_Nov-2022.pdf 2 https://www.csis.org/blogs/perspectives-innovation/taiwans-semiconductor-dominance-implications-cross-strait-relations 3https://www.semiconductors.org/wp-content/uploads/2021/03/SIA-BCG_Global-Value-Chain_2-pager.pdf
1 https://sciencepolicyreview.org/wp-content/uploads/securepdfs/2023/08/MITSPR-v4-191618004005.pdf 2 https://www.semiconductors.org/wp-content/uploads/2022/11/SIA_State-of-Industry-Report_Nov-2022.pdf https://sciencepolicyreview.org/wp-content/uploads/securepdfs/2023/08/MITSPR-v4-191618004005.pdf 3 https://www.semiconductors.org/study-finds-federal-incentives-for-domestic-semiconductor-manufacturing-would-strengthen- americas-chip-production-economy-national-security-supply-chains/
1https://www.semiconductors.org/wp-content/uploads/2022/11/SIA_State-of-Industry-Report_Nov-2022.pdf 2https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-and-science-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/
Of the more than 50 highly specialized touchpoints in the semiconductor technology supply chain, there are at least 15 for which a single geographical region controls 65% or more of the global market share.1 No single country is fully self-sufficient – so even the slightest disruption affecting just one of these operations could cause worldwide chipmaking activities to come to a screeching halt.
VULNERABILITIES THAT COULD CAUSE DISRUPTIONS iN FUTURE CHIP SUPPLIES
World Tensions and Nationalism
Climate-induced Extreme Weather
Skilled Labor Shortages
¹https://www.travelers.com/resources/business-industries/technology/semiconductor-technology-risks
“Imagine a scenario where Taiwan’s chip supply and resources become unavailable. Given its significant stake of over 50% of the global market share, this situation could have ripple effects across diverse industries with global exposures.”
Countries in conflict can disrupt the availability and flow of specialized supplies and services between borders. Political power plays could result in trade restrictions that limit critical commodities and capabilities from being exported to or imported from certain countries. Nations expanding onshore capabilities may prioritize self-reliance over global cooperation in the supply chain.
Global conflicts and policymakers can hold extraordinary power to change the landscape of the semiconductor technology supply chain.¹ For instance, tensions surrounding Taiwan’s independence could jeopardize the flow of advanced chips.
- Tony Giannone, Vice President, Travelers Multinational Practice
¹https://www.csis.org/analysis/reshoring-semiconductor-manufacturing-addressing-workforce-challenge
Experts estimate that the U.S. will need ~300,000 new chip workers to meet self-sufficiency goals. Taiwan’s chip worker shortfall increased 77% between Q2 2020 and Q4 2021. South Korea anticipates a shortage of ~30,000 chip workers in the next decade. A recent study found that the current 300,000+ chip worker shortfall in China will only get worse. Japan needs 35,000 additional engineers over the next 10 years to revive its domestic capabilities.
Semiconductor design and manufacturing requires highly specialized skills that remain in short supply, which can stall chipmaking innovation and productivity.¹
1 https://e360.yale.edu/features/how-climate-change-is- disrupting-the-global-supply-chain 2 https://www.undrr.org/publication/human-cost-disasters- overview-last-20-years-2000-2019
Freezing weather in Texas caused a major automotive microchip manufacturing and shipping backup in 2021, exacerbating the pandemic-induced new car shortage.1 Separated by three months, flood and drought reduced inbound and outbound semiconductor shipping capacity in Europe for days.1 In 2020, semiconductor packaging delays caused by a typhoon in Malaysia forced shutdowns at some U.S. automakers.1
Chipmaking operations remain susceptible to the occurrence of increasingly frequent and severe weather events, potentially impacting suppliers.
Climate-Induced Extreme Disasters
The occurrence and impact of climate-related natural disasters is on the rise.2
1 https://tac.bis.doc.gov/index.php/documents/public-presentations/484-sia-semiconductor-supply-chain-briefing-deck-vsent-sia-branded-6-8-21/file
Resulting Global Economic Losses
Total Climate-Related Disasters
2000-2019
4,212 events
$1.63 trillion
1980-1999
$2.97 trillion
7,348 events
Total Climate-related Disasters
1https://e360.yale.edu/features/how-climate-change-is-disrupting-the-global-supply-chain 2https://www.undrr.org/publication/human-cost-disasters-overview-last-20-years-2000-2019
1https://www.csis.org/analysis/reshoring-semiconductor-manufacturing-addressing-workforce-challenge
1https://www.travelers.com/resources/business-industries/technology/semiconductor-technology-risks
"Imagine a scenario where Taiwan's chip supply and resources become unavailable. Given its significant stake of over 50% of the global market share, this situation could have ripple effects across diverse industries with global exposures."
1https://tac.bis.doc.gov/index.php/documents/public-presentations/484-sia-semiconductor-supply-chain-briefing-deck-vsent-sia-branded-6-8-21/file
Vulnerabilities That Could Cause Disruptions in Future Chip Supplies
As the appetite for technology grows, supply chain challenges are likely to persist. Resulting chip shortages could impact high-tech manufacturers’ ability to satisfy demand and stay competitive.
Potential Impact of Chip Shortages on High-Tech Manufacturers
Increased Costs
Product Failures and Defects
Long-Term Business Impacts
A low stockpile of chips could pose significant risks to a manufacturer’s bottom line and reputation, including1:
Missed Deadlines Delivery delays may result in costly contractual liability issues. Inventory Shortages Inability to meet demand can lead to lost sales and opportunities. Loss of Business Income Failure to fulfill orders can result in loss of income, a tarnished reputation and legal liabilities. Higher Related Costs Labor, storage and transportation costs can add up quickly.
Production Delays
Operational Inefficiency Slowed production due to chip shortages underutilizes labor and manufacturing resources, which can simultaneously increase operational costs and financial losses.
When chips are in short supply, competition increases, which can drive up costs. The direct and indirect implications for high-tech manufacturers include¹,²:
Expedited shipping Restocking supplies Design re-engineering
¹https://www.travelers.com/resources/business-industries/technology/semiconductor-technology-risks ²https://www.sciencedirect.com/science/article/pii/S0925527320301456
Quality Control Cut corners or rushed production could lead to product defects. Chip and Product Security Counterfeit or compromised chips can become susceptible to malfunction and cybersecurity. Design Workarounds Hasty changes can negatively impact product performance. Secondary Suppliers Using backup suppliers can heighten counterfeit component risk, compromise production capabilities, cause delays and drive prices higher.
As chip-enabled electronics become more powerful and sophisticated, the potential for production and design failures becomes more prevalent. Chip shortages may lead to costly end-product performance, safety and liability issues related to1:
Stalled Growth Preoccupation with inventory management challenges could divert attention from R&D and innovation, impacting market competitiveness and business sustainability.
Working Capital Constraints Increased costs and decreased sales can tie up financial resources, limiting your ability to invest in other areas of your business.
Reputational Damage Prolonged product delivery delays or defects could make it increasingly difficult to attract and retain customers and business partners.
Chip shortages affecting manufacturing companies’ ability to consistently deliver robust, reliable products can have lasting negative effects on future business performance, including1:
Hidden Expenses
Underutilized labor Untapped manufacturing resources
Operational Inefficiency
Premium prices due to demand Less flexible contract negotiations
Higher Chip Prices
Chip shortages affecting manufacturing company’s ability to consistently deliver robust, reliable products can have lasting negative effects on future business performance, including1:
Operational Inefficiency Underutilized labor Untapped manufacturing resources
Higher Chip Prices Premium prices due to demand Less flexible contract negotiations
Hidden Expenses Expedited shipping Restocking supplies Design re-engineering
https://www.travelers.com/resources/business-industries/technology/semiconductor-technology-risks
Backup suppliers that meet chip performance and budget requirements. Quality control procedures to ensure component and end-product integrity. Contractual risk transfer to protect against global product liability. Insurance strategies to limit potential losses resulting from chip shortages.
Monitor industry trends, supplier dependencies and geopolitical factors that could impact chip inventories. Then develop, document and test contingency plans to mitigate identified risks. Be sure to address and include:
Practice proactive risk management
6
https://hbr.org/2021/12/engineering-your-way-out-of-the-global-chip-shortage
Products designed to work with two or more types of components can ease the stress of having to source the only chip that fits. Using modular or standardized components across product lines can also help reduce reliance on specialized chips and manufacturers.
Flexibility in engineering and design can help mitigate supply chain risk.
Allow for design adjustments and agility
5
Work closely with customers and partners to better forecast demand, anticipate shortages and maintain an adequate inventory buffer.
Solely relying on just-in-time inventory management can be risky. Keeping additional stock of critical chips and components on hand is key to mitigating the immediate impacts of supply chain challenges.
Maintain an inventory buffer
4
Implementing these technologies can provide real-time visibility across the supply chain to better identify potential shortages and enable proactive production planning and scheduling solutions.
Advanced software systems and AI-based tools are now available to help manufacturers anticipate and manage semiconductor pricing and supply fluctuations.
Leverage technology to optimize production planning
3
Working with the U.S. – or other Western chip fabricators – helps keep supply chains closer to home and farther from the risks associated with reliance on international trade.
Recent government investment from the CHIPS Act means high-tech manufacturers may soon have more opportunities to partner with American-based chipmakers.
Consider onshore manufacturers
2
Broadening your roster of trusted chip suppliers can make it easier to pivot operations and procure quality components when the threat of shortages looms, reducing the risk of costly production delays and product defects.
Evaluate and establish relationships with multiple chip fabricators of diverse geographies, capabilities and capacity before bottlenecks occur.
Maintain a diversified network of suppliers
1
Six Strategies to Help High-Tech Manufacturers Mitigate the Impact of Global Semiconductor Technology Shortages
Broad Global Insurance Coverage Can Help Protect High-Tech Manufacturers from Supply Chain and Other Global Risks
Global CompanionSM Plus+ coverage and services include:
To remain resilient during semiconductor shortages, manufacturers need robust global and domestic insurance solutions, ideally from the same provider. This approach can help avoid coverage gaps and streamline claim resolution. Travelers offers Global CompanionSM Plus+, a package policy for U.S. manufacturers with foreign exposures. As a member of the International Network of Insurance (INI), we have a global presence that spans 150 countries, with coverage and services that include:
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Your independent agent can help determine which global and domestic insurance coverages can help protect your business.
Coverage Considerations for High-Tech Manufacturers
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