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Unpacking the Semiconductor Shortage & its impact on Telecom

If absence makes the heart grow fonder, we all are growing fonder of semiconductors. The chip shortage that has been worsening throughout 2021 is in many ways unprecedented, and like many industries, telecom is being sucked into the maelstrom.

How did this happen? Well, it’s complicated.

Semiconductors, which are built on chemical elements like silicon, gallium arsenide and germanium, are key to transistors, integrated circuits and diodes powering everything from computers and smartphones to electric vehicles and robotic toys to data center infrastructure and networking equipment.

The industry producing these ships is cyclical: Firms design new chips; foundries manufacture those chips; other companies buy the chips to use in products that are bought by consumers and businesses. But, even as those products are sold, next-generation semiconductors with greater performance and functionality to power next-gen products are already being designed and made.

The cycle moves fast. Moore’s Law suggested the number of transistors in an integrated circuit built doubles every two years. But many believe we have left Moore’s Law in the dust. This cycle is also a supply chain of many links--semiconductors designers and makers all get material ingredients from different suppliers, and supply their chips into many different product companies. In our globalized economy, all of these companies rely on different forms of transport and logistics to bring in supplies, and get resulting products out the door.

But no chain is stronger than its weakest link, and in the semiconductor supply chain a weak link can cause a chip shortage. It has happened before. In the 1980s, a surge in demand led to one chip shortage, and in another case a trade pact designed to boost U.S. chip production caused instability in the supply chain. During the 1990s, new chips required new manufacturing innovations that lagged behind, leading to another shortage. In the last two decades, shortages were caused by aggressive market adoption of new technologies and products. In 2011, the Japanese earthquake caused another disruption.

In most of these cases, one factor--demand, a labor shortage, geopolitics, manufacturing delays, logistical bottlenecks, environmental disaster--was the root cause.

Now, imagine all of these things happening simultaneously, augmented by a global pandemic. That’s the situation we’re in now.

A perfect storm

Over the last two years, the semiconductor industry has been hit by a perfect storm, a cliche, but an accurate one. The factors that converged to create it include:

Covid-19: The pandemic swiftly altered everyday life and business for the entire planet. Lockdowns and other restrictions steamrolled best-laid plans, shutting down whole ecosystems for weeks or months.

Semiconductor companies halted or radically changed their production activities. Materials suppliers did the same, though factories in different countries often shut down at different times as the pandemic traveled in waves around the globe. This resulted in production and scheduling hiccups between manufacturers and their suppliers.

Globalization: In recent years, supply chains have become more globalized, although sometimes only to become more centralized somewhere else, too far away to effectively manage. For example, much foundry business has moved to Asia over the years. And while China is home to only a small percentage of that, the U.S. and other nations have grown increasingly sensitive to China’s role in the ecosystem.

Extreme weather: Taiwan, home to TSMC, the world’s largest chipmaker, experienced a historic drought, especially bad for an industry that uses tons of water during manufacturing. Elsewhere, wildfires, floods and other hallmarks of climate change have caused delays. Logistics problems: The pandemic did its part to make shipping and transportation systems and schedules fall out of sync. On top of all that, a giant ship got stuck in the Suez Canal, reminding everyone that this narrow strip of water is important to international shipping.

Labor shortages: Lack of skilled workers is being felt everywhere: Warehouses and docks attempting to unload and reload backlogged containers; fabless firms still trying to innovate at a blistering pace; manufacturers and suppliers trying to keep up with one another’s schedules.

Increasing demand: If all of this weren’t enough, market demand for semiconductors continues to soar amid accelerating adoption of multiple technologies-- 5G, cloud, AI, broadband, IoT, robotics, autonomous vehicles. The pandemic-related surge in remote working has only quickened the pace.

Stockpiling: Companies trying to ensure they have enough supply to satisfy their biggest customers started holding back inventory, amplifying the shortage. Several chip firms also have raised prices, causing buyers to delay purchases, and to pass price increases onto their own customers.

The storm hits telecom

In the telecom industry, where semiconductors populate everything from data center servers and network routers to smartphones and IoT devices, an increasing number of telcos have been told by suppliers that there would be delays of weeks or months before they could receive gear like broadband routers and customer premises equipment that they provide to their own end users. There have also been delays in smartphones as 5G was ramping up.

The chip shortage also arrived as telcos were aggressively deploying new technologies--not just 5G, but AI, SD-WAN, edge computing, and more--to drive new end user applications, the migration to cloud-based service models and the decentralization of networking.

As 2021 has gone on and order delays have lengthened, some telcos have become stockpilers, trying to hold back older product inventory so that they can meet customer needs until newer-generation products finally come in. For most of this year, end users of the telecom devices and networks that rely on semiconductors probably had no idea what was going on, but lack of new products and trickle-down price increases are becoming more noticeable.

When will the storm pass?

Pretty much everyone in the semiconductor industry agrees they have never seen anything like the current global chip shortage and worldwide supply chain breakdown. There are no easy fixes, though the semiconductor industry certainly is trying.

Probably the most significant measure taken is that several firms announced massive investments in new and expanded factories. In most cases, these investments have been encouraged and aided by favorable government policies and subsidies, and a desire in several countries to bring chip production back home.

Meanwhile, other technology giants have seen the chip shortage as an opportunity to get into the game. Google and Facebook, for example, each have their own chip production strategies.

Chip companies also are thinking about what they should do differently, driving them to create new strategies, set alarms to alert them to troubling trends, and adopt redundancy plans.

Is this enough? We don’t know yet. Most new manufacturing capacity isn’t coming online for another year or two, and may not measurably affect chip production for another year after that. Favorable government policies are changing the industry’s landscape, but only gradually. Also, Google, Facebook and others making more of their own chips will help them, but it’s unclear how it will affect other chipmakers. And, new business practices designed to help avert the next crisis may not do much for what’s already broken.

For now, it seems like all we can do is wait--wait for production pace to pick up again, wait for all the containers at overcrowded ports to be unloaded, wait for a labor rebound, wait for a post-Covid world in which factory shutdowns aren’t a recurring event.Many industry observers believe this shortage will not abate until sometime in 2023, but can such predictions be trusted? Earlier this year many were still banking on a 2022 recovery.

Eventually, new manufacturing capacity will have an impact, supply chain links will get back in sync with one another, and then… we may have a glut of semiconductors, at least for a while, and then maybe another shortage, but hopefully one that isn’t as bad. Because the semiconductor supply chain has so many moving parts, there could be peaks and valleys in supply and demand for several years to come. As many of us have begun to say with greater frequency since the advent of Covid, we may not like it, but it could be the new normal.

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