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From raw materials to finished goods, the Covid pandemic has wreaked havoc on global electronics supply chains. For two years and counting, it has brought into sharp focus the limitations of finely tuned, highly efficient just-in-time sourcing practices. While there are expectations that 2022 will see some relief, the uncertain path Covid will take could have longer-term implications.
According to a recent report from IHS Markit, disruptions and supplier delivery times in 2021 lengthened to a degree not seen in the 30 years the company has been conducting monthly purchasing managers index (PMI) surveys. For example, heading into 2022, companies reported output constrained by shortages was running 3.5 times the long-run average.
As the electronics industry struggles with a dearth of semiconductors, there’s also been a global breakdown in logistics and transportation services. “As the year begins, we remain in the midst of the most severe crisis in container supply chains going back to Malcolm McLean, who founded the container shipping industry in the late 1950s,” according to Peter Tirschwell, vice president, maritime and trade, IHS Markit. “We would like to be able to say that we see signs of the log jam breaking. But frankly, we don’t,” he said.
Likewise, experts don’t foresee chip supplies recovering before 2023.
“Covid is an unprecedented set of circumstances that has revealed the fragility of supply chains and exposed organizational challenges,” said Richard Barnett, chief marketing officer, Supplyframe. “We’re seeing supply and demand imbalances, shortages, and market volatility that will extend into 2023.”
The automotive industry’s roller-coaster ride is a case in point as component inventories destined for shuttered automotive plants in 2020 were redirected to other sectors. As carmakers resumed production, they faced serious shortages of electronic components and subsystems in their assembly plants, resulting in incomplete vehicles rolling off the assembly line and being shipped to dealerships.
For example, Toyota expects to miss its annual 9-million-vehicle production target. The reason is fierce competition for semiconductors with other automakers and consumer electronics companies that prevents Toyota from ramping up car output to offset the production lost in 2021.
Richard Barnett, Supplyframe
“It’s like whack a mole,” Barnett said. “Automakers are trying to build what they can. For example, they might include three high-end options for one vehicle, but it’s missing the radio. That’s not sustainable. They’re not going to design their way out of those problems right now.”
According to Matteo Fini, vice president, automotive supply chain and technology, IHS Markit, the situation is forcing automakers to go against everything they have done in the past 30 years. “This includes taking on inventory for certain parts because, in relative terms, it costs peanuts to have that inventory compared with having a line stoppage,” he said. “A line stoppage costs upwards of $50 million per week for an OEM, an unpalatable outcome if you’re missing just maybe $500,000 worth of inventory.”
The longer Covid sticks around, the more challenging the outlook. In mid-2021, IHS Markit forecasted 4.5 percent global GDP growth for 2022. That’s now down to 4.2 percent mainly because inflation has become more pervasive due to imbalances in supply and demand. The projection for 2023 is 3.4 percent growth.
The IHS Markit GDP adjustment was partly driven by the company’s 2022 business outlook survey of 12,000 companies, which found weakening profit projections. Respondents feared price hikes, supply shortages, customer resistance to higher prices, an inability to pass costs on to customers after sharply rising prices, and falling profit margins in 2021, according to IHS Markit. The survey also revealed that profit expectations for 2022 will be the weakest of the pandemic so far.
It’s not just about Covid
The speed and magnitude of the recovery depend in part on the potency of the next Covid variant (or variants). But it also depends on companies pivoting away from the strategies and tactics that have worked reliably for the last few decades. The call for supply-chain resilience is gaining steam challenging the mantra of just-in-time efficiency and lowest cost.
Similarly, companies are starting to evaluate their complex multitier supply chains with poor upstream visibility. One option gaining traction is to align with regional supply chain partners. For example, the relevance of the North American USMCA, formerly known as NAFTA, as a regional supply chain center has been amplified by the Covid-19 pandemic and the growing geopolitical competition with China.
“The decisions companies make today regarding their supply chain footprint must start with a clear definition of their corporate priorities and a comprehensive understanding of all the physical, financial, logistical and cultural variables influencing execution,” said David Paulson, vice president of Avnet Velocity and Avnet United.
A holistic perspective forces OEMs to think differently about their supply chain relationships. For example, partnering with suppliers they have historically only had arms-length relationships. This is the case in the automotive segment as companies like BMW and General Motors are striking deals with chipmakers to avoid future chip shortages.
Another critical factor is geopolitics, specifically the increase in tensions between the U.S. and China over the future of Taiwan and access to bleeding-edge chip technology. It is vital for the West to retain relationships with Taiwan chip foundries, specifically TSMC. It’s a positive sign that TSMC and Intel are both planning fabs in Arizona and Intel recently announced plans for a mega-fab in Ohio.
A positive development is that Intel and TSMC have committed to building new fabs in Arizona. And Intel recently announced plans for a mega-fab in Ohio. However, no one is holding their breath about when these fabs will come online. “Those decisions will take three to four years just to get to runtime, much less to get to a positive ROI,” said Supplyframe’s Barnett.
Then there is the issue of climate change. Companies need to implement near-term adaptations against severe weather events, fires and floods, and the need for capital investment to adapt to rising sea levels and ensure access to freshwater.
All of these issues are on the table. “It requires three or four years to work through the challenges that will cause more sustained change and accelerate digital transformation to make both organizations and supply chains more resilient,” said Supplyframe’s Barnett.
