Why Is There Semiconductor Shortage and How Would It Affect Telecom Sector: Tips On how To Stay Afloat

We are in the midst of global semiconductor shortage and it is estimated to last till 2023 and 2024. This is a painful period, as the ongoing crisis is affecting more than 169 industries and has led to major shortages and queues amongst consumer electronics. What is more concerning is that it is only a matter of time before it hits pillar industries, such as telecommunication sector for both consumer and business use.  

What Caused the Global Chip Shortage? 

The pressure of meeting increasing semiconductor demand has been developing among chip manufacturers for years, in the process of rolling out 5G, deploying cloud network functionality, connecting volumes of IoT devices that previously did not have connectivity or require sophisticated integrated circuits (IC) i.e. chips. 

The recent unfortunate incidents overstretched the situation and caused the global chip shortage in a vast range of industries. 

1. Boom in demand due to Covid-19. According to KPMG, due to Covid-19, the digital transformation has accelerated by 81% in all industries. Many were forced to work from home which creates a surge in demand for chip-based products, such as electronics, autos and telecoms. 

2. Supply chain disruption. The semiconductor industry is widespread and diversified. No one country or company has true independence in its value chain. Intellectual property and software to design cutting-edge chips, for example, is dominated by the United States, while special gases key to fabricating chips come from Europe. And the manufacturing of the most advanced chips is completely located in Asia.  

The supply of semiconductor chips is highly reliant on three foundries, TSMC, SMIC & Samsung. In 2021, a drought in Taiwan, the worst for 50 years, severely affected production line of TSMC which holds 54% market share in the foundry market.  

Other events, such as fires in factories, power outages and the transportation blockage at the Suez Canal, also have held back supply. 

How Will the Chip Shortage Affect the Telecom Industry? 

Currently semiconductor shortage is hitting most hardly in auto industry and car industry. Due to the customers are less stable and more inconsistent, auto and car manufacturers paused chip orders during Covid-19 outbreak. This led to low priority in the chip order queue, which caused chip shortage in these two industries. Telecom sector, fortunately, up until now sheltered themselves by advance ordering and stockpiling. But the telecoms sector is just as vulnerable to shortages of semiconductors and other components as is the car industry. 

However, we are seeing side effects, such as longer lead time and rising chip price. 

According to Susquehanna Financial Group, the lead time between ordering a chip and taking delivery in July 2021 increased to 20.2 weeks up from 17 weeks in April.  Broadband providers (ISPs) are seeing delays of more than a year when ordering internet routers, becoming yet another victim of chip shortages choking global supply chains. Lead time for broadband router chip is now running at 60 weeks and still rising. Supplies of power management, memory and screen display chips are also scarce and getting scarcer. 

The race for self-sufficiency in semiconductors is on, and it’s a very costly exercise. Estimates are that for any region to achieve self-sufficiency will cost at least $1 trillion and result in rises in the price of chips for end users in the range of 35 per cent to 65 per cent. 

Stay Afloat During Semiconductor Shortage 

Since delays on delivery times and the huge increase of prices are inevitable, it’s time for telcos to search for alternatives. 

Raise capital 

Although an executive order by President Joe Biden seeks to bolster production and strengthen supply chains, it will likely take many years for the order to provide relief. In the meantime, companies, especially Tier-1 suppliers, should focus on raising capital while market conditions are amenable. 

Track the financial and operational health of key suppliers 

The risks of depending on an unreliable supplier can be devastating. By identifying risky suppliers, you can avoid violated contracts, credit damage and project delays. 

Engage contingency suppliers 

You may need to find ways to diversify the suppliers you need and revisit the whole way you treat risk management. 

Qualify alternates 

For at-risk (or likely to become at-risk) parts, proactively and aggressively allocate engineering capacity to qualify form–fit–function equivalent components, starting with the most crucial. 

Build inventory banks 

Having extra products in your inventory means that you can quickly replace equipment when it becomes faulty. Currently, it can be difficult to source the equipment needed so we would recommend having spare parts in reserve for when you need them. 

Invest in more sophisticated demand-planning capabilities 

Manufacturers should be doubling down on their efforts to gain insight into their supply chains so they’re able to respond to sudden shifts in demand more effectively. Speed, real-time visibility and automation have become the defining themes for effective supply chain management. Those that are able to build robust supply chains will have a better chance of dealing with future disruption. 

Second-user telecom network equipment  

The quickest way to solve chip shortage is by sourcing pre-owned or refurbished equipment. While "used manufacturing equipment" might not sound like a sexy solution to a global crisis, it does improve rigid supply chains, increase equipment liquidity and drive environmental sustainability in high-tech manufacturing through recirculation of machines seldom at end-of-life when retired by their first owners. 

Seek better alignment with carriers and other end consumers 

You may have to put in additional steps to contractual arrangements with customers. If you can’t meet your obligations, a clear understanding of your contractual terms will allow you to plan and prioritize your response.