Catch up on how we got to this point from Part One of this article.
Today: What to do about it
A decades-long failure to invest in capacity and employment has made U.S. firms rely almost exclusively on offshore fabrication plants. We need to consider history. The use of industrial policy in the early days of the industry tells us clearly what we need to do to recapture a technological edge for every aspect of the supply chain.
In “Supplying Demand: The Chip Shortage in Macro Context,” Skanda Amarnath and Alex Williams point out the following:
“The present crisis in semiconductor manufacturing has much deeper roots than pandemic-driven supply disruptions. Crafting effective policy to rectify the shortage requires us to reckon with these long-term causes, but also widens the aperture for supply-side government spending dramatically.”
In 2022, this led the U.S. to craft and pass legislation supporting the semiconductor industry. Known as the CHIPS and Science Act of 2022, the U.S. government plans to spend $54.2 billion over a five-year period to bolster semiconductor and microelectronic production domestically. Although prudent, the measure will take time to materialize. It’s a fact that ROI on investments in semiconductor manufacturing take years to achieve. If semiconductor firms are being asked to use their cash to expand capacity, they must be confident that demand for that capacity will appear.
Read more about the CHIPS & Science Act of 2022 here.
If factories are closed without any excess inventory at hand, then when demand does pick up – which it did substantially during COVID – prices will skyrocket, which adds more panic to an already panicked market.
Another challenge is not being able to better predict the volume of production required. Semiconductor makers can’t simply rely on orders. Although optimizing operations and factory utilization are admirable goals, semiconductor firms miss the opportunity to capture the full value of what they are creating. If they execute deals without knowing the volume in circulation, end market applications, and the transactions being made in real time, they are missing out.
A recipe for the future
Here are some recommendations on what the semiconductor industry as well as individual players within it need to do.
1. Consider economics 101
Supply and demand is a simple concept, but it can be easily overlooked in the complex analyses we do day-to-day. Everything comes back to it and unless the government is involved in regulating prices, firms must do this on their own, feeling out the market one deal at a time. But although semiconductor companies have done much to maximize shareholder value – by optimizing manufacturing operations and outsourcing – this has limited the ability for them to be nimble enough to adjust agilely as market demand swings. With no visibility into real movement and transactions of goods and services, they’re forced to rely on orders as a proxy for demand.
Taking a step back, when demand outpaces supply, we know prices increase. If industry investments increase at the same time – driving more capacity – supply and competition both increase, which pushes down prices. Straightforward, but if you are looking at the wrong data sources – leading versus lagging – then you could miss the picture. Instead, you should consider the level of market investment and in which domains, the current availability of supply across the entire supply chain, and actual, real-time data from transactions.
2. Get visibility that scales as the industry grows in complexity
Semiconductors were once wholly powered by one large customer – the government – that had both the willingness and ability to pay. As semiconductors began being used in a more diverse set of commercial applications and consumer products, revenue increased, but so did complexity.
The growth and complexity of today’s lean business model makes it harder for technology companies like semiconductor manufacturers to actually know what to produce for the market. You can have economies of scale, but you need a way to see all the way to the point-of-sale (POS) transactions to gain better visibility into the demand, supply, and the final market price point.
What’s needed: visibility. A way to see all the diverse variations of the routes your product takes to market: which channels, which end customers, and which geographies.
You need this clear, real-time visibility into where semiconductor and electronic components are being shipped to, packaged into, distributed, and purchased. The way the industry is structured – to properly manage inventory, price, discounting – everything that allows you to sell your products – you need that kind of visibility so you can deliver life-changing products to the world.
3. Innovate everything: products, technology, business models, and operations
The secret sauce to high-tech manufacturing has always been innovation. Innovation provides the leading-edge products to show the world what is possible. This in turn creates the value economics and anchor pricing that sets the pricing and commercials of all the microelectronics that came before it.
Product innovation is required to stay competitive. Technology and business model innovations can give you the market insight needed to take action to maximize margin on every deal. And operations innovation allows you to advance production processes to maximize efficiencies. Without all of this, you are blind to demand spikes and shocks and will be unable to respond accordingly.
Price erosion is common for most SKUs and active price management is key to staying competitive. But to do this you need to understand the historical data as well as contract compliance on current volume commitments and incentive programs. You need to know how to manage supply across the channel. And you must know how to manage value for products that require advanced manufacturing methods or those that have longer product lifecycles.
Conclusion
We are quick to forget the past. Yet we shouldn’t – the industry dynamics have shifted but we are all under the same economic laws. To keep the upper hand, semiconductor firms should stay true to the secret sauce and innovate, and maintain close partnerships with downstream players. Innovate systems because if demand drops, semiconductor makers need an early warning system that enables you to move as fast as the market. Such systems can help you see inventory levels through the channel, monitor POS transaction details, manage price protections, stock rotations, & debits, and execute deals, quotes, and contracts with the right price at the right time.
In this way you can better manage your products in market, ensure sufficient supply, capture demand, and effectively deliver more of your innovative technology – which is transforming lives every day – to the rest of the world.
Learn how Model N can help you bring life-changing products to the world.
