The Employment Wave
Although the industry is highly automated, much of high-tech production is still labor intensive which has driven the growth in dominance of countries in Asia in this sector. China is the largest employer in this industry with almost 3.3 million workers, nearly 10 times the size of the US market. However, the distribution of types of occupations in key countries is revealing.
The APAC countries have a far larger proportion of manufacturing workers and machine operators—these are typically blue-collar employees working on the plant floor. This contrasts with the US where, despite having a smaller pool or workers, they typically occupy positions such as engineers and technicians, managers, and supervisors.
Future industrial automation is more likely to affect production workers than, for example, engineers, with consequences more keenly felt in countries where those occupations dominate.
The Investment Wave
In April 2020, US President Joe Biden reaffirmed previous plans for the US to invest heavily in semiconductor research and manufacture. In August 2022, President Biden signed the CHIPS Act which will inject over $50 billion into the industry. The Act authorizes up to $200 billion in subsidies over 10 years.
The fabrication plants required to manufacture semiconductors are extraordinarily expensive, and require many years to build and then reach peak manufacturing capacity. For example, in February 2021 Samsung Foundry filed documents seeking to build a new semiconductor manufacturing facility in the USA. With an expected cost of over $17 billion, it is expected to come online towards the end of 2023.
The levels of capital investment and planning required to build large fabrication plants such as these means the industry cannot always be responsive to sudden and unexpected increases in demand—as seen during the COVID-19 pandemic for home computing devices - or sudden shortfalls in supply, for example during the 2022 Russian invasion of Ukraine.
It can take years for high-tech component suppliers to adjust to unexpected changes like these. Many Asian countries like Taiwan, China, South Korea, and Japan are also planning to increase investment expenditure from existing levels to help plug the gap in semiconductor supply. We can see that Taiwan is expected to invest the most in this industry, almost 30% more than China and 50% more than the US.
The Supply Wave
The high-tech supply chain is a complex and interconnected global network of component suppliers, OEMs, and contract firms, who often produce both consumer and industrial products. Although the industry tiers and connections are similar to other major manufacturing sectors such as aerospace and automotive, the key role of the ongoing development of semiconductor technologies adds an additional level of dependency.
Furthermore, in 2021 just five countries made up over 80% of the global value added for the electronic components and boards sector (which largely consists of semiconductor manufacture). Additionally, four of the top five producers are from the APAC region. For end markets in the Americas or Europe this adds further risk and cost factors related to shipping and transportation logistics.
The increasing dependence on semiconductors in automotive leaves the industry extremely vulnerable to supply-side shocks—for example, Renault’s 2022 H1 sales were down 12%, with the company citing the semiconductor crisis as a key reason for the decrease*.
The auto industry is just one sector where the supply chain has come under strain due to chip shortages. Shockwaves have spread across the technology sector and even those with maximum purchasing power, such as Apple, are feeling the effects.
Consumer markets have also been impacted. Home gaming rose in popularity during the lockdowns of 2020 and, at the end of that year, both Sony and Microsoft released their latest gaming consoles, the PlayStation 5 and Xbox Series X respectively. This resulted in an additional surge in demand, with supplies selling out quickly. Both Sony and Microsoft continue to struggle to manufacture enough consoles to fulfil demand.
The chip industry is a cyclical sector, and the current period of consistent shortages suggests there will be a period of oversupply at some point in the future. Based on the current timing of capacity ramping, there are estimates** that the earliest there would be broad-based oversupply of semiconductors for cars, for example, would be at some point in 2023.
With a looming global downturn likely to affect consumer spending, the high-tech sector will face further demand driven challenges in 2023, placing further pressure on OEMs and suppliers at a time when technology development is increasing.
Riding the Waves
Given these fast-moving, disruptive waves, it is vital for companies engaged with the high-tech sector to stay on top of these industry trends and challenges. Access to expert-led, up to date, tactical industry intelligence can enable all levels of individuals in these organizations to improve decision making and better understand customer challenges.
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References
*https://www.industryweek.com/operations/article/21246414/microchip-shortages-hit-renault-sales
**https://www.jpmorgan.com/insights/research/supply-chain-chip-shortage
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