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Survey Report

Semiconductor Supply Chain Risk Report 2023

May 23, 2023

WTW surveyed 100 senior decision makers in leading semiconductor companies globally, to understand their supply chain risks and challenges, their organization’s approach to risk management and what future supply chains will look like.
Credit and Political Risk|Cyber Risk Management|Casualty|Property Risk and Insurance Solutions
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Learning the lessons of disrupton

Despite the supply chain disruption of recent years and current political and economic uncertainty, the semiconductor sector is doing fairly well overall in 2023.

This is largely due to the ever-growing demand for specialized chips used in emerging technologies such as artificial intelligence (AI), autonomous and electric vehicles, the internet of things and 5G.

But there are questions over the industry’s capacity to meet this demand.

The supply chain crisis highlighted the complexity and vulnerability of the industry’s globalized supply chains, with many potential choke points which can hold up production — and lead to sudden shortages of chips.

In our 2022 Global Semiconductor Survey, supply chain disruption emerged among the greatest risks to business success and biggest obstacles to achieving strategic objectives.

How are semiconductor businesses adapting?

To find out how the industry is navigating this changing landscape, we surveyed 100 risk and supply chain leaders across the sector, including fabs, fabless design and intellectual property (IP), integrated device manufacturers and specialized semiconductor companies serving sectors from automotive to renewable energy.

How do they see the supply chain landscape? How are they building resilience? What are the main challenges and risks they face? And what will the supply chains of the future look like?

Increasing complexity widens the risk horizon

Our survey suggests semiconductor businesses are worried about a range of supply chain risks, reflecting the complexity of the production process and concerns about the availability of key components and raw materials.

Wider external factors such as political instability, climate change, cyber risk and economic uncertainty are also top concerns.

Increased product complexity

Increased product complexity was the biggest factor underlying supply chain risks, named by 31% as a top concern.

Soaring fab costs and the demand for an ever-increasing functionality have made product development an important differentiator for the semiconductor industry.

Companies that design the most functionality and performance into their products the quickest, are the most likely to see a distinct competitive advantage, requiring a constant focus on research and development (R&D).

Climate and environment

More than half of respondents (53%) named climate change and environmental factors among the global trends having the greatest influence on supply chain risks, while 31% placed environmental change among the factors underlying supply chain risks.

The dependency on suppliers clustered in areas at risk from extreme weather events may be a factor here.

Recent events such as the 2021 drought in Taiwan, which affected supplies of ultra-pure water needed to clean silicon wafers, reinforced these concerns.

Almost three-quarters (73%) cited natural resources such as water and raw materials among the environmental factors posing the greatest risk to their business.

Economic risks

Economic uncertainty emerged as the third leading factor underlying supply chain risks, ranked by 30% as being among their top concerns.

This may reflect rapidly rising raw material and energy, as well as labor and other operating costs.

While the demand for semiconductors remains relatively healthy, there are fears that a recession could hit not just demand for consumer electronics but also corporate technology budgets.

Supplier solvency and liquidity issues was listed as a concern by 29%.

Critical shortages and disruption

Continuing shortages of raw materials (43%) topped the list of supply chain factors expected to have greatest impact on business in next two years, followed by energy and other service interruptions (40%).

Just-in-time operating models and shortages of components and talent all scored 34%.

Logistics and warehousing shortages also featured prominently at 33%.

These findings suggest that worries about availability of critical supplies are likely to hang over the industry for some time to come.

Cyber risks

When asked about the potential impact of risks on the supply chain, 38% named cyber as a high impact risk and 51% as medium.

Growing digitalization and automation of production processes and systems increases the risks of cyber-attacks on semiconductor companies, as well as their suppliers.

Failing to manage cyber risks effectively can lead to loss of intellectual property and have knock-on business impacts, including delays in designing, manufacturing, ordering and delivery of finished microchips.

Geopolitical risk

64% described the impact of geopolitical risks on the supply chain as medium and a further 20% as high.

This result may indicate concerns over tensions between China and Taiwan, where a large proportion of semiconductor fabrication is located, as well as the conflict between Russia and Ukraine.

Ukraine produced up to 70% of the world’s neon gas, which is essential to manufacturing many semiconductors, before the conflict.1

These problems are leading to pressure from Western governments to onshore or nearshore previously off-shored activities.

Given the ever increasing strategic nature of the sector, semiconductor businesses will need to adopt a more real-time review of their sourcing strategies to make sure they can withstand any future trade or military conflict.

ESG

A large majority (78%) indicated that sustainability was a key goal in their firms’ supply chain, while 73% said ESG is a specific selection criterion when selecting new supply chain vendors.

As in other industries, semiconductor firms are coming under increasing pressure from regulators and customers to decarbonise their supply chains and source raw materials, including rare and precious minerals, responsibly.

Pandemics

Though we may be past the acute disruptive impacts of COVID-19, the risk of a new strain of the virus, or a new unforeseen pandemic, seems to be still front of mind, topping the list of global trends with the greatest influence on supply chain risks at 68%.

4 key findings

61% of businesses said losses related to the supply chain had been higher or much higher than expected over the last two years.

79% said they have made at least some improvements in their approach to supply chain management in response to the pandemic.

81% said a lack of data, knowledge and understanding were among the factors posing the greatest challenge to addressing risks over the next three to five years.

76% agreed or strongly agreed that a lack of alternative suppliers impeded their ability to implement an effective dual or multisource strategy.

Resilience through knowledge

It’s been a bumpy time for supply chains over the last few years.

For many semiconductor companies, the supply chain crisis highlighted structural issues that had been building under the radar for many years.

As the industry has grown in size and complexity, it has become dependent on a wider network of suppliers located across the world.

This global trading system, which has worked well for years, is now threatened by national interests in an increasingly difficult geopolitical environment.

Other risks such as shortages of raw materials are also becoming more critical.

Our survey has shown that businesses are working with their key suppliers to overcome these challenges and considering a wide range of strategies to increase resilience.”

Fredrik Motzfeldt | GB Industry Leader, Technology, Media & Telecommunications

Our survey has shown that businesses are working with their key suppliers to overcome these challenges and considering a wide range of strategies to increase resilience.

However, they’re often hampered by an inability to get hold of detailed accurate data or achieve full visibility through the chain.

Firms are also facing increasing external risk factors, from extreme weather to cyber threats, which can threaten production of key components and raw materials.

Working more closely with suppliers as partners can help companies understand their supply chains better and address these risks.

Diagnostic mapping and monitoring tools and analytics can help to visualize, quantify, and assess risks across the chain and in specific locations.

WTW has an experienced team of experts with the tools and competencies to help clients understand their supply chain vulnerabilities and align their production with financial risk.

We can also help you manage and transfer risks for both property-related and pure economic losses, helping you build greater resilience against future shocks.

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To learn more, download your free survey report by completing the short form at the top of this page.

Source

1 Centre for Strategic and International Studies Russia's Invasion of Ukraine Impacts Gas Markets Critical to Chip Production

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