Chip Challenges: Semiconductors and Supply Chain Risks

January 2, 2025

Article

Our dependence on semiconductors is so important that some governments compare it to rice. These complex chips, made with valuable minerals, are key to so many supply chains that any disruption can have devastating ripple effects, including on personal livelihoods and national security.

Major geopolitical tensions as well as environmental and forced-labor issues are putting strains on global production and supply of chips. Understanding these factors and the supply chain risks they present can help organizations manage this increasingly volatile threat to resilience.

This article will explore the production and shortage of semiconductors, supply chain risks tied to the industry, and ways to improve resilience in light of those risks.

What Are Semiconductors?

Semiconductors are microchips designed to manage and control the flow of electrical current in electronic devices. Often called “chips,” semiconductors contain billions of minute transistors that serve as tiny switches to control current. Smaller transistors on a chip result in higher speed and lower energy consumption.

Some of the most powerful semiconductors are made with a process (3 nm) that can fit over 50 billion transistors on a chip the size of a fingernail. The “nm” designation is used by the industry to refer not to size but to increased transistor density and speed. The chips are made of materials such as silicon, germanium, and silicon carbide.

Currently the most powerful mass-produced semiconductors are manufactured at 5 nm. Because of the complexity of the machinery required, two companies dominate this market: Taiwan Semiconductor Manufacturing Company (TSMC) and South Korea’s Samsung Electronics. A few other companies, like Intel, are ramping up to compete.

While the smaller, more advanced chips get the most attention, larger legacy chips are still integral to the production of most modern electronic devices.

How Are Semiconductors Made?

The industry is divided into four main categories:

Foundries (or fabs): High-tech factories that specialize in manufacturing semiconductors
Integrated Device Manufacturers (IDMs): Companies that design, manufacture, and assemble their own chips
Fabless companies: Designers of chips that do not have foundries (fabs)
Outsourced Assembly & Testing (OSATs): Companies that have chips outsourced to them for the final stage of assembly and testing.

Semiconductors require manufacturing on an atomic level, so the process to produce them is far from simple. A single chip can take more than three months to manufacture and requires a stringent production environment. Not only do you need large quantities of raw materials such as silicon wafers and various specialty chemicals, but also large factory spaces, dust-free rooms, and expensive, cutting-edge machinery.

The fabrication process is just one step in the manufacturing process. Next is the design stage. So-called fabless companies do not have their own foundries and instead focus on designing their own custom chips and then outsourcing their production to pure-play foundries. Many major tech companies have begun developing their own chips in-house and then outsourcing their production to pure-play foundries. Intellectual property is the “lifeblood of the semiconductor industry,” and the exact process involved in manufacturing silicon wafers is a closely guarded secret.

The final step is assembly, packaging, and testing. This involves a series of steps designed to take the silicon wafer and cut out the individual chips before undergoing the process of becoming the chips that we see inside our electronic devices. This step usually occurs in-house at Integrated Device Manufacturers (IDMs) and some foundries but can also be outsourced to specialized companies that package, assemble, and test semiconductors. These Outsourced Assembly & Testing (OSAT) companies have far lower barriers to entry than fabrication due to the lower capital and workforce skill requirements, and as such tend to be geographically concentrated in Asia, particularly China and Taiwan.

Why Are Some Chips Scarce?

The complex, strict, and expensive procedures necessary to make semiconductors already makes them more susceptible to supply fluctuations. Recent factors have also put major pressure on the industry:

Pandemic closures: Covid-related factory shutdowns caused a global shortage that lasted for several months. Most semiconductors are made in South Korea, Taiwan, and China, where factory closures began earlier than countries such as the U.S. and UK because of the pandemic’s inception point, and in many cases were closed for longer due to strict lockdowns.
Explosive growth in demand: The global semiconductor market is expected to have a compound annual growth rate (CAGR) of 15% from 2024 through 2032. The boom in AI has added a new dimension to this demand: The most powerful chips, including those involved in AI, are most susceptible to shortages today.
U.S.-China trade tensions: Trade restrictions between the two countries have hampered supply and hiked prices. Recent export controls from China on critical chips metals like germanium and gallium — of which China is a dominant producer — put new challenges on semiconductor supply chains across the globe.

In 2022, the U.S. enacted the CHIPS and Science Act (CHIPS Act) to combat this shortage and bolster domestic production. At that time, the United States was only producing about 10% of the world’s supply of semiconductors — and none of the most advanced chips. The CHIPS Act makes funding available for large-scale manufacturing projects and facility upgrades to expand U.S. production.

Supply Chain Risks Add to Semiconductor Shortage Concerns

Adding to the factors outlined above, there are a number of third-party and supply chain risks that can disrupt semiconductor supply chains. Here are a few of the most relevant:

Geopolitical tensions and FOCI risk: The semiconductor industry is deeply intertwined with global geopolitics. Foreign ownership, control, or influence (FOCI) risk is a critical factor, as it involves assessing the extent to which foreign interests can control or influence a company and its supply chains. This is particularly relevant in the semiconductor sector, where intellectual property and national security concerns can lead to restrictions on foreign investments and partnerships. For example, countries may impose regulations to prevent foreign entities from gaining control over critical semiconductor technologies, which can disrupt supply chains and limit access to essential components.

Natural disasters and climate events: Semiconductor manufacturing is geographically concentrated, with key production hubs in regions like East Asia. This concentration makes the industry vulnerable to natural disasters such as earthquakes, floods, and typhoons. Climate change is increasing the frequency and severity of these events, posing significant risks to production facilities and logistics networks. Companies must invest in robust disaster recovery and business continuity plans to mitigate these risks.

Cybersecurity threats: The semiconductor industry is reliant on digital technologies, making it a prime target for cyberattacks. Cybersecurity risks can manifest in various forms, including data breaches, intellectual property theft, and ransomware attacks. These threats can disrupt manufacturing processes, compromise sensitive information, and damage reputations. To counter these risks, semiconductor companies must implement robust cybersecurity measures, including regular security assessments, employee training, and incident response plans. Additionally, they should ensure that their suppliers and partners adhere to stringent cybersecurity standards to protect the entire supply chain ecosystem.

Regulatory compliance with international laws: The semiconductor industry operates within a complex regulatory environment, with varying compliance requirements across different jurisdictions. Noncompliance with regulations, such as laws against forced labor in supply chains, can result in significant fines, legal challenges, and operational disruptions. Moreover, changes in trade policies, such as tariffs or export controls, can impact the flow of goods and materials, leading to supply chain bottlenecks.

Managing supply chain risks — a key requirement for CHIPS Act funding — is integral maintaining operational efficiency and building resilience in semiconductor supply chains.

The Risk Solution for Semiconductor Supply Chains

Keeping tabs on the many risks related to global, multi-tier supply chains in the semiconductor industry requires an advanced technology solution. The 1Exiger platform stands out with its comprehensive capabilities and innovative features, including:

Holistic risk assessment: The 1Exiger platform offers a comprehensive risk assessment across seven critical dimensions: foreign ownership, control, and influence (FOCI); reputational, criminal and regulatory (RCR); environmental, social, and governance (ESG); financial; cyber, and product/operational risks. This multi-dimensional approach ensures that companies can identify and mitigate a wide range of risks that could impact their supply chains.

Advanced AI and data analytics: Powered by Exiger’s award-winning AI technology, the platform leverages a vast array of data sources — over 31 million unstructured and 16,000 structured data sources — to deliver deep insights into supply chain risks. The AI-driven due diligence engine provides real-time risk scoring and fact detection, enabling companies to make informed decisions quickly.

Supply chain network discovery: The platform’s ability to map supply chain relationships down to the nth tier is particularly valuable for the semiconductor industry, which relies on complex, multi-tier supply chains. 1Exiger provides unparalleled transparency into supplier ecosystems, allowing companies to understand their supply chain dependencies and vulnerabilities.

Digital twin and predictive analytics: The creation of a digital twin of the supply chain allows managers to simulate and analyze potential risks and disruptions. This feature, combined with predictive analytics, enables proactive risk management and strategic planning, helping companies optimize their supply chain operations and enhance resilience.

Automated risk mitigation workflows: 1Exiger offers automated workflows for risk mitigation, streamlining the process of addressing identified risks. This automation reduces the time and effort required to implement risk management strategies, allowing companies to respond swiftly to emerging threats.

Continuous monitoring and real-time alerts: The platform provides continuous monitoring of the supply chain ecosystem, with real-time alerts for new or material changes in risk. This feature ensures that companies remain vigilant and can take immediate action to address potential disruptions in semiconductor supply chains.

Global coverage and expertise: Exiger’s global reach and expertise in supply chain risk management provide companies with access to a solution that is both comprehensive and tailored to their specific needs. The platform’s extensive data partner network and industry knowledge ensure that companies receive the most relevant and actionable insights.

By integrating these features, the 1Exiger platform empowers companies to navigate the complexities of their semiconductor supply chains with confidence, ensuring operational continuity and competitive advantage.

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