Based on the insights garnered from our November 2021 Stratigame on the Global Computer Chip Supply Chain Disruption, the following are some of the recent developments up and down the global semiconductor manufacturing supply chain and value chain.

Supply Chain, Go To Market and Distribution Impacts

Fake Chips a Growing Threat to National Security and Critical Systems

In February, Europol released the Intellectual Property Crime Threat Assessment 2022 – highlighting the criminal activity taking advantage of the global chip shortage:

“Counterfeiters are exploiting the global supply shortage in semiconductor chips. Mobile phones, their accessories, and components are among the most affected commodities targeted by IP design and trademark infringements.   The growing global shortage of semiconductor chips is linked to the high demand for digital devices and manufacturing problems that emerged during the COVID-19 pandemic.  The electronics industry is facing a considerable demand for computers, components, mobile phones, tablets, gaming consoles, and other devices. Counterfeiters may try to exploit this demand and supply shortages by introducing counterfeit semiconductors such as diodes to the market.”

“Supply chains are global and vulnerable to the introduction of counterfeits since typically several distributors handle components before they reach the manufacturing sites. Tracing the original supplier of the counterfeit semiconductors can be difficult when trademarked counterfeit chips are verified by the semiconductor firms. Disruptions in supply chains and the possible introduction of counterfeit components has the potential to cause serious failures in critical infrastructures.  Semiconductors are an integral part of critical systems used in the healthcare sector, transport, defence, and trade. The risk of privately used electronic devices being affected is also high. Additionally, counterfeit electronic devices may also feature malware and other harmful software, adding the risk of data theft.”  (1)

in January, a report by the Department of Homeland Security itemized issues of national security, critical infrastructure security, and counterfeit component parts in the semiconductor supply chain:  “The concentration of production assembly in China has increased the risk of counterfeit or used components being inserted into products, potentially damaging product integrity and brand reputation and creating a possible security risk.” (2)

Neon Output for Chips Cut in Half by Russia’s Attack on Ukraine

In early March, According to Reuters:

• Production Halted:  Ukraine’s two leading suppliers of neon, which produce about half the world’s supply of the key ingredient for making chips, have halted their operations as Moscow has sharpened its attack on the country, threatening to raise prices and aggravate the semiconductor shortage.   While estimates vary widely about the amount of neon stocks chipmakers keep on hand, production could take a hit if the conflict drags on, according to Angelo Zino, an analyst at CFRA.  “If stockpiles are depleted by April and chipmakers don’t have orders locked up in other regions of the world, it likely means further constraints for the broader supply chain and inability to manufacture the end-product for many key customers,” he said.
• Ukrainian Supply is Critical:  Some 45% to 54% of the world’s semiconductor-grade neon, critical for the lasers used to make chips, comes from two Ukrainian companies, Ingas and Cryoin, according to Reuters calculations based on figures from the companies and market research firm Techcet.  Global neon consumption for chip production reached about 540 metric tons last year, Techcet estimates.
• About Ingas:  Before the invasion, Ingas produced 15,000 to 20,000 cubic meters of neon per month for customers in Taiwan, Korea, China, the United States, and Germany, with about 75% going to the chip industry, Nikolay Avdzhy, the company’s chief commercial officer, said in an email to Reuters.  The company is based in Mariupol, which has been under siege by Russian forces.
• About Cryoin:  Cryoin, which produced roughly 10,000 to 15,000 cubic meters of neon per month, and is located in Odessa, halted operations on Feb. 24 when the invasion began to keep employees safe, according to business development director Larissa Bondarenko.  Bondarenko said the company would be unable to fill orders for 13,000 cubic meters of neon in March unless the violence stopped. She said the company could weather at least three months with the plant closed but warned that if the equipment were damaged, that would prove a bigger drag on company finances and make it harder to restart operations quickly.  She also said she was unsure the company could access additional raw materials for purifying neon.
• Innovation Stifled?  But smaller chipmakers may be harder hit, according to Lita Shon-Roy, president of Techcet.  “The largest chip fabricators, like Intel, Samsung, and TSMC have greater buying power and access to inventories that may cover them for longer periods of time, two months or more,” she said. “However, many other chip fabs do not have this kind of buffer,” she added, noting that rumors of companies trying to build up inventory have begun to circulate. “This will compound the issue of supply availability.”
• Higher Pricing Globally:  Bondarenko says prices, already under pressure after the pandemic, had climbed by up to 500% from December. According to a Chinese media report that cited Chinese commodity market information provider biiinfo.com, the price of neon gas (99.9% content) in China has quadrupled from 400 yuan/cubic meter in October last year to more than 1,600 yuan/cubic meter in late February.  Neon prices rose 600% in the run-up to Russia’s 2014 annexation of the Crimean peninsula from Ukraine, according to the U.S. International Trade Commission.
• Taiwan’s Strategic Supply:  The Economy Ministry of Taiwan, home to the world’s largest contract chipmaker TSMC, said that Taiwanese firms had already made advanced preparations and had “safety stocks” of neon, so it did not see any supply chain problems in the near term. The statement to Reuters echoed similar remarks from Taiwan’s central bank earlier on Friday.
• Replacing Supply will be Difficult:  Companies elsewhere could initiate neon production but it would take nine months to two years to ramp up, according to Richard Barnett, chief marketing officer of Supplyframe, which provides market intelligence to companies across the global electronics sectors. But CFRA’s Angelo Zino noted that companies may be unwilling to invest in that process if the supply crunch is seen as temporary. (3)

Design and Production Value Chain Impacts

Design Concerns Shift Toward Component Sourcing

If you are not familiar with the site, EPSNews is an invaluable resource for “buyers, sellers, and suppliers of components, design, distribution, logistics, production, and other services to the global electronics manufacturing industry.” (4)  In March, Barbara Jorgensen from EPSNews provided a very interesting analysis of the design phase impacts of supply shortages and dependence on offshore production:

• Component shortages “are changing the way engineers design, according to a customer survey by electronics distributor Avnet Inc. Component and services providers that get involved early in a customer’s design process can optimize manufacturing considerations such as efficiency, cost, sustainability and – increasingly — supply chain. Subcontractors want to work closely with OEMs, but that’s not always realistic if manufacturing is offshore. Proximity to designers is an advantage for electronics manufacturing services (EMS) providers that fine-tune product designs for highly regulated markets.”
• Long-term sourcing is normally not a primary concern for prototypes. But sixty-four percent of respondents to Avnet’s survey said their companies are designing more based on the availability of components rather than preference.  In highly regulated industries, customers are more likely to balance rock-bottom prices for security of supply. “Low-cost sourcing is now where most of the pain points are,” said KMC’s Kane. “With [sourcing from] or offshoring to China you may get better rate variances but there comes an inflection point when you can’t take any more cost out.”
• Get Involved Early in the Design Process:  Component and services providers that get involved early in a customer’s design process can optimize manufacturing considerations such as efficiency, cost, sustainability, and – increasingly — supply chain. Subcontractors want to work closely with OEMs, but that’s not always realistic if manufacturing is offshore. Proximity to designers is an advantage for electronics manufacturing services (EMS) providers that fine-tune product designs for highly regulated markets.
• Onshore Design and Production Case Study:  KMC Systems, for example, services the healthcare industry, developing products for liquid biopsy, animal sciences, bioprocessing, blood management, pharmaceuticals, biotech, cell & gene therapy, in-vitro diagnostics and next-generation sequencing. Its Merrimack, NH, manufacturing facility is within an hour of Boston’s world-class hospitals and academic institutions and its suppliers are within several hours’ drive.  “We made a deliberate decision to stay onshore and that’s stood well for us, especially in the past couple of years with the Covid pandemic,” said Derek Kane, vice president and general manager for KMC. “When [customers] are designing something, we have found time and again that getting involved at an early stage has a longer-lasting impact on the product.”
• Innovation and Production Case Study:  San Francisco-based Tempo Automation has developed a software-driven platform for automating and perfecting the design and assembly of PCBs, said Joy Weiss, president and CEO.  The company…specializes in quick-turn, high-mix low-volume PCB prototyping. “Customers tend to be companies that are iterating a new product that has a long tail – things that go into space or an MRI machine – that are low volume,” Weiss said. “But a lot is spent on these PCBs before they are released as a new product.”  “The good news is we need tens of something not millions, but ultimately [PCBs] are heading into production,” said Weiss. “It’s easier to source those kinds of quantities than to source on the broader scale. If customers have to do some redesigning due to the availability of parts, we can do that in days rather than weeks. We can monitor the availability of components and collaborate with customers and advise them about shortages as we go through the design process. It’s really a matter of design versus the ability to build a board.” (5)

What Next?

The ERAI Database:  According to the website, “ERAI, Inc. is a global information services organization that monitors, investigates, and reports issues affecting the global electronics supply chain.  Fake electronics can be anonymously reported to ERAI, which provides intelligence to its members and can be used to vet vendors tp avoid counterfeit component parts and chips.

SAE Aerospace Standard AS6081:  Standards like AS6081 have emerged.  Implemented by the aerospace industry, AS6081 is used to verify parts and reduce the use of counterfeit electronics. Is there an equivalent to AS6081 in your industry vertical?  Or can AS6081 be ported over and implemented to solve your organization’s pain points?

Opportunities for Innovation:  According to The Register: DHS “is also awarding contracts to small businesses to develop tools to help check that parts are genuine. Blockchain technology is being considered by the semiconductor industry to track parts and materials to the original source.” (6)

EPSNews reporter Jorgensen also pointed out that the “prototype-through on-demand production market is estimated at $290 billion domestically, according to Tempo. The segment is rapidly growing in the semiconductors, space, medical device, industrial/ecommerce, and aviation/defense industries.  Onshore business models [also] got a short in the arm recently from the Biden administration’s review of strategic supply chains.  While much of the attention in the electronics arena has focused on semiconductors, the administration has now officially recognized the need to rebuild the entire electronics manufacturing ecosystem, including printed circuit boards (PCBs), PCB assemblies (PCBAs), critical minerals, advanced packaging of multichip modules and substrates and skilled workers, according to electronics industry association IPC.”

“Recent IPC studies have urged Congress to combine its investments in semiconductor manufacturing with additional support for advanced packaging, PCBs, and related technologies. Without such action, even if the U.S. begins to produce more semiconductors, the chips will still need to be sent offshore to be packaged and assembled into finished products, leaving the U.S. vulnerable to supply chain shocks.  ‘While the U.S. has allowed its domestic electronics industries to atrophy, America’s competitors have invested heavily in theirs,’ said Chris Mitchell, IPC vice president of global government relations. ‘These reports are another step in a long-term effort to rebuild this crucial industry in the United States.’”

The previously mentioned company KMC  – and parent Elbit Systems of America  – recently opened an innovation center in Cambridge, MA, consolidating expertise in hardware and software design, robotics, optics, fluidics, chemistry integration, motion and thermal control, risk management, supply chain management, performance testing, and advanced manufacturing techniques. “What I feel really optimistic about,” said Kane, “as we expand in life sciences is engaging with new development projects.”  (5)

Stay Informed

It should go without saying that tracking threats are critical to inform your actions. This includes reading our OODA Daily Pulse, which will give you insights into the nature of the threat and risks to business operations.

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