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As the world grapples with coronavirus disease 2019 (COVID-19)
pandemic containment, most car manufacturers and tier-1 suppliers
have had to suspend operations or are functioning at reduced
capacity. This has resulted in a reduction in demand of the
semiconductors used in cars, at least in the short term.
Looking at the supply chain ecosystem, semiconductor companies
and their suppliers of lead frames, mold compounds, and raw
materials such as silicon, are also feeling the effects of the
pandemic. Considering the backend process of making these
semiconductors, the assembly and testing being far more labor
intensive than wafer fabrication and the front-end processes, there
could potentially be a substantial bottleneck once demand starts to
grow.
Even if the backend processes are not constrained, logistics is
a large and invisible part of the supply chain that is critical to
getting parts and materials where they need to be. This is because
when things function smoothly, it is more of an afterthought
compared with the other supply chain processes. However, when it
does not work, it is the efforts of the largely unseen global
supply-chain managers and their teams that must work to resolve the
logistical issues.
Complex sequence of transportation of
semiconductors
Semiconductor manufacturing processes can be simplified in terms
of wafer processing on the frontend and assembling and testing on
the backend. Logistics is involved before, in between, and at the
end, of each of these processes. It is the movement of raw
materials to the supplier, of finished wafers to assembly
locations, and of the finished ICs to the customer. A majority of
these semiconductors are either transported by air or on land,
depending on the origin and destination country. Shipping by sea is
also an option, although it's more of an exception than the rule in
regard to transportation of semiconductors in various stages of
completion.
Since semiconductors cover a wide spectrum—from two and
three terminal analog devices using mature processes, all the way
up to the powerful SoCs (system-on-chips), ASICs
(application-specific integrated circuit), and memories using
advanced digital processes—wafers are fabricated throughout the
world. Additional processes such as wafer thinning or adding
micro-lenses to image sensors, are often done off-site which
require further shipment of wafers. Regardless of the need for
additional processes, many wafers are flown elsewhere to be
packaged and tested. Most of the packaging happens in mainland
China, Malaysia, the Philippines, Vietnam, and other countries in
the Pacific Rim. After packaging and testing, the finished
components flown to a separate location for consolidation before
being transported to tier-1 suppliers' assembly plants in various
regions around the world.
While these procedures may seem straightforward, one must
consider the aspect of transportation before shipment takes place.
For instance, the materials must first be loaded into trucks and
driven to airports, after which the materials need to be unloaded
and then put into the airplanes before they are flown to their next
destination. In addition to dedicated cargo carriers, commercial
flights are also heavily used for carrying cargo. The capacity can
range from expedited shipments like counter-to-counter and
hand-carries to standard cargo. As regional and international
passenger flight services have been reduced globally, there is a
decrease in the cargo shipment capacity provided by commercial
flights. While it is possible to replace planes with ships to
offset depleted air cargo capacity, the amount of time taken to
transport the cargo to its destination increases significantly.
Once the cargo arrives at the port of entry, it needs to clear
customs and the consolidated shipment needs to be broken down into
customer-specific shipments. These customer shipments can then be
transported (usually trucked) from the port to a customer's
dock.
To sum up the entire sequence of transportation, the materials
are assembled, tested, driven, flown multiple times with most
international movements needing customs clearance, and then the
shipment is broken down into customer-specific units, with the
final stage being the delivery of the materials to the customer's
factories. While a lot of wafers can be fabricated with relatively
few people, the aforementioned logistical chain requires healthy
manpower. Therefore, when demand starts picking up and every link
in the supply chain has the required inventory and capacity to
support it, there will still be a logistics challenge in
transporting parts to their destinations in a timely manner.
Costly penalties for delay in delivery
Considering the nature of agreements, suppliers have to support
automotive demands and ensure the delivery of parts as needed;
automotive products is one of the top priorities for capacity,
shipments, and logistics. Any delay in shipment delivery can have
serious financial implications. Penalties can include a supplier
paying the cost of a car assembly plant being shut down due to a
supplier's part not being available or delayed.
For example, a widget supplier, which is selling its products for
low prices, being the reason why a tier-1 company can't provide its
solutions to an automaker, thus causing production stoppage for a
week at the automaker's plant. In such a scenario, the OEM would
hold the tier-1 supplier responsible and the tier-1 supplier would
hold the widget supplier accountable for that loss.
Additionally, tier-1 companies track on-time delivery for all
their suppliers and use this as a factor in awarding new designs
and contracts. These reasons are why the supply chain responds to
demand from the OEMs and tier-1s as quickly as possible to avoid
costly penalties and losing new designs. Since these penalties can
quickly add up, suppliers are motivated to pay expedite fees to
avoid them. Paying to expedite shipments works when there are
workers and shipping capacity and it is a matter of how much to pay
to move to the head of the line. Unfortunately, if there are no
planes and trucks available and no manpower to operate them, the
system becomes jammed.
However, the supply chain has fewer options because of the
quality and qualification expectations of OEMs and tier-1 companies
to find alternative sources of material or manufacturing capacity.
The automotive sector is more agile than it has ever been, but
there are still limits. Until air cargo capacity is back to normal,
and priority is returned to automotive semiconductor shipments as
opposed to the current COVID-19 related products like Personal
Protection Equipment (PPEs) and ventilators, logistics will
potentially have a bottleneck as automotive demand recovers. The
logistical challenges don't lend themselves to easy workarounds, so
in the short term, it could be the most overlooked part of the
supply chain and also one of the more challenging processes to
fix.
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The above article is from AutoTechInsight
by IHS Markit. AutoTechInsight provides a wealth of original
thought leadership, data, and analysis on a broad spectrum of
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Posted 14 April 2020 by Phil Amsrud, Senior Principal Analyst - Automotive, IHS Markit
