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COVID-19 impact: The invisible bottleneck of automotive semiconductors logistics

14 April 2020 Phil Amsrud

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 automotive industry topics and sectors. Content includes news and analysis, topical reports, supplier profiles, and an automaker-supplier relations database across 12 domains. Visit AutoTechInsight to view all our offerings.

Posted 14 April 2020 by Phil Amsrud, Senior Principal Analyst - Automotive, IHS Markit

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