A semiconductor shortage is a nightmare for manufacturers, assemblers, consumers, and just about everyone else today. In powering everything from automobile systems to electronics, we rely on semiconductors in many areas of our daily life.

The ongoing conflict in Ukraine is tragic on many levels. But with the disruption to supply chains of raw materials for microchip manufacturing, Russia’s invasion threatens semiconductor supply worldwide.

Current Semiconductor Shortage

The global semiconductor industry continues to experience a severe shortage. Supply chain disruptions brought about by the outbreak of Covid-19 have made these critical components in short supply.

While COVID-19 boosted demand for electronics and automobiles by preventing people from spending money on transport or other services, pandemic-related lockdowns compelled chipmakers to shut their plants. Disruptions in shipping compounded the shortage of semiconductors globally.

Russia’s invasion of Ukraine has made it more difficult for companies to obtain neon gas, which is needed for lasers used in chip manufacturing. Also, palladium is in short supply, which is used in other stages of the manufacturing process. These issues are aggravating the shortage that affects everything from smartphones to cars.

The shortage of semiconductors has hurt many industries globally. In particular, the automobile and electronics industries have been crippled by this shortage.

Due to the scarcity of wire harnesses made in Ukraine by Leoni, BMW and Volkswagen have begun shutting down production lines in Germany. In addition, Michelin has indicated that it may halt several of its European operations owing to logistical issues caused by Russia’s invasion of Ukraine.

Port Volumes vs. Component Receipt

A disruption in the supply chain, a weather incident, or a geopolitical event has little influence on transport networks in most cases.

However, when a pandemic with obligatory lockdowns, labor shortages, and conflicts are added to the mix, a perfect storm emerges, throwing the whole supply chain into disarray.

That’s precisely what’s happening with shipping networks right now, as port congestion and continuous container scarcities are only two of the major difficulties that consumers, carriers, suppliers, and logistics providers face.

Manufacturers experience shortages of essential components and increasing energy and raw material costs. They compete for limited space on ships, driving freight rates to new all-time highs and forcing many exporters to increase prices or cancel shipments.

In the coming years, supply chain interruptions, factory closures, port closures, and restricted transport options are projected to become the norm in Europe. This instability will be exacerbated by increased energy costs and commodity prices as a consequence of blockages, sanctions, and trade restrictions.

Potential Impacts on the Chip Manufacturing Industry

The war in Ukraine will shape the semiconductor industry for many years to come. Already facing a microchip shortage, events in Ukraine is but the latest threat to semiconductor supply chains.

Chip manufacturing relies on critical materials supplied by Ukraine and Russia. For example, Ukraine supplies much of the neon used in a key production stage of semiconductors. Russia is a key supplier of metals such as nickel, copper, and aluminum. Any supply issues of these input factors could cause a significant price hike in semiconductors and products that feature semiconductors.

Shortages of critical materials and the increase in prices of production inputs will bring about drastic changes in supply chain operations. While manufacturers may have a sufficient supply of production factors in the near term, mitigating threats in the long run have taken center stage in the industry.

Reshoring Supply Chain

Russia’s invasion and the accompanying sanctions that result is one of many recent events threatening the stability of global supply chains. The US-China trade war, Covid-19 disruptions, and climate-related events further exacerbate these risks for manufacturers. The result is increased momentum for localized sourcing strategies.

After all, this transition has been underway for years already. With the spike in oil price during the financial crisis of 2008 and the host of recent natural disasters like the SARS epidemic and the tsunami that struck Japan and countries around the world, leaders began to recognize the increased risk associated with globalized supply chains.

The change was slow at first, as the significant benefits provided by Asian manufacturers were difficult to overlook. But more recently, following the onset of the trade war with China coupled with pandemic-related hardships and the surge in natural disaster disruptions to normal operations, the push for localization has increased.

An example of increasing localization of supply chain operations is Intel. Intel’s plans to invest $20 billion to construct two factories for semiconductor production in Ohio is one such instance. Another is Schneider Electric; in building three manufacturing plants in North America. Another prime example of the push for increased localization is the battery manufacturers’ and automakers’ plan to set up 13 electric vehicle battery factories in the US over the next five years.

However, this transition to more localized production will also require government support. Improvements in infrastructure, including airports and ports, will need to happen. But governments are starting to act. The European Chips Act and the US Chips Act, while yet unfunded, are government initiatives to promote domestic semiconductor supply.

Rise in Prices

Prices of semiconductors and products that use semiconductors will likely rise across the board. Transportations costs will inevitably be on the rise. The price of oil and gas has jumped since Russia’s invasion, and higher transportation costs will eventually reflect this reality. Another complication to transportation costs will be the uncertainty surrounding Russia’s transport infrastructure to supply manufacturing in Asia to markets in Europe. If Asian manufacturers lose access to this network, uncertain supply and higher costs will follow.

Neon is a critical element in the production of microchips. This noble gas is used to regulate the delicate job performed by lasers in etching silicon in the production of microchips. A disruption in the global neon supply, in which Ukraine is the world leader, would have disastrous effects on the industry.

And this is already happening. Two of the largest neon suppliers in Ukraine, Cryoin and Ingas, have been forced to cease operations due to the ongoing conflict.

If history were to repeat itself, firms and consumers alike should expect a significant spike in prices. In 2014, when Russia annexed Crimea, the price of neon skyrocketed by 600%. China, the world’s second-largest neon supplier, has seen neon prices shoot up by 400% from Oct. 2021 to Feb. 2022.

How Businesses Can Protect Themselves

The effects of Russia’s invasion of Ukraine will change how businesses operate. It is important for firms to respond to this new business environment. Firms also need to be ready to act quickly and capitalize on new opportunities.

To effectively do this, companies need to put in place new policies and systems that serve these aims.

Real-time Market Information to Identify Arbitrage Opportunities

Businesses should use primary and qualitative research to find supply sources and transitory purchasing windows daily with the support of a trusted technological partner.

Costs of semiconductor components such as ICs, diodes, and passive components have climbed by over 50 percent since the beginning of 2021. This underscores the need to seek and capitalize on opportunities to secure critical components.

Speed up the Process of Adding New Suppliers

Companies may greatly improve their time to market for onboarding new chip vendors by close collaboration with their technology provider.

The objective should be to substantially minimize the time it takes to add suppliers, understanding that if it can’t be done in a day, organizations risk losing valuable supply.

Expedite Payments by Working with Finance Teams

Procurement teams should enlist the help of their finance teams to enable speedier payments to suppliers. They should work with finance teams to develop a fast track that enables suppliers to be paid within a day.

Determine the Optimal Chip Order Quantities

Companies that want to secure consistent chip supply should plan ahead of time on order volumes that are economical and cost-effective.

Freight prices are anticipated to rise even more owing to a scarcity of containers, port congestion, and increased demand. These considerations need to be factored into any purchase decision.

Unifying processes

By combining design tools, development, and techniques, businesses can convert design iterations into process improvements and break the cycle of time-consuming feedback loops, allowing them to get products to market much more quickly.

Design for Resilience

Companies that can redesign products to reduce their reliance on components that are vulnerable are better prepared to handle disruptions. It allows companies to respond quicker to disruptions such as a microchip shortage and better weather storms than competitors.

The Road Ahead

The war in Ukraine will likely deepen the global microchip shortage. With new supply issues of critical inputs and greater inflationary pressure resulting from Russia’s invasion, the semiconductor industry will continue to experience challenges for the foreseeable future.

The industry needs to continue to push for the localization of supply chains and invest in the expanded production of microchips. While it will take some time to realize these developments, they will address many of the problems we face today.