What’s the first thing that comes to mind when you hear 2021? The Covid-19 vaccine rollout? The Tokyo Olympics? NASA’s rover Perseverance landing on Mars? All are excellent answers. All are major events that happened over the course of 2021. This includes an ongoing event that made headlines throughout the year: the global semiconductor shortage.
The shortage affected all sectors, from coffee to toilet paper again. But the chip shortage had the greatest impact on the electronics sector. The semiconductor chip shortage is still here as demand grows. Despite this, experts are positive about overcoming the peak sooner than later. Reports on trends throughout Q3 and Q4 of 2021 suggest stabilization and that the worst, while lingering, is over. Problems with allocation might persist throughout 2022, but the brunt of the storm has passed.
So, why was the 2021 shortage so hard on industries, especially within the electronics sector? If one was to summarize the cause there isn’t one place to assign blame. The largest contributor to the 2020-2021 shortage would be the Covid-19 pandemic. However, it wasn’t what caused the shortage, nor the reason it went on for so long.
The Covid-19 pandemic only drew attention to critical stress points in an already vulnerable supply chain. These stress points existed far before Covid-19 forced global lockdowns. The pandemic only drove them to the breaking point.
It can be argued that the missteps that led to the perfect storm of the chip shortage started over 20 years ago.
How the Pandemic Exposed a Vulnerable Global Supply Chain
December 12, 2019, Wuhan China in the Hubei Providence. A small group of people begins to experience shortness of breath and fever. This group consists of average men and women with no ties to one another. They are all believed to be suffering from pneumonia.
The cause of the illness is unknown. The strain of pneumonia is also unknown. By December 31, 2019, on New Year’s Eve, the World Health Organization China Country Office is informed of this outbreak. Little is known about the transmission rate, the symptoms, and what this pneumonia is. What they do know is that all cases seem to have originated from the Huanan Seafood Wholesale Market in Wuhan.
It would take until January 7, 2020, for Chinese authorities to identify the source of the illness after isolating it. It was a novel coronavirus. A month later on February 11, 2020, WHO would give this novel coronavirus a name. Covid-19.
It wouldn’t be until March 11, 2020, that WHO would declare Covid-19 a pandemic. What followed would be an immense shift in what was considered “normal.” For the United States, lockdowns started midway through March. For a lot of businesses, adaptation was necessary or many risked shutting down for good. Some, despite everything, did.
For those that could, many organizations switched to work-from-home (WFH) models. Dozens of people now required better-equipped computers, more capable phones, faster networks, and speedy shipping to meet the sudden rise in demand. While the majority of all business sectors needed to find a way to get their products to consumers under stay-at-home orders, the electronics sector faced the opposite.
What hit the electronics sector was an unimaginable boom in demand. So what’s the problem? A boom in demand does mean lower supply to meet needs, but why was this demand incapable of cresting?
Simple. China, the home of numerous manufacturing plants for electronic components, was in serious lockdown. With no labor to fill the gaps, U.S.-based companies waiting for chips were suddenly cut off from their supply.
Natural Disasters, Pandemic, Geopolitical Strife, Oh My!
With China on lockdown and facing a global pandemic with skyrocketing demands for chips, the electronics sector had to look elsewhere. The overreliance on Chinese manufacturers meant there was now a huge backlog to fill and a few semiconductor factories to fill it. Even those factories were forced to shut down for stay-at-home orders eventually.
During that time, disaster struck.
A fire at a massive auto-chip plant in Japan ravaged Tokyo in March 2021. A little less than a month prior severe winter storms in Texas left several important semiconductor factories dead in the water for weeks. Semiconductor fabs, in contrast to a car production line, for example, do not have a simple “on and off” process.
Willy Shih, a Harvard professor specializing in manufacturing, explained the process. “Semiconductor chips are made with complex manufacturing processes that have hundreds of steps, and almost all of them require precise control of things like operating temperature,” Shih said.
If lockdowns, fires, and winter storms weren’t enough to grind our vulnerable supply chain to a near-complete halt, there were more problems to come.
A block in the Suez Canal by the transport ship Evergreen Marine at the end of March sent waves of disruption through the chain once more. In April, the Taiwanese Semiconductor Manufacturing Co (TSMC) said mounting geopolitical tension was causing consumers to double-order in a frantic move to increase supply.
Over the summer, as tension rose, experts warned that the growth of advanced technology combined with high levels of outsourcing would lead to future disruptions. If the 2021 chip shortage was bad, imagine how catastrophic future shortages could be.
What Can Be Done to Ease Shortage Woes in the Future?
While the problems that contributed to the 2021 shortage are numerous, the solutions, likewise, are many. Why these solutions weren’t examined at the start is due to one, single obstacle. Which was, unfortunately, growing too comfortable with the old “normal”. Issues arise and complications occur, no matter how stable a system seems. The importance of finding workarounds is what will benefit everyone in the future.
What are the solutions to specific problems? For many of these problems, such as fires, bad weather, geopolitical tension, and labor shortages have the same solution. Diversifying your supply chain is a necessary step. For the longest time, the majority of businesses would operate on the oversaturation of the Chinese electronic market. While purchasing from China is not an issue, buying from only China-based companies is.
The rising geopolitical tension, combined with lockdowns in production-heavy provinces contributed to the shortage in the global market. Far too many companies depended on Chinese original equipment manufacturers (OEMs) to fill backlogs. The solution to this problem is China plus one strategy. The strategy calls for buying from China alongside another country to diversify risk.
Likewise, increasing semiconductor manufacturing within the U.S. would remove the overreliance on foreign production to meet market demands. A bill to help incentivize more businesses to stay within the U.S. called the CHIPS Act plans to use $52 billion dollars to accomplish this goal.
While unknown risks, such as weather or building fires, are mostly unpredictable, if manufacturers in your supply chain cease production or face temporary shutdowns from anything, there is a solution. That is stock supply.
Keeping a supply of necessary components that can keep production operational during strenuous times is needed. Unfortunately, during 2020 and 2021 many sectors were forced to consume their excess supply, what little they had of it, to stay open.
Now, like many companies in 2021, none of these options were available. If a similar situation arises in the future what can a business do to make it through a shortage?
Luckily, there is an answer for that too. It’s building and maintaining a strong relationship with your chosen distributor.
Strong Relationships with Distributors Gets You Through it
It’s not a contradiction. In the 2021 September issue of Electronics Sourcing North America, Pierre Brossier, regional director for Sanmina Corporation explained the importance of maintaining relationships with a small number of distributors. He said, “Sanmina cultivates long-term relationships versus taking an opportunistic approach. Our partners know that they can rely on us.”
Many manufacturers are following Sanmina’s approach. This includes Vincent Cellard, vice president of Flex, an electronics manufacturing service (EMS) provider. Cellard told ESNA, in the same issue, that Flex prefers working with distributors over OEMs in shortages. Noting that in certain scenarios, Flex will “leverage [distributors’] strong positions with a manufacturer that we may not enjoy to the same degree.”
Shortages will often strain the relationship between the OEMs and product manufacturers, such as automakers for example, due to limited stock. Electronic distributors are able to navigate shortages with agility buyers do not have. A great distributor promotes collaboration among every company part of a supply chain so relationships grow and develop and success follows.
Find Someone Who Has Your Back
That is how Area51 Electronics will see its partners through future shortages, by maintaining a close relationship to address and assess their partners’ needs. As an authorized and independent distributor, Area51 Electronics has access to a massive portfolio of electronic component suppliers. This means that for anyone looking for genuine parts from original equipment providers or hard-to-find obsolete parts, Area51 Electronics can get them.
Area51 Electronics was one step ahead of the shortage with something in their arsenal many distributors needed after the shortage was already in effect. It’s called the “collaborative advantage.” It is all about forming an alliance to ensure both companies are working synergistically for the greater good.
Area51 Electronics gives its customers a competitive edge by offering both authorized and independent lines of inventory all in one place. It removes the desperate switch from distributor-to-distributor that doesn’t offer the same supplier portfolio. And Area51 Electronics adheres to the highest standards of quality control and counterfeit mitigation to ensure its customers receive genuine, authentic electronic parts and components.
With the increasing demand for smart technology and advances in current appliances from computers to cars, shortages are more likely. The pandemic and the subsequent natural disasters took the world by surprise, however, it’s not impossible for the stars to align once more in the future. To make sure future shortages don’t take you by surprise, focus on forming strong partnerships with distributors that can see you through it.
Area51 Electronics plans on doing just that.
