The future of semiconductor procurement – The changing semiconductor supply chain – Insider Monkey
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Senior Manager, Technology/Media & Entertainment/Telecom Sector/Intelligence Unit, EY Strategy and Consulting Co., Ltd.
Leading TMT Intelligence Unit and building creative Thought Leadership.
Semiconductors are one of a number of essential components that underpin modern society, as evident in their extensive presence in many of the products we depend on every day. Essential to the manufacture of computers, smartphones, automobiles and many other products, semiconductors make modern life possible.
However, the manufacturing of semiconductors requires both sophisticated technology and substantial investments, and is largely clustered in a select group of countries and companies. These factors generate a number of risks in semiconductor supply chains. COVID-19, US-China trade frictions, and other events of recent years have increased the severity of the global semiconductor shortage and impacted a wide swath of industries. One example of this impact is automobile manufacturers forced to delay production plans, despite increased demand for their products, due to component supply issues caused by the semiconductor shortage.
In light of such vulnerabilities, resiliency and diversity in the supply chain are now recognized as urgent and critical aspects of ensuring economic security and resolving other issues. One particularly notable risk is the current dependence on the cluster of countries and companies that produce semiconductors. These and other external factors pose challenges that companies can only surmount with sophisticated semiconductor sourcing strategies.
Semiconductor Equipment and Materials International (SEMI) valued the 2022 global semiconductor market at approximately USD618 billion and projects that the market will reach USD1 trillion by 2030. While smartphones and computers remain the strongest source of demand for chips on the semiconductor market, increased use in other applications (e.g., in automobiles and IoT devices) has resulted in dramatic increases in overall demand for semiconductors in recent years. Demand for semiconductors is expected to increase further due to advancements in AI, blockchains and other new technologies.
The EY CEO Outlook Pulse Survey shows that as many as 40% of CEOs responded that they have reconfigured their supply chains to address geopolitical challenges. In contrast with the global response, a mere 25% of CEOs in Japan’s TMT industry responded that they have reconfigured their supply chains. Moreover, only 13% of CEOs in Japan’s TMT industry responded that they aimed to adapt the supply chain for resiliency as part of their strategic initiatives in the next six months, marking another low figure compared to the 32% of global CEOs who responded similarly.
As evident from these survey responses, the challenges facing the supply chains in general are great in number. Below is a summary the challenges relevant to semiconductor procurement.
Source: Created by EY based on SIA materials
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Transfer pricing taxation is also one of the major challenges for such semiconductor supply chains. The transfer pricing rules require appropriate prices for related party transactions and allocate taxation rights among the countries involved in the transaction. Transfer pricing rules are internationally aligned and, in principle, are based on the arm’s length principle where related party transactions should be conducted under the same terms and conditions with independent third party transactions. However, there are many cases where it is practically difficult to apply the arm’s length principle into the semiconductor supply chain. For example, intellectual property regarding the design and development of semiconductors is not commonly transacted in the market, and therefore providing an objective evaluation of its value can be impracticable. The risks and functions related to the manufacturing and sale of semiconductors are not distributed equally among companies within the supply chain, and explicit identification of that distributions can be also challenging.
Given this complex environment, what can procurers of semiconductors do to insulate themselves from supply chain risk?
Companies have begun adopting a different approach to semiconductor procurement, prompted by the prolonged shortage of semiconductors in recent years. The following are effective countermeasures that can be taken in response to the latest such developments.
Supplier diversification and centralized purchasing
Achieving greater supply chain transparency and building collaborative relationships with semiconductor suppliers
Accurate demand forecasting and consideration of alternative solutions
Adapting the semiconductor supply chain to the changing tax environment
【Authors】
Supply Chain and Operations
Kenji Hirai (Partner)
Ichiro Saito (Senior manager)
Ernst & Young Tax Co.
Takashi Ajita (Partner)
Technology, Media & Entertainment, and Telecommunications (TMT)
Kyoko Hasegawa (Consultant)
Tetsuo Kan (Consultant)
*Affiliations and titles are as of the time of the publication of this article.
For inquiries about this article, please contact:
EY Japan Consulting TMT team
email
The semiconductor industry provides infrastructure essential to any digital society, and its supply chains are made of complex webs that traverse multiple countries. Semiconductor supply chains are affected by a host of challenges including talent shortages and the regulation of materials. Such issues make reconfiguring the semiconductor procurement component of corporate supply chains a key facet in enhancing resilience in parts procurement for the greater manufacturing industry.
About this article
Senior Manager, Technology/Media & Entertainment/Telecom Sector/Intelligence Unit, EY Strategy and Consulting Co., Ltd.
Leading TMT Intelligence Unit and building creative Thought Leadership.
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