The semiconductor industry’s path to recovery following the coronavirus crisis

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Component market down in Q1

Currently, the COVID-19 pandemic is threatening the lives of countless people around the globe. Although countries like China, where the virus hit early on, are starting to recover, Europe and the United States are in the worst stages.

Obviously, concern for human life is paramount. However, the economic impact of the coronavirus cannot be ignored or understated. Every industry is feeling the effects of the virus, which has slowly brought the world to a halt over the past two months.

So, what does recovery look like? For the semiconductor industry, rebounding from the impact of COVID-19 won’t happen overnight. However, with some creative supply chain management and production optimization, a full recovery is possible.

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Reality Check

Though it still doesn’t feel real at times, the scope of the coronavirus pandemic is massive. As of this writing, more than 367,000 cases have been confirmed across 168 countries. However, experts believe that countless more cases are still unconfirmed due to a lack of testing kits.

In response, governments have taken unprecedented steps to try and stop the spread of the virus. From China to Europe to the U.S., “stay at home” orders have sent employees home and slowed production to a standstill.

The resulting economic impact isn’t here yet. However, it is a problem that the world will need to address. For businesses, tackling the COVID-19 problem is twofold—keeping employees safe and maintaining operations.

While the first takes precedence, the global economy relies on businesses continuing their operations. For the semiconductor industry, maintaining a relatively normal output is even more important. As society adapts to a world that looks very different (and more remote), technology has become more important than ever.

Semiconductors are at the heart of it all. When the COVID-19 pandemic settles down, consumers will go back to buying devices. Companies will realize that their digital infrastructure is woefully inadequate. The pandemic will almost certainly drive the world to a more digital state—even once it is in the history books.

A massive supply of components will be needed in the coming years to fulfill that demand. As such, the semiconductor industry needs to start its recovery as soon as possible.

Transparent Supply Chain

Most businesses, whether in the semiconductor industry or not, have a rather large inventory. The following graph from McKinsey & Company shows the general stockpiles held by companies across several different sectors.

Image: McKinsey & Company

Unsurprisingly, the pharmaceutical industry has the largest inventory. That’s incredibly important as any disruption to the supply of medicine would be a catastrophic health crisis. However, it’s worth noting that the semiconductor industry follows in second place.

According to this estimate, the industry has enough supply to last until some time between mid-May and mid-September without feeling the effects of the COVID-19 slowdown. That’s good news as it gives companies precious time to get their logistics in order. However, it likely won’t be enough.

Experts believe that the peak of the virus in the United States may not even arrive until May. We could feel its effects deep into the summer. So, while the world hopes for a positive outcome, it’s best to prepare for a scenario that seems more pessimistic.

For the semiconductor industry, supply chain management will be a hot topic moving forward. The first step to recovering from the coronavirus is to lessen its effects. By taking an accurate, realistic count of existing inventory, companies can buy time to determine their next moves.

This includes things like identifying alternative suppliers who have been impacted less by the outbreak. For the companies that are operating with relative normalcy, finding buyers in need will be an important process during the coming weeks.

Ultimately, the most important supply chain intervention is to ensure that the needed supplies to keep the production lines moving are available. Regardless of how they must be acquired, obtaining the parts needed to maintain output is essential.

Determining Demand

The next phase of recovery is identifying demand. It’s easy to get stuck in a pattern of production when things are going well and companies are buying normally. However, the next few years will likely be abnormal as the global economy works to catch up.

This means that chipmakers need to carefully consider demand. What worked last month might not be applicable after the virus retreats.

Developing a demand forecast strategy will be crucial. The consumer devices market may be skewed as people focus their priorities on other expenses. However, the enterprise tech sector should experience a boom in the coming years as companies address the shortcomings exposed by the new work from home mindset.

Optimizing Production

Something that goes hand in hand with managing the supply chain is optimizing production. While that is always important, it will become even more so in the days to come. As semiconductor manufacturers learn to deal with the complicated issues facing the world in the wake of COVID-19, those with optimized production lines and product output will find success.

In the short term, companies will need to make quick decisions to keep their production line moving while shorthanded. However, many of those changes won’t be sustainable in the long run.

After analyzing demand projections, chipmakers will need to adjust their practices accordingly. Whether this means cutting back on output of certain products to focus on the most in-demand ones or simply adjusting timeframes, production optimization will be more important than ever in the coming years.

Finally, the semiconductor industry will need to look at the larger picture. In all likelihood, the COVID-19 pandemic will expose some painful holes in the overall supply chain. Once recovery is able to occur and operations become stable, chipmakers will need to focus on rebuilding a resilient supply chain.

With savvy business strategy and some creativity, a full recovery is certainly possible. However, it will take patience, time, and cooperation from chipmakers across the semiconductor industry.

For more on how to maintain your supply chain, click here.

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