Change is afoot in the chip manufacturing industry, and COVID-19-induced supply chain shortages aren’t the only thing to blame. Deloitte says this is how semiconductor companies can respond.
A study from Deloitte on business transformation in the semiconductor industry finds that there are big changes happening in the chip manufacturing world, and not all of them are due to pandemic-related supply chain interruptions.
It’s true that the COVID-19 pandemic has led to a global chip shortage, but the common assumption that the pandemic was the cause doesn’t go far enough into understanding the state of the semiconductor industry prior to the pandemic, said Deloitte semiconductor sector for consulting lead Brandon Kulik.
“Semiconductor companies have under-invested in basic things like automation, they’ve honed in on selling the same products to the same customers and have been following Moore’s law to make their chips smaller and more energy efficient — all the things they’ve been doing forever. When something happens that’s once in a lifetime, like the pandemic, their ability to shift is not as great as that of other industries,” Kulik said.
In short, the semiconductor industry, despite its history of innovation and pushing the limits of computing, is a rigid establishment that doesn’t react well to change. That rigidity meant that many semiconductor companies lacked foresight and thought the shortage would be brief, which led to ordering fewer parts that in turn led to further shortages when the drought didn’t end, Kulik said.
Paul Silverglate, tech sector lead for Deloitte U.S. firms, likens the chip shortage to a supply chain thought experiment called “the hog cycle.”
“It takes X number of years to raise pigs so that they’re ready for sale and so the idea was that when there was a big demand everybody would go into the pork business and start raising pigs and by the time the pigs were ready to go to market there was a glut on the market,” Silverglate said. China, Taiwan and other chip manufacturing countries are building more fabrication centers and attempting to ramp up production, Silverglate said, but there’s still a lot of time until things get back to normal. According to Kulik, it could be a couple more years until the industry settles into its new normal.
What the new chip industry normal will look like
Fifty-eight percent of survey respondents said that their company was currently working through business transformation initiatives, suggesting that the need for change is obvious. The study found four primary characteristics of transformation in the semiconductor industry, and each comes with its own essential takeaways for chip companies looking to transform and stay competitive.
Disruption of plans
The study said that 49% of transformation strategies have had to materially change while already in progress, “half of semiconductor companies have had to materially modify their transformation strategy to adapt to changes in the market, strategic objectives or technology,” the report said.
Deloitte concluded that companies were jumping the gun and moving forward without a fully developed plan. That, say Kulik and Silverglate, is the worst possible scenario.
“Facts are your friends,” said Silverglate. “So, the way that you transform is to have a clear understanding of all the facts at play. You have to be tighter linked into your own company and understand what the different parts of your business are doing, so that when you need to transform you can affect all those parts at the same time.”
In short, companies need to be built for change and ready to respond to the unexpected.
Breaking in to new frontiers
Chip sales is largely a B2B transaction, Kulik said, but it doesn’t have to be restricted to hardware. Semiconductor companies should be open to new partnerships and new ways of building products, the report said, suggesting that AI, edge computing, IoT and other services are a way to grow without needing to generate excitement at the consumer level, which Kulik said chip companies often fail to do.
Don’t be afraid to expand your market reach, the report suggests, even if you haven’t yet built the infrastructure to support it. Finding new partners can mean finding new revenue streams, new products and other ways to affect transformation.
Changing models and solutions
Chip sales are one and done: You don’t keep paying for a processor once you’re out the door. This is a lost opportunity for semiconductor manufacturers, the report said, and suggests new models of revenue, like subscription-based services, to help chip companies grow.
“All the data that flows through a chip can be monetized,” Kulik said.
data flow flows through the chips, and the chips are where much of the actual AI sits where the decisions are made, and you can look back at what’s happening with that device, the information that’s coming in, how it’s being used, what’s flowing out and how it’s being used,” Kulik said.
The move to that sort of service (providing data analytics of anything that passes through a chip) can have a vast effect on a multitude of industries, Kulik and Silverglate said. Factories can be reconfigured more quickly, medical devices can be adjusted, stores can find ideal product layouts and more.
Growth into digital spaces
Semiconductor companies make chips. What they don’t do as much of, the report said, is build software for those chips, which Kulik said can provide new unforeseen uses of those chips in the future. “If you can recode the software and you’re not completely stuck to every lithographic etch in the chip; you can build in and around the code that can make different use of that chip,” Kulik said.
Along with that, Silverglate said the pandemic and the disruption to the semiconductor industry has created the perfect opportunity for growth. “The pandemic has been a lightning rod for change, and now people are feeling comfortable with it. As we’re bouncing out of the pandemic and comfortable with change, the next step is how we use that momentum to succeed,” Silverglate said.
Deloitte suggests that all business leaders should consider four questions as their business transformation plans materialize that can help ensure success:
- What’s the transformation ambition?
- What’s the scope, size and speed of the transformation?
- How does the transformation ambition align to or change the current enterprise strategy?
- What are the business models needed to achieve the transformation?
Regardless of what a company may plan to do, or how to do it, it’s time to begin. “If you’re hesitating or can’t figure it out, the other guys are,” Kulik said. The new threat to chip companies, Silverglate added, isn’t the next faster chip, “it comes down to how well your competition can pivot, and your ability, or inability, to do the same.”