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Despite the pandemic and economic downturn, the semiconductor industry grew 6.5% to $439 billion in 2020, and 79% of executives believe profits will increase in 2021, according to a report from accounting firm KPMG and the Global Semiconductor Alliance trade group.
The semiconductor industry will continue growing due to the mainstream growth of the internet of things, 5G wireless networks, and the auto industry, according to the KPMG Global Semiconductor Industry Outlook.
KPMG surveyed 156 senior executives from global semiconductor companies in the fourth quarter. Eighty-five percent of the executives predicted that revenue will continue to increase in 2021, and 73% plan to increase capital spending. Seventy-one percent of respondents said they plan to spend more on research and development.
Sixty-eight percent reported that executing on growth initiatives is their top strategic priority over the next three years. As far as concerns, 53% of executives listed territorialism (concern over territory disputes such as those between the West and China), and 37% cited supply chain disruption.
Forty-four percent of respondents ranked making their supply chains more flexible and adaptable to geopolitical changes and other disruptions as one of their top three strategic priorities.
Sixty-three percent expect to increase headcount over the next year, while 30% identified talent risk as an issue facing the industry. Developing and managing talent was rated one of the top three strategic priorities (53%), up 13 percentage points from last year.
Lincoln Clark, partner in charge of KPMG’s global semiconductor practice, said in a statement that the pervasiveness of technology across society and all sectors is accelerating as we undergo profound shifts in home-based work, education, and entertainment. This is driving a surge in demand for chip-based products, and semiconductor companies have been quick to react to the change.
Respondents highlighted the most potential for growth in sensors/micro-electro-mechanical systems (MEMS), analog/radio frequency (RF)/mixed signal, and microprocessors — including graphic processing units (GPU), microcontrollers (MCU), and memory protection units (MPU).
Supply chain risks
Semiconductor companies are not alone in their concerns about the supply chain. The pandemic has triggered an across-the-board reassessment of supply chain resiliency — from businesses to governments — to ensure they are prepared for future crises. U.S. President Joe Biden recently announced a supply chain review after the ongoing pandemic sparked a number of shortages across critical industries. He expressed particular concern about semiconductor supply chain issues.
KPMG urged companies to review their supply chains in light of political and pandemic concerns.
Many carmakers have faced semiconductor shortages, and some have even been forced to close production lines. Automakers have historically relied on just-in-time inventory, and with early COVID-19 shutdowns and demand rising faster than expected in the second half of 2020, they could not ramp up the ability to source sufficient volumes of the necessary semiconductor content fast enough.
It is important for companies to weigh the benefits of “just-in- time” versus “heavier assets-on-hand” inventory approaches. The geographical diversity of supply chains is an important consideration, with more flexible supply chains — and those that can adapt to geopolitical changes — becoming increasingly successful.
The report also suggested chipmakers and their customers reassess the need for redesign or introduction of micro supply chains for critical components, rather than applying one-size-fits-all supply chain procurement models.
Many companies already outsource the manufacturing/assembly of their products or key components to third-party suppliers, many of whom are in low-cost manufacturing countries. Depending on the arrangement, inventory that is held at the supplier location or in transit could become “accounting inventory” on the books. And verifying the completeness, existence, and accuracy of this inventory could present audit challenges. Alternatively, operations that elect the heavier assets-on-hand approach to address just-in-time requirements open themselves up to greater risk of excess or obsolete inventory.
Companies are also facing a greater risk of tariffs. KPMG said reducing costs and risks associated with rising trade and tariffs across the supply chain is crucial. In the semiconductor industry, for example, some manufacturers have made significant supply chain changes, including sourcing chip content from different geographies, to optimize operations in the current high-tariff environment.
Additionally, nationalist technology and trade policies — particularly by the U.S. and China — may add cost pressure and supply chain complexity. Governments have grown increasingly protective of homegrown intellectual property, especially as it relates to sensitive technology sectors such as 5G and others. With growing frequency, export controls and sanctions are tools to restrict foreign access to advanced hardware, software, and technical data. These controls present significant compliance and operational challenges, and effective management is key to maintaining a market edge, KPMG said.
The pandemic has accelerated the digital transformation in many industries but slowed progress in others. At the same time, it forced many manufacturers and suppliers to update their systems and operating models to accommodate remote workforces and become more efficient and cost-effective.
KPMG said companies should be fully aware of the practices of suppliers, producers, vendors, and partners across the entirety of their supply chain to ensure they meet various compliance requirements.
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