The Emergence of New Business Models in the Semiconductor Industry


The chip market supply chain has improved since last year. But, while product design and specifications have gotten back on track after a period of unavailability of components, an alternate route to product realization still needs to be explored. During the pandemic, the components that were available were often priced excessively high and subject to three-to-four-quarter delays. Some service providers and solution R&D companies took the lead by redesigning the product based on available components.  

Fresh Investments in Chipmaking

In the post-COVID era, enterprises are facing acute challenges with geopolitical issues that have disrupted the Chinese supply chain. As the China-Taiwan issue snowballs into a geopolitical challenge stretching beyond each country’s borders, TSMC, the world’s largest contract chipmaker, would need fabs from locations other than Taiwan. Organizations have realized that depending on a single regional supply chain can create serious challenges.

Accordingly, companies in the U.S. (such as Intel) and those in Europe (such as Infineon) are working on three-nanometer (nm) fabs that would reduce the dependency on the Chinese supply chain. Manufacturers that have end-to-end products linked tightly with the Chinese supply chain are considering alternatives to meet demand and continue production, even compromising on cost if needed. One example is the adoption of the ST microchip, despite it being expensive.

Impact of Geopolitical Issues on the Chipmaking Industry

Original equipment manufacturers (OEMs) are looking for partners to redesign their products with available components and avoiding suppliers that are impacted by the geopolitical issues. Tools such as SiliconExpert play a significant role in this. With over two billion database parts, the software provides supply chain information by the part number, including details on the manufacturer, manufacturing location and sourcing of the raw material, along with actionable insights on product obsolescence, product life and other parameters. This information is critical to engineers looking for alternate suppliers.

Impacts of Chip Shortage on Different Industries

While the Automotive and Healthcare industries are still struggling to cope with the global chip shortage, the situation in the consumer appliances and electronics sectors has improved. A few medical device companies are opting for bulk purchases in lieu of product redesign. Due to the lack of availability of lean or just-in-time inventory, these companies are placing orders for field programmable gate arrays (FPGAs) for the next two to three years and putting this on the balance sheet. This demand matches the scalability required by the chip manufacturers for profitable production.

The automotive segment, on the other hand, does not portray a promising scenario after the setback due to the pandemic despite consistent demand. While the supply of microcontrollers is manageable, most of the chips are still 52 weeks out. These chips play a crucial role for L3 and L4 functions (used in semi-autonomous driving), such as adaptive cruise control, which requires considerable processing due to sensor fusion. OEMs have been delivering cars without these functionalities for the last few months, with the option of a retrofit once the chips are available. Several OEMs have reported a significant backlog in delivery due to the component shortage.

The Rise of Custom, Design-Focused Boutique Service Providers

A new generation of semiconductors comes with the realization that yesterday’s business models are obsolete. As chipmaker Intel ramps up its foundries and manufactures wafers at scale, new business models will emerge. Save program-based engagements on product design services, the margins are thin for service providers supplying to smaller players. Companies like Intel have been maturing their foundry services while working with focused service provider partners such as UST and LTTS, who use Intel foundries for product development. This has helped the service providers to offer design services to smaller players with reasonable margins; this model can be expected to mature in the future.

Semiconductor juggernauts like Intel, Qualcomm and AMD do not outsource all their product development since it is the legacy of their business. Meanwhile, the market is witnessing a paradigm shift as some companies, such as Faraday and Open-Silicon (now SiFive), have demonstrated capabilities in custom chip design. These companies mostly support smaller organizations, sometimes even start-ups, enabling them to productize their innovative solutions.

Reducing Supply Chain Dependency on China

As the chip supply chain dependency on China lessens, other nations are rushing to grab a share of the market, with each country adopting a different strategy. As one of the major contenders, India is having second thoughts on constructing a three nm fab, which requires an investment of $30 to $40 billion and considerable IP that currently sits with the U.S. Instead, it is taking a self-sustaining approach ― catering to the domestic demand of higher nm chips (such as for LED lights that requires 28 nm).

Meanwhile, the U.S. has taken a more aggressive strategy. As per the Chip and Science Act, none of the 3 nm designs can be moved out of the country, and U.S. entities cannot sell AI chips to China. Though the U.S. has not ruled out procuring components from China, it has specified that tech innovations should be from the U.S. Europe, on the other hand, has been taking a step back on AI to focus on ensuring a sustainable supply of chips for its automotive manufacturers.

While it is impossible to completely do away with Chinese components, the dependency on the supply chain in China can be reduced. Service providers and system integrators play a crucial role here, with some demonstrating the ability to reduce this dependency from 90% to less than 40%. This will likely have a cascading effect in the mid to long term, reducing the dependency on the Chinese value chain and also affecting manufacturers’ margins. This is expected to be bolstered by the fab capacity that will emerge across the globe through 2026 from the sizeable investment made by the technology enterprises.

ISG helps manufacturers navigate a changing chip market and re-envision their supply chain. There is no need to struggle alone. Contact us to find out how we can work together.