The future of semiconductor procurement - The changing semiconductor supply chain

What are the key factors for stable semiconductor procurement?

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.

• Regulation of materials: New regulations affecting per- and poly-fluoroalkylated substances (PFAS) are being discussed in the US and Europe and could come into effect as early as 2025. SEMI Japan president Masahiko Hamajima stated that because PFAS are used in various stages of semiconductor manufacturing, and photoresists in particular are essential to the manufacturing of advanced semiconductors, forbidding their use could render manufacturing of such products impossible, and hence the transition to safe alternative materials is now a pressing issue for the industry. He also stated that developing PFAS-free alternative materials will take time, with some industry insiders predicting a timeframe of 15 years or longer for a complete transition.

• Talent shortage: Semiconductor manufacturing requires a high degree of skills and knowledge, and the industry is in need of talent with specialist capabilities. However, the rapid growth of the semiconductor industry in recent years has only exacerbated the talent shortage. The shortage of engineers and other workers with technical capabilities is particularly significant, a sign of the lack of workers with specialist knowledge of the production line design, controls and other aspects of the manufacturing process. Demand for semiconductors is surging, and each launch of a new manufacturing plant or R&D location can result in an additional crunch for talent. Talent shortages of this nature have a substantial impact on productivity and the quality of semiconductor products. Increases in the loss of industry talent and company attrition rates are also present issues that give additional weight to the importance of talent acquisition and training within the industry.

• Impact of tariffs and consumption tax incurred upon inventory adjustments and supply chain reconfigurations: The balance between demand and supply is a significant factor in the semiconductor market, where sudden fluctuations in demand cause inventory shortages, yet stagnations in demand result in excess inventory and the need to dispose of such inventory. For these reasons, manufacturers must swiftly implement targeted measures in response to market conditions, such as optimizing inventory management practices and expanding or shrinking production lines. Supply chain reconfigurations also result in tariffs and consumption tax implications. Semiconductor products are transacted on the global market, and reconfiguration of a supply chain necessitates the completion of numerous procedures pertaining to import/export, logistics, and other facets of such transactions. Additional tariffs and consumption tax could result in increased product prices, while import/export procedures could give rise to delivery delays.
  

Given this complex environment, what can procurers of semiconductors do to insulate themselves from supply chain risk?

Key facets of supply chain reconfiguration

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

• Supplier diversification can mitigate the risk of being dependent on a single source for procurement. Having multiple sources of supply facilitates consistency in procurement and enhances price competitiveness.
  
  
• Centralized purchasing streamlines the procurement process and lowers the effort required to conduct inventory management. For example, Toyota Motor Corporation has allied with DENSO Corporation and other Toyota Group companies to introduce centralized purchasing; the parties share information relevant to the product supply chain even as products undergo R&D, are accelerating the intercompatibility of semiconductor design and switching to the use of generic semiconductors. Such actions assist semiconductor manufacturers in production planning and bring increased productivity, which enables the Toyota Group to enhance their purchasing power through efficiencies of scale.

Achieving greater supply chain transparency and building collaborative relationships with semiconductor suppliers

• In order to achieve greater supply chain transparency, it is essential that companies collaborate and exchange information with semiconductor suppliers and trading companies.
  
  
• Other effective methods include building traceability or digitalization into the entire supply chain. These are challenges that cannot be addressed solely by the companies that procure semiconductors, and in fact require the building of collaborative relationships with semiconductor suppliers to address. Nippon Electronic Device Industry Association president Shozo Saito has shared his comments from this perspective, stating that it is important to approach solutions by creating a seamless supply chain by partnering with suppliers during design, development and later stages, and adding that companies must move beyond the concepts of supplier and purchaser and approach suppliers as business partners.
  In light of this input, achieving consistent success in procurement amidst the constraint of lengthy lead times for semiconductors requires that companies give due consideration to aligning their purchasing order timelines for consistency with semiconductor production lead times. One-sided demands for a semiconductor supplier to address uncertainties arising from inconsistencies between semiconductor production lead time and the timing of purchasing orders could instead have an adverse effect on any business partner relationship that could be built with such a supplier. Another important method of achieving greater transparency and strengthening business partner relationships with suppliers is to share production, sales, and inventory data (PSI data) on a shared platform, and thereby use ordinary operations to address uncertainties.

Accurate demand forecasting and consideration of alternative solutions

• Product demand fluctuates depending on market trends and advancements in technology. Accurate forecasting is therefore a crucial prerequisite when concluding long-term contracts with semiconductor manufacturers to secure a consistent supply, as it enables the purchaser to secure a long-term contract for production capacity from such manufacturers.
  
  
•  The use of alternative or generic products is also an effective way to address instability in semiconductor supply. These measures alleviate the impact of price surges and shortage of semiconductors. With that said, the use of alternative semiconductor products may require alterations to product designs or specifications, and it is important to prepare to accommodate such changes to product designs and specifications. In regard to mid-to-long term consistency of supply, SEMI Japan president Masahiko Hamajima commented that it is also important to use components that utilize the latest technology to the full extent possible, giving an example of automobiles to illustrate how impacts could be mitigated by using standardized components and 16nm to 28nm nodes rather than legacy nodes of class 40nm to 60nm, for which it can be difficult to guarantee long-term availability.

Adapting the semiconductor supply chain to the changing tax environment

• Numerous international transactions take place within the semiconductor supply chain, which means that it can easily be affected by changes in the taxation and tariff policies of any relevant country, and it is therefore important that companies manage taxation risks and formulate appropriate tax strategies. While transfer pricing presents a range of complex and challenging issues in the context of the semiconductor supply chain, taking the appropriate actions to address such challenges will also prove beneficial in the design of an effective supply chain.