The global semiconductor industry has always been cyclical in nature, but the COVID-19 pandemic turned an expected down-cycle into a drawn-out shortage that has impacted industries ranging from autos to computers. Now, as companies rush to catch up with demand, experts are calling for Canada to focus on building capacity at home.
Semiconductors, commonly known as computer chips, are a foundational part of a growing number of electronic devices. As Sarah Prevette, chair of the recently formed Canada’s Semiconductor Council, explains, they’re integral to everything that makes an electronic device “smart.”
“I think lots of folks struggle to understand semiconductors and the role that they’re playing in their own lives,” she says. If you want the convenience of smart cars or home appliances, “you are dependent on this semiconductor chain.”
This is why disruption in this industry has caused ripple effects throughout the global economy. Semiconductors are found in everything from computers to wireless networks to medical equipment – industries that have become even more important during the pandemic.
However, as global demand for these components increased, production capacity remained stagnant. This is because semiconductors are not an easy product to manufacture. It takes enormous amounts of money to build fabrication plants, where semiconductors are produced, and construction often takes years.
Intel, one of the world’s largest chip manufacturers, made waves earlier this year when it announced plans to spend US$20-billion over three years on two new facilities in Arizona. The massive investment illustrates why the industry experiences such extreme up-and-down cycles – one year, companies may be scrambling to increase capacity to meet demand, and the next year they may have a new facility that is producing more than is needed.
The pandemic has only exacerbated this pattern.
“In the past, it has always been cyclical, but what happened in the last two years, I would describe it as the perfect storm. Everything has lined up to create the current shortage,” says Claude Jean, the executive vice-president and general manager of Teledyne DALSA Semiconductor, a Bromont, Que.-based technology and semiconductor chip company.
When the pandemic hit, industries such as the automotive sector anticipated a downturn in consumer demand and lowered their computer chip orders, not expecting that there would be a shortage when demand for vehicles rose again in 2021, says Mr. Jean from Bromont. Multiply this surge in demand across various industries and it explains why the current shortage occurred.
“The cycle was expected, but the magnitude was not expected,” says Mr. Jean.
Adding to the supply bottleneck created by the pandemic, the long-standing issue of climate change also worries the industry.
“Microchips are almost exclusively manufactured in countries with very high risk of natural disasters,” says Glenn McGillivray, the managing director at the Institute for Catastrophic Loss Reduction and an adjunct professor of disaster and emergency management at York University.
A great deal of the semiconductor industry is based in Asia, particularly for outsourced production. The Taiwan Semiconductor Manufacturing Co., for example, is the world’s largest foundry and an essential link in the global market. However, last year Taiwan experienced its worst drought in 56 years, putting a strain on its semiconductor production, which is an extremely water-intensive process. TSMC alone uses more than 150,000 tons of water per day. Fabrication facilities require these enormous amounts of water to cool equipment and rinse microchips, among other processes.
This type of severe weather will only continue to disrupt supply chains as the effects of climate change escalate. This, combined with the shortage brought on by COVID-19, led many Canadian experts to conclude the solution is to increase domestic capacity.
“We need to get production into places that are deemed to be safer than some of the places that we’re using right now,” says Mr. McGillivray.
“It’s been very clear that there’s a unique opportunity to … think strategically about where Canada should play as a matter of national security and global competitiveness,” says Ms. Prevette.
She sees this current moment as a chance for Canada to build capacity around different aspects of the semiconductor industry, such as in skills and talent, which she said the country has an abundance of and merely needs to support more through greater investment. Ms. Prevette is not alone in her thinking.
“Canada’s perfectly positioned to contribute to this industry,” says Mr. McGillivray. “We have the minds that are needed to do this sort of thing, we have the ability to construct facilities; we’re in a great position to be able to take advantage of this increase in demand and the need to bring these plants to safer places.”
While Mr. Jean agrees that increasing Canadian manufacturing capacity could be a solution to the shortage, he cautions around seeing it as the only solution. It’s not as simple as building a facility and being able to produce any type of chip, he says – every facility is specialized and so Canada also needs to think carefully about what niche it can fill.
“We should never pretend that Canada could become 100 per cent self-sufficient in terms of semiconductor component manufacturing.”
As the supply chain issues continue to play out on a global scale, the effects will also continue to be felt on the individual level. For the average Canadian consumer, the semiconductor shortage has meant paying a bit more for that new car or computer or having to wait for the price to go down – or for there to be a supply of that product altogether. Since it’s difficult for companies to increase production capacity quickly, this may be the reality for at least another six months, or even up to two years, says Mr. Jean.
“The question of how long the shortage lasts is really dependent upon how global players come together and the investment Canada is willing to make,” adds Ms. Prevette.