What’s Ahead for Semiconductor Supply Chains in 2025

Semiconductor professionals worldwide are hopeful for rebalancing and normalizing across their companies’ inventory in early 2025. Semiconductor supply chains will likely face constraints as factory infrastructure costs, geopolitics, and talent shortages reveal vulnerabilities contributing to ongoing semiconductor supply challenges.

Join us as we explore the state of semiconductor supply chains ahead of electronica in Munich, highlighting both risk and opportunities for industry professionals in the coming year.

The State of Semiconductor Manufacturing in 2024

Artificial intelligence (AI) and hyper-scale cloud computing will drive much of the chip demand for edge computing, data centers, networking and infrastructure equipment, and the proliferation of IoT products.

A case in point is TSMC, which has experienced a steady increase in semiconductor demand driven by the boom in AI products. The market is forecast to grow steadily for at least the next few years, perhaps longer.

The constraint in semiconductor supply will be the pace of fab production, which has slowed in the US. Many fabs that started construction in 2021 and 2022 have been delayed due to a slowdown in consumer demand, geopolitical events, and high development equipment costs.

For example, in 2023, TSMC reported multiple delays at its $40 billion Arizona facility. Recently, the company announced it would receive up to $6.6 billion in CHIPS Act funding to expand the site. However, the facility won’t be operational until 2028.

The next generation of semiconductors to hit the market is sub-11nm geometry, which will power high-growth, advanced technologies such as AI and high-end cloud computing. As AI applications and markets grow, new fabs will prioritize next-generation chip investments. Sub-11 nodes are the most profitable and expensive, limiting the number of companies able to invest in the larger node sizes.

Developing leading-edge capabilities is more profitable for Japan than the rest of the world and an excellent way to defend against losses from China’s expanding portfolio of mature process nodes, including ARM-based MCUs and analog ICs, that support home and export markets.

China is endeavoring to shift its reliance on foreign mature node products in the next few years from as much as an 85% share for foreign makers to 50% to 60% for domestic producers.

Water and Chip Demand Outpace Supply Heading into 2025

Global chip shortages have improved recently, but demand continues to outpace supply in many categories, as new capacity takes years to come online. Moreover, semiconductor manufacturing is growing more complex and has notoriously long lead times.

Access to water is a significant concern that impacts half the global population. By 2023, the demand for freshwater is projected to exceed supply by 40%. With no conservation of these and other natural resources, more than half the world’s food production will be at risk of contracting within the next twenty-five years. A contraction will negatively impact many industries, including semiconductor manufacturing.

Though many technology companies anticipate rebalancing semiconductor inventory in 2025, the chip supply chain will continue to face challenges and constraints for years to come. Infrastructure costs, geopolitical events, increased vulnerability to natural disasters, and natural resource and talent shortages contribute to ongoing difficulties even as the global semiconductor supply normalizes.

Artificial intelligence (AI) and hyper-scale cloud computing are driving the surge in chip demand. This has also led to shifting fabrication plant (fab) priorities, which will impact component sourcing in 2025 and beyond.

Though some signs of market recovery are positive, procurement departments should remain cautious and be ready to proactively prepare for recovery while developing strategies that help minimize risk.

Uncertain Access to Raw Materials in the Coming Year

With vast reserves of minerals, Ukraine holds immense potential as a significant global supplier of critical raw materials for defense, high-tech, aerospace, and green energy. Russia’s invasion of Ukraine, competition between China and the US, the 2024 US elections, and Israel’s war with its Arab neighbors will disrupt semiconductor supply chains around the world.

For example, raw materials vital for aerospace and defense, green energy, and high-tech companies need diversified and resilient supply chains. The world’s democracies rely on. In the last five years, the aluminum, lithium, and nickel market has doubled to over $320 billion and is projected to double in size in the next five years.

With vast reserves of minerals, Ukraine is well positioned to contribute significantly to the worldwide supply chain for many of them. However, Russia’s invasion of Ukraine was disruptive, and China has highlighted the need for resilient and diversified supply chains.

This awareness has prompted the European Union and the United States to adopt strategies to reduce dependency on non-democratic regimes. Leveraging Ukraine’s resources can bolster these efforts, driving Europe’s green transition and supporting Ukraine’s post-war recovery.

China has attained global dominance in critical minerals through strategic long-term investments, industrial policies, and advantages such as lower labor costs and more lenient regulations. This control extends to 85-90% of global rare earth elements from mining to refining and 92% of global manufacturing of rare earth element magnets.

China supplies more than half of the 30 critical raw materials identified by the European Commission and nearly 40% of the EU’s needs. Australia and South Africa supply raw materials, specifically lithium, cobalt, and manganese. Canada and Brazil are major suppliers of nickel, cobalt, and rare earth elements.

Before 2022, Ukraine was a significant supplier of steel plates, titanium, lithium, gallium, iron ore, and manganese to Europe. However, the Russian invasion disrupted these supply routes, necessitating more expensive and slower rail alternatives.

Russia is also a significant supplier of titanium, nickel, and platinum metals. However, sanctions have exacerbated global shortages of essential materials, such as titanium, crucial for the aerospace and electronics industries.

The relationship between the US and China has worsened recently, with a trade war and new restrictions on sharing hardware. The shifts in international relations and the US elections on November 6 will not only impact the US but potentially redefine its role on the global stage. For example, tension between China and Taiwan in the South China Sea is rising.

The US-China tech war is intensifying as the US restricts semiconductor exports to China, which impacts global supply. Any further sanctions or decoupling between the major world economies could disrupt the production of critical components, such as chips, rare earth minerals, and manufacturing services.

It’s Time to Address Labor Shortages

According to new research by Visual Components of manufacturing decision-makers in the US, four in ten organizations (39%) cited revenue losses as a key long-term consequence of the labor shortage.

“The labor shortage significantly contributes to rising costs for US manufacturers. Simulation software offers an opportunity to upskill existing staff and reduce the reliance on expensive skilled staff from external sources. This can empower employees on the factory floor to meet customer demands and revenue targets against a challenging economic backdrop,” says Mikko Urho, CEO of Visual Components.

Further research findings identify increased labor costs (53%) as the main short-term consequence, alongside project delays (32%), inability to meet customer demand and production targets (34%), and profit or revenue declines (27%).

With talent at a premium, organizations have had to spend more from their strained budgets on new hires. 93% of US businesses have had to dig deeper into the company reserves to offer higher salaries to attract in-demand talent.

The need to offer higher salaries only adds to the overall wage bill as overtime becomes necessary for remaining productive. Greater pressure is also being added to budgets as rising costs and inflation (58%) continue to take hold. 

Join Supplyframe at Electronica 2024 in Munich 

The electronica trade show in Munich offers the ideal time to connect with customers and prospects as we learn what’s on the horizon for our industry and how we can address complexity, cost, and risk head-on.

Supplyframe, a Siemens Company, will be at electronica 2024 from November 12th through the 15th in Hall B5, booth 241. Our booth will offer live product demos, speaking sessions with industry leaders, and much more.

Book a meeting with us at electronica here. We look forward to seeing you in Munich!