computer chips – The OM Blog by Heizer, Render, & Munson

OM in the News: Taiwan, Chips, and Global Supply Lines

“If anyone hits Taiwan, or there is a serious disruption . . . the tech and electronics industry worldwide is basically screwed,” says the founder of chip provider MA-tek in Financial Times (June 1, 2023). Taiwan is best known for making cutting-edge semiconductors. But its companies also turn out other crucial components from printed circuit boards to advanced camera lenses and they run huge device assembly operations in China. This has created a triangle of critical interdependence between Taiwan, China and the US that has deepened even as tensions have risen.

To understand, let’s look at the iPhone. It is one of the most successful consumer devices of all time: 2.4 billion sold since its launch in 2007, racking up over $1 trillion in revenue for Apple. Its success rests on a sprawling Asian supply chain producing chips, displays, speakers and more on an almost unimaginable scale. At its heart lie both mainland China and Taiwan. Each iPhone needs some 1,500 different components. Nearly 70 per cent of Apple’s top suppliers, making everything from processors to casings, are based in either China (26%), Taiwan (23%) or the US (18%).

The most valuable components — including core processors, 5G modems, Wi-Fi chips, and premium camera lenses — are made inTaiwan. All told, the island’s suppliers account for nearly $200 of the total materials bill for each iPhone. These chips, however, are designed by Apple, or otherU.S., Japanese or European chip developers, such as Qualcomm, Sony, and Bosch.

Chinese suppliers are concentrated in less technologically demanding areas, like product assembly and mechanical parts. The number of China-based suppliers has overtaken all other countries to become the largest source over the past few years. They have also started to move up the supply chain, and now make some of the advanced OLED screens for iPhones. China is also where 95% of all iPhones are assembled, a figure that has changed little since its launch. The country is a major market for Apple, too, providing 1/5 of its total annual revenue. Complicating the picture is the fact that many Taiwanese and U.S. suppliers serve Apple from hundreds of facilities in mainland China.

Without any of these components, an iPhone would not be an iPhone. But a formula that has worked for 15 years is being put to the test as geopolitical tensions rewrite the rules of tech manufacturing.

Classroom discussion questions:

Western nations this month vowed to “reduce excessive dependencies in our critical supply chains.” How can they do this?
What has brought this supply chain issue to a head?

OM in the News: Is the EV Supply Chain Ready?

“The car industry is staging a revolution,” writes The Wall Street Journal (Nov. 14, 2022)—a transition from the gas engines that have powered vehicles to a battery-propelled future. But a key part of the reinvention remains unfinished and filled with risk: the supply chains for the parts needed to assemble electric vehicles.

The guts of EVs— batteries, electric motors and the electronics that mesh them together—are nothing like the engine blocks, transmissions and drive shafts that move today’s cars. “This industry is going through a transformation like it hasn’t seen since World War II. The whole supply structure is going to change,” says an industry expert.

On the upside, EVs require vastly fewer parts: An EV motor has only about 20 moving parts, compared with 200 in an internal combustion engine. Yet the industry is young, and finding reliable sources for EV parts is daunting.

Some pinch points: The batteries and most of the EV motors rely on unusual metals that can be costly and hard to obtain. The vehicles’ electronics require new chips from a semiconductor industry still working through pandemic-era backlogs. (EVs require more than twice as many chips as internal-combustion vehicles— 1,300 versus 600). Even the aluminum trays that hold batteries beneath the floors of electric vehicles can be scarce. There are supply chains within supply chains.

One of the biggest potential problems is finding sufficient and affordable supplies of key raw materials, including lithium, nickel, manganese and cobalt. Much of the mining and processing of these metals is based in just a few countries. Two-thirds of cobalt is mined in the Congo, where workers face dangerous conditions. Australia mines about half the lithium, while nickel is centered in Indonesia. The refining of these materials for use in batteries is even more concentrated: China processes 70% of the world’s lithium and cobalt, and 99% of the manganese.

Some car makers are already predicting battery shortages. “Put very simply, all the world’s battery cell production combined represents well under 10% of what we will need in 10 years,” says the CEO of Rivian Automotive. He added that “90% to 95% of the battery supply chain does not exist.”

Finally, the majority of motors used in today’s EVs rely on permanent magnets which require costly rare-earth metals. The dominant supplier is again China, and producing the metals can cause pollution and environmental damage.

Classroom discussion questions:

What positive supply chain issues does the EV industry expect?
What supply chain constraints are expected and how will they be addressed?

OM in the News: The Ongoing Supply Chain Squeeze

Across the world, manufacturers of everything from cupboards to cars or computers are still grappling with a logistics crunch that has disrupted supplies of essential inputs, threatening the post-pandemic economic rebound and boosting inflation, reports The Financial Times (Sept.7, 2021).

The demand for computer chips is oustripping supply

Furniture, the latest sector to feel the supply chain pinch, encapsulates the broader problems. Even giant companies such as Ikea have been affected. The Swedish furniture maker has said it “cannot predict” when normal supplies will resume because of a “perfect storm of issues” that includes a shortage of truck drivers.

Transport is a “nightmare” where even “a screw or small component from Asia can take 3 months”, said one French furniture exec. “We had 16 containers being shipped to the US in June and July and they still hadn’t got through by August. Lead times to the U.S. have doubled.”

Transport costs have soared. Between China and Europe, fees are 7 times higher than last year. To work round that problem, Ikea said it was diverting some supplies on to trains. “We will use rail transport from China to Europe to free up container capacity that we can use to ship more to U.S.,” the company stated. In the U.S., meanwhile, lumber supplies usually transported by truck through the southern states have been disrupted by Hurricane Ida, which created havoc on the Gulf Coast.

Nearly half of EU rubber, machinery and computer producers, and most electrical equipment makers, report supply shortages. Almost 60% of carmakers remain affected. In Germany, where car production is 30% below pre-Covid levels, Volkswagen had planned to add extra shifts to clear an order backlog. But new Asian outbreaks of the Delta variant have shut ports and semiconductor manufacturing facilities there, stymying plans. It’s a common problem throughout the sector. VW believes computer chip supplies “will remain very volatile and strained” through the third quarter of this year. But one European economist believes full normalization will not happen until 2023.

The bottom line: uncertainty remains as to how the stability of global supply chains and the handling of the coronavirus pandemic will develop, especially in China, Europe and the U.S.

Classroom discussion questions:

Why is there a shortage of computer chips, and what can be done? (See Supp. 7 of your Heizer/Render/Munson text, Capacity and Constraint Management)
How can companies deal with shipping backlogs?

OM in the News: Intel Brings Good News to US Manufacturing

In these troubled times, Intel’s announcement (Computerworld, Feb.18,2011) that it would start construction this year on a new $5 billion microprocessor plant in Chandler, Arizona is indeed good news. The company, which also does manufacturing in Oregon and New Mexico in the US, and in Israel, Ireland, and China overseas, will open the Arizona plant in 2013 with 1,000 highly paid permanent workers. When complete, the factory will be the most advanced, high-volume semiconductor facility in the world. Fab 42, as it will be called, will produce 14-nanometer chips. (Nanometers, billionths of a meter, measure the width of chip circuits. Shrinking them makes chips more powerful or cheaper to make). The chips will be used in PCs, electronics, and mobile phones.

Intel has already committed another $6-8 billion this year to make upgraded chips at its other plants and to build a new plant in Oregon. This will provide those facilities the ability to produce 22-nanometer chips, which are in turn faster than the company’s current 32-nanometer chip-making process. The upgrades budgeted by this money will create yet another 1,000 high-skilled jobs, along with 6,000+ construction jobs. Intel will further hire 4,000 new R&D workers this year to round out the positive news. Revenue is expected to rise 14% to $49.5 billion, according to Bloomberg (Feb.18,2011).

The company, which makes 3/4 of its chips in the US, was praised last week by President Obama, who stated: “By and large, Intel has placed its bets on America”. Intel execs, meanwhile, have called on the US government for tax breaks to make it cheaper to build facilities in the US.

Discussion questions:

1.Why is the Intel announcement such good news?

2. Why does Intel have plants abroad?

3. What makes chip manufacturing such a difficult business?