Electronics supply chains undergoing profound shift
A major reassessment of risk is about to transform electronics and technology supply chains
Electronics supply chains, which have been among some of the most disrupted in recent years, are in the midst of a large-scale reorganisation of manufacturing capacity, as the sector seeks to address vulnerabilities says a new white paper from Reuters Events, Supply Chain and Maersk.
Principally, these efforts revolve around widening the number and location of supply chain partners to reduce reliance on small geographic centres of production, alongside deepening production capacity in already developed markets, with the latter getting a boost from recent government incentives.
A break in risk perception
This strategic shift has been driven by the exposure of the vulnerabilities in electronics supply chains due to recent disruptions and, consequently, a realisation of potential bottlenecks.
The Ukraine War, in combination with China not reopening, was really what triggered people
“I think the biggest thing that's shifted is perception of risk,” states Misha Govshteyn, one of the experts quoted in the paper and CEO of MacroFab - a US-based platform that connects electronics contract manufacturers and customers, as well as providing their own facilities.
That perception has been reinforced with each wave of disruption. “Tariffs came first,” he says, but “that wasn't enough … The pandemic was second. However, the biggest events were actually all about the geopolitical situation getting much worse. The Ukraine War, in combination with China not reopening, was really what triggered people,” he says.
Too much too close together in electronics supply chains
The research, which is free to download here, notes that electronics and technology supply chains are put most at risk by their highly centralised nature in terms of geography, key companies and material availability.
For example, Taiwan alone produces more than 90% of semiconductors under 10 nanometres in size. Indeed, wafers, printed circuit boards and semiconductor equipment production facilities all currently revolve around East Asia, with China, Japan, South Korea and Taiwan the global leaders in these sectors.
There has been a long-term trend showing a move of Electronics & Electrical (E&E) sourcing away from China, especially among Western buyers
Further upstream there are risks as well, with many of the key providers of chemicals necessary for production processes located in just a few factories per region. A senior director for one of the world’s major chip manufacturers told Reuters Events, Supply Chain that sourcing the required chemicals was the most challenging aspect that they were facing in their global supply chains.
As Govshteyn notes, these issues are increasingly becoming tied to the geopolitical sphere, which governments view as strategically significant. The US, Japan and the Netherlands agreeing to restrict chip exports to China in January 2023, while China retaliated with its own export restrictions on key metals gallium and germanium in July 2023.
A shift out of China in progress
The consequence is more diversity in production centres, with a move outside China a particularly prominent direction for electronics and technology companies.
“There has been a long-term trend showing a move of Electronics & Electrical (E&E) sourcing away from China, especially among Western buyers,” says Sebastien Breteau, CEO for quality control and auditing firm QIMA.
For Bose Corporation they are looking to be “more diversified regionally within our supply chain, meaning that countries like Vietnam, Thailand, Malaysia,” are key targets for expansion says Global Head of Commercial Supply Chain Operations Tom de Groot.
Stability a necessity
While many Asian countries are set to benefit, they are not alone in seeing capacity expansion, with companies also focusing on Europe and North America.
For assembly and high value componentry and products there is a significant wave of inbound investment into these two regions, as well as countries located within their periphery.
These locations are on the rise because they offer “political and economic stability” alongside a “mature ecosystem with a skilled labour force” says Coy Zhong Ping Zhang, Head of Technology Vertical in the Greater China Area for A.P. Moller – Maersk.
Renewed government focus is also playing a role, with major incentives packages announced by various governments now feeding their way into planning and investment strategies.
In the US, public and private investments related to the CHIPS incentive program total $106bn and the EU’s CHIPS Act set aside a €43bn package.
People do see manufacturing in North America as an advantage
Alongside these mega packages, the Canadian, Chinese, Indian, Japanese, South Korean and UK governments have also announced supporting measures for chip manufacturing.
The final factor though, is the proximity and access to major end markets these locations offer. This has become more important in the context of recent disruptions, where shortages of chemicals and components, particularly semiconductors, from distant production centres left many companies scaling down production lines, or even shutting them down completely for short periods.
Closeness to key markets means “people do see manufacturing in North America as an advantage,” according to Govshteyn. “So, what we've seen is that when we are within 5%-to-10% of the of the price in China, it's very competitive and that’s when people pull the trigger and end up moving.”
Nonetheless, the transition will take time and is not free of hurdles.
“As with any sourcing moves, these things take time, especially when moving away from sourcing markets like China, which have vast infrastructure in place,” comments Breteau.
Access to local supply chains is just much better in China
Similarly, Bose’s de Groot notes that alternative locations suffer from an “absence of good second- and third-tier suppliers into facilities,” especially for chemicals and components.
“Access to local supply chains is just much better in China,” admits Govshteyn. “When you go to China and you're assembling electronics, you can easily get plastics right next door or metals right next door. There's a whole ecosystem.”
However, “the demand is just now starting to build,” he thinks. This will bring change so, “when you look at the at this same problem 10 years from now, I think you're going to see a very different result.”