Cheap as chips? Overcoming semiconductor supply issues

2 mins read

Written by David Atkinson, Regional Director, UK Head of Manufacturing SME & Mid Corporates, Lloyds Bank.

Just about every semiconductor supply chain can be traced back to Taiwan.

It makes more than nine in ten of the world’s advanced microchips, and our over-reliance on this Chinese territory has been thrown into sharp relief in the last three years.

The pandemic not only reduced manufacturing capacity, decreasing the available chip supply, but the switch to remote working ramped up demand as companies rushed to buy home computers for colleagues.

At the same time, Taiwan suffered its worst drought in more than 50 years, and water is a key requirement for making microchips.

And the supply of neon gas – another essential element in microchip manufacture – has been severely constrained by the war in Ukraine, which provides about half of the global supply.

Open to exploitation

The consequences are being felt beyond the manufacturing sector too; I know of one firm that ordered a fleet of new vehicles 18 months ago, but the microchip shortage has led to long delays in them being delivered.

In turn, this has pushed up their maintenance costs as they work to keep their ageing fleet on the road.

Some unscrupulous speculators have pounced on this opportunity to engage in profiteering, buying up stocks purely to sell on at a profit.

I’ve heard stories of microchips that were previously 30 pence each now selling for £300 – a markup of almost 10,000%.

Today, supply remains patchy and suffers from peaks and troughs.

Taiwan may be 6,000 miles away, but I’ve seen first-hand how UK firms that manufacture circuit boards or electronics equipment using microchips have changed the way they source the components.

Stocking up

Historically, it was common practice to buy chips on a just-in-time basis or keep a few weeks stock on site.

But now, manufacturers are moving to acquire many months’ worth of microchips up front for planned or expected manufacture.

While this is an effective way to secure both supply and price, it represents a huge working capital outlay.

And it has put pressure on their collateral positions, which were previously pretty secure.

Given the working capital outlay of holding so much stock, we are seeing manufacturers switch to a bill and hold arrangement with their customers.

That means billing customers in advance for the microchips needed for their product’s production run, then storing them at their premises until needed.

And manufacturers still need to leave themselves the flexibility to hike prices if that becomes their only option.

That can mean the savvy trying to include a price escalation clause in contracts so they can pass on higher costs to customers in the form of fixed or flexible price increases.

Reaching the Summit

This month I’m hoping to meet some of you at the National Manufacturing Summit, run by the Manufacturing Technology Centre at its training and conference centre at the Ansty Business Park in Coventry.

Charlie Nunn, Group Chief Executive of Lloyds Banking Group, will be a keynote speaker and the Lloyds Bank team will be on hand to chat too.

It’s a free hybrid event on March 29 and 30 that you can either join in person or online and this year’s theme is unlocking the digital revolution, with a focus on accelerating the adoption of digital manufacturing technologies.

I think that’s going to be particularly pertinent topic at a time when technologies like 3-D printing, artificial intelligence and automation present a huge opportunity to enshrine growth and productivity in the UK manufacturing sector.

Frankly, it’s not an option; if we don’t invest in digital, it’s hard to imagine a strong manufacturing sector in the long term.

For more information, visit