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Illustrations by Security Management; photos by iStock

Semiconductor Slowdown

Ron Lander, CPP, was in a bit of a pickle. The chief specialist for Ultrasafe Security Solutions needed a fire alarm panel for a high priority customer—a school that was expanding into a new facility that required a fire detection and alarm system before it could open its doors

It was August 2021, and the school planned to open the new facility in September for the beginning of the 2021–2022 academic year. There was just one problem: the fire alarm control panel would not be available for two to three months, at least.

“I’ve talked to two different vendors,” Lander says. “We’ve never had this extreme of a shortage. And they’re saying it could be for the next year or two because when they do get supplies, they’re filling their back orders and they’re out again.”

And it’s not just fire alarm panels. It’s burglar alarms, laptops, monitors, and pickup trucks—just some of the millions of electronics that require semiconductors to function. Manufacturers have been attempting to meet the staggering demand, selling $41.8 billion worth of semiconductors in April 2021 alone—a 21.7 percent year-over-year increase from $34.4 billion in April 2020—and on the path to sell $527.2 billion of semiconductors in 2021, a 19.7 percent increase from 2020, according to the Semiconductor Industry Association (SIA).

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But it has not been enough. Semiconductor manufacturers battled a perfect storm of elements that slowed down production and distribution, ranging from plant closures due to COVID-19, inclement weather in Texas that disrupted a manufacturer’s power supply, a fire at a Samsung plant in Japan, and poor decision making on market expectations during 2020, says James Lewis, senior vice president and director of the Strategic Technologies Program at the Center for Strategic and International Studies (CSIS).

“People were panicked at the beginning of COVID; they didn’t take into account what we call pent-up demand—that once things got better, there would be a huge increase in demand,” Lewis explains. “No one thought people would be buying cars, and the chip guys said, ‘Here’s booming demand for Xboxes and TVs.’”

Now, however, demand is still up and will only continue rising with the digital transformation happening across the world. And to address the long-term need for increased supply, major changes and investments will need to be made to the supply chain to make it more resilient.

The Basics

When most people think of the assets that power the modern economy and the security profession, they probably envision electricity, the Internet, smartphones, surveillance cameras, and alarm systems. But that’s only part of the picture.

“A lot of people didn’t realize how important semiconductors were—it’s kind of geeky, you have to admit,” Lewis says. “The individual chip itself is a commodity, and they make millions of them…but it turns out that it’s the core of everything we do in the digital environment.”

At a basic level, semiconductors—also known as integrated circuits or microchips—are made from a pure element, such as silicon, that has undergone a process called doping to make it conductive. The element is eventually turned into a chip that can be placed on a motherboard, which runs electronic devices.

Private companies and nations invest billions of dollars in research into designing semiconductors. Raw materials—such as sand—are gathered, purified, and melted into solid cylinders called ingots. These ingots, which can weigh more than 200 pounds, are then sliced into 1mm-wide wafers, polished, printed with a circuit design, and then cut into individual pieces called dies. The dies are then packaged into what is commonly known as a chip, which is embedded in an electronic device. It’s a complicated process to build the tiniest, yet most essential component to millions of products.

The United States was the initial global leader in this space due to early investment and capabilities for research, design, and production. It also relied on Moore’s Law—reducing chip size while increasing speed and lowering power required—to improve performance of semiconductors while maintaining or reducing cost. Under this concept, the number of transistors on a chip double roughly every 18 to 24 months, explained Victoria Coleman, former director at the U.S. Defense Advanced Research Projects Agency and current chief scientist for the U.S. Air Force.

Stages of Semiconductor Production

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Research

Design the circuit

Obtain raw materials, such as sand

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Purify and melt the raw materials to create ingots—solid cylinders that can weigh more than 200 lbs

Slice the ingot into silicon discs—approximately 1 mm wide—and polish them

Print circuit designs on the wafers

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Cut the wafer to create up to 70,000 individual semiconductors called dies

Package the dies into a finished semiconductor

Place the semiconductor on a circuit board for an electronic device

 

At a certain point, the ability to increase semiconductor density plateaued and chips could no longer be improved the same way. So, companies were forced to innovate to create other competitive advantages, Coleman said in a panel discussion hosted by the Wilson Center in March 2021.

“Post 2020, they couldn’t shrink for free, so they wanted to develop enough innovation on the side so that it looked like Moore’s Law was still in effect,” she added.

The research and design costs grew significantly to remain competitive, and some of the venture capital that these firms relied on dried up in the United States. Economic forces, globalization, and concerns about the environmental effects of semiconductor production also contributed to some manufacturers moving their production overseas.

In 2002, the U.S. Environmental Protection Agency (EPA) proposed a rule to address adverse impacts to the environment due to semiconductor production, including air pollution. Its first final rule was issued in 2003, with another in 2008, to create regulations for the use of five chemicals involved in semiconductor manufacturing: hydrochloric acid, hydrogen fluoride, glycol ethers, methanol, and xylene.

At the same time, other nations began investing in their own semiconductor research and production capabilities. An analysis by Accenture and the Global Semiconductor Alliance found that today 25 countries are involved in the direct supply chain and 23 countries are involved in the supporting marketing functions for semiconductors.

“Wafer fabrication is the most globally dispersed, with 39 countries directly involved in the supply chain and 34 involved in market support (including photolithography equipment, etching and cleaning tools, deposition equipment, and fabrication facility support equipment),” according to Globality and Complexity of the Semiconductor Ecosystem, published in 2020. “Direct involvement in wafer design spans 12 countries, while direct product testing and package manufacturing each are done across 25 countries.”

The United States continues to control 47 percent of the global market share for semiconductor sales—topping $208 billion in 2020, according to SIA. The United States’ semiconductor manufacturing capacity, on the other hand, has fallen more than 10 percent between 2013 and 2021 from 56.7 percent to 43.2 percent.

The Asia Pacific region has the largest regional semiconductor market of more than $271 billion in 2020. China accounted for the largest single-country market in the region, making up 56 percent of the Asia Pacific market and 34 percent of the total global market.

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Some federal governments have invested heavily in building up their semiconductor manufacturing in the past and are continuing to do so to remain competitive. The European Union, for instance, has pledged to invest $20 billion to $30 billion between now and 2030 to increase chip manufacturing and research in member states, according to SIA.

South Korea also rolled out its K-Belt Semiconductor Strategy with investments between $55 billion and $65 billion to secure a leading position in producing semiconductors by 2030 through doubling its workforce, offering manufacturing investment tax credits, and developing a 50 percent research and design tax credit.

But the biggest investment comes from China. It has pledged to achieve chip self-sufficiency by 2025, investing more than $30 billion in research and design, offering corporate tax exemptions worth approximately $20 billion for 10 years, and investing $100 billion at the national and local levels in chip manufacturing.

The United States has not made similar investments in semiconductor technology, and therefore many commercial industries chose to manufacture their semiconductors overseas for the lower cost of labor, foreign policy decisions, and environmental concerns related to manufacturing, said Eileen Tanghal, partner at In-Q-Tel, a strategic investor that identifies and invests in innovative technology startups to support the U.S. intelligence and defense communities.

Speaking at the Wilson Center panel discussion, Tanghal explained that many U.S. commercial industries have chosen to have their semiconductors manufactured at Taiwan Semiconductor Manufacturing Company (TSMC) instead of producing them domestically.

To create incentives and investments in domestic semiconductor research, design and production, then-U.S. President Donald Trump signed into law the CHIPS for America Act in June 2020. As of Security Management’s press time, Congress had not allocated funding for the act’s initiatives.

Lewis says that TSMC has pledged to relocate some of its production to the U.S. state of Arizona for incentives worth $10 billion to $11 billion. “But even if that started today, we wouldn’t see any of those chips until 2023 or 2024,” Lewis says, adding that with research and design, it takes two to three years to build a cutting-edge chip.

This lack of investment has taken a toll. In 2020 and into 2021, various manufacturing sectors announced they were slowing—or halting—production because they could not obtain the semiconductors that they needed to create their products. General Motors (GM), for instance, announced in September 2021 that it would temporarily pause production at eight of its 15 North American plants for two weeks. Ford announced a similar measure in response to the semiconductor shortage.

“The strategic significance of semiconductors and their ever-increasing importance for economic competitiveness and supply-chain resilience has become a focus for governments worldwide,” according to SIA. “The widespread global chip shortage as a result of the COVID-19 crisis in late 2020 has shown that vulnerabilities in the global semiconductor supply chain put at risk many technologies and products essential to our daily lives. Indeed, the United States is now vulnerable to supply chain disruptions as it has fallen behind global competition in providing support for this strategic sector.”

The Security Industry Impact

In retrospect, sometimes the most innocuous conversations can reveal themselves to be the turning point for an organization. What started out as an update from an employee about a delay on a new car order later became the reference point for Karen Evans, CEO of Sielox, about the semiconductor shortage and the potential ramifications for her company if it wasn’t prepared.

“I started paying attention to it when one of my employees was waiting on the delivery of a car—and here we are, a year and a month later, he doesn’t have delivery of that car,” Evans tells Security Management in an August 2021 interview. “I saw that and then we were looking for computers to source for customers, and we were looking at a four- to 12-week delay—it was the semiconductors and chips that were going to the manufacturer of these products that were the issue.”

So, in July 2020, Evans and her team began to have their contract manufacturer buy up stock of materials—including semiconductors—aggressively, changing from its previous strategy of having a minimum of four months’ stock to having a year’s worth of supply on hand.

“We’re bringing in larger quantities, and now we don’t have the storage space to store finished components,” Evans says. “But we’ve never been out of stock.”

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Sielox, however, is a bit unusual in that regard. It was founded in 1979 in California, and it has been designing and developing its own software and hardware solutions ever since. All its products are also manufactured in the United States, currently by New Jersey-based contract manufacturer Syscom.

“Our plan is to maintain the current levels that we increased to in 2020 and not go back to our previous levels until COVID is behind us,” Evans says. “We’ll maintain a much higher level of finished good inventory, as well as supporting our contract manufacturer so we can keep producing.”

This has not been the case across the board for the security industry, however. Drew Weston, CPP, chief operating officer of CodeLynx and chair of the ASIS International Security and Applied Sciences Community, says that it has been a “nightmare” attempting to get new orders for equipment and products filled.

“We’ve seen lead times for everything that we touch going up,” he says. “It started in March 2021 and has gotten worse—not better. We’re seeing open-ended lead times.”

Weston first began noticing the lagging fulfillment times with orders for high-end PTZ cameras, fisheye cameras, and products with artificial intelligence and machine learning capabilities. Further into 2021, he says, everything from access control readers to cameras to desktops to displays has been impacted.

“Just today, with orders that we’ve had out for six weeks, we had to ask customers if we can swap products,” Weston says. “We’re asking distributors: ‘What can they ship today?’”

Honeywell, one of the largest manufacturers of fire alarm panels and fire detection systems, depends on semiconductors to power its devices.

“Every type of detector is going to have one chip—if not more—and every notification device is going to have a microchip in it,” says Daraius Patell, vice president and general manager of fire, Americas, for Honeywell. “They talk to our panels, and when you walk into a building there are multiple chips within the panel—the primary board, the communications card that talks to the central station.”

Patell declined to say where the chips Honeywell puts in its products are produced, but he did say the company began to notice the shortage in “mid to late” 2020. Honeywell began placing “significant orders” with its suppliers to hold as much stock as possible. The company also increased its communication with clients, with Patell himself emailing his entire customer base to let them know they would “feel an impact” from the semiconductor shortage and that Honeywell’s lead times would be extended.

“I didn’t make a blanket statement—just that some products might be a week or two or a month or two,” Patell says. “We just have to communicate and be as transparent as possible. They’re talking to contractors and building owners, and they need to know when they’re opening up.”

Honeywell also began work within its engineering team to see how the company could expand its base of suppliers to qualify more companies.

“When I look at our cash position and where we’ve invested, our raw materials stock is up millions and millions of dollars because we’ve invested in buying chips and other components to make sure we can protect our customer base,” Patell says.

Even with those steps, however, Honeywell’s customer base is feeling the impact as the company is “not able to supply 100 percent of our demand,” he adds. As soon as a product is finished—like a fire alarm panel—it’s immediately sold and sent to the facility that’s awaiting its installation rather than filling out a dealer or integrator’s inventory for future jobs.

“I want our product to be factory to functioning in four days,” Patell says. “In the past, we’d have inventory…but we’re not in a position where they can buy a product to put on a shelf. They’re buying a product to install.”

Patell says he does not anticipate the current environment of extended lead times—of weeks to months—to get better before the end of 2021. In the first quarter of 2022, however, Honeywell may see improvement because more of the raw materials it has on order should be available, and the additional qualifications by the engineering team will have gone into effect.

“That project has been kicked off and we know those timelines; those are going to be improved,” Patell adds. “There’s real data that gives me a sense of confidence.”

In the meantime, clients continue to adjust their expectations, keep tabs on wait times and Internet forums, and be creative with their problem solving. Take Lander, who just before Security Management’s press time confirmed he’d be receiving two of the panels he needed: one from a local distributor and one from a dealer he found on the Internet, potentially delivered by the end of the month. 

Megan Gates is senior editor for Security Management. Connect with her at [email protected]. Follow her on Twitter: @mgngates.

Read more about the national security ramifications of the semiconductor shortage here. 

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