Newsletter-Sept

Supply Chain Market Report – September 2022

Welcome to Elementum’s Supply Chain Market Report. Business leaders need to know what’s on the horizon and how to prepare their organizations. This monthly newsletter observes one or two important macro trends through the lens of Supply Chain Management. We review how those trends are likely to impact Supply Chain and what leaders can do to adjust. We’ll also highlight emerging technologies that we believe can have an outsized impact on global supply chains.

If there are topics you’d like us to cover, email info@elementum.com.

This edition will cover all things related to the Semiconductor Supply Chain:

  • Why semiconductors have been supply constrained
  • What manufacturers are doing to respond
  • What the future of the industry will look like

According to Gartner, the semiconductor industry grew a staggering 26.3% in 2021 and is projected to grow another 7.4% in 2022. You can understand why. Growing industries like 5G, gaming, data centers, automotive, and wearables require a lot of computational power. 

But this growth presents a unique, global supply chain challenge. Add on top of that: pandemics, geo-political conflict, and shifting government policies, and you have a real problem.

This month, Jeff Rittener (Chief Trade Officer, Intel) shares his perspective as an insider, summarizing the main challenges and how companies like Intel are responding.

Q & A

Question

Let’s start with you. You’ve had quite the career at Intel over the years. It would be great for people to hear a little bit about that.

 

Answer

Thank you, Kyle. I have been in Intel for a very long time, more than thirty years. And, it’s been quite a ride. Intel’s just a tremendous company — one of the best to work for, and it’s also been fascinating for me to work in the area of trade. Trade over the years has elevated to such a level that now everybody who’s interested in what’s happening in the world, has an interest in trade. 

So, I started at Intel as an export analyst. This is back during the first Cold War, if you will, and over time, I moved on from export to assume responsibility for customs, and eventually for a world wide trade organization. I spent a couple years running government affairs, and right now I run the International trade group for Intel, which is made of about one hundred and thirty individuals.  

One of my career highlights I’ll share with you: a couple of years ago I had a chance to run the Government affairs organization, and that allowed me to participate in a lot of important meetings back in Washington, Dc. In fact, I even had a few meetings at the White House. I had a chance to actually have a meeting in the executive offices, where the Vice President has his office they said, “You gotta see this,” and they opened the desk, and  written on it, were all and names of Vice Presidents over the last forty, fifty years — it’s definitely fun just to to be in the mix and see something like that! 

So I suppose what I enjoy most in my career at Intel has been the people — working with incredibly talented people, doing incredibly challenging and complex projects.

 

 

Question

Now our audience is mainly supply Chain folks, who probably collaborate with folks in trade, but that’s not their core scope. So it’d be great for folks just to hear: as you oversee trade, what is the scope of that organization?

 

Answer

We’ve grown over time — just as the world gets more complex — and currently I have one hundred and thirty employees scattered around the world, and a lot of our employees are based at our manufacturing sites, and that enables us to be at the site. So they’re able to address real time, the movement of goods across borders. If you can’t move your goods across borders you really can’t succeed, so I have people dedicated to do that.I have my teams broken into two parts: one is export controls and sanctions, and that’s because today, this has really become a topic that everybody’s looking at and talking about. The other is customs and trade facilitation: focusing on the movement of goods and making sure we’re in compliance and also working efficiently and accurately. 

 

 

Question:

It seems like the demand for these products (semiconductors) is off the charts, and that production capacity has been trying to keep up. How would you describe and summarize some of the problems facing the industry today? 

 

Answer

The first one I would talk about is technology itself. I mean, technology is advancing every single day. And if you think about our need for data and that data has to be computed, it has to be stored, and at the end of the day it’s chips that power all of this. And I think the problems that we’ve seen with the supply and capacity issue really were exacerbated during the pandemic. 

You have this demand for computing devices so that you could work from home. You could study from home. You could communicate with your doctor from home. I mean everything really began to show just how much we need chips. We also have realized that we had an over-dependence on Asia when it came to chip supplies, and I think the pandemic really demonstrated that too: we couldn’t get chips when we needed them, because we were so dependent on the supply chain, and moving the goods. Add in the issues with China: shut down because of Covid, so how do we get our goods in a timely manner?  At Intel we’re trying to keep pace with this demand from a manufacturing perspective. For us, it’s estimated that demand is going to increase by five percent each year between now and 2030. To meet that demand, companies like Intel, and others — we’ll need to increase capacity by fifty seven percent.

 

 

Question

It shows the gap between where things are and where they need to be, and for folks who maybe were just reading the news over the last couple of years — they see this dynamic where we need to increase production capacity. But if you could take us inside — open up the curtains: What has it been like over the last couple of years working in the industry?  

 

Answers

It’s been extremely challenging. When the pandemic first hit, we were being asked country by country to shut down our facilities, and to shut down a fabrication plant — even for a minute! — it’s such a huge cost. We’ve also seen geopolitical instability, with Russia and Ukraine, and how suddenly, because of sanctions you couldn’t move goods into Russia, or get your goods out of Russia very easily. So we’ve seen geopolitical instability become real, and then you have the supply chain disruptions. I also mentioned the situation in China, where with a Zero Covid policy we’re shutting down an entire city. How do you manage that? All of these have really led to a challenge for a supply chain, and ultimately I think it really affects the global economy. 

We’re seeing that today at Intel. One of the things that we’ve had to do is really look at our supply chain and figure out, how do you make it resilient? Addressing these issues, I think what’s ongoing work for companies is to start thinking new and fresh. 

 

 

Question

There’s a lot going on to try to bring production up domestically because of all these risks that you’ve mentioned. Maybe you could share a little bit about what’s going on today. What are the big things happening in the industry right now that are trying to address this problem?

Answer

I think the biggest concern that we’ve identified, at Intel, is that the semiconductor supply chain is imbalanced. 80% of chips are produced outside of the US.  If you go back ten, fifteen years ago, where thirty percent of semiconductors were produced in the US. Twenty percent in Europe. So we’re seeing a need to rebalance that supply chain. And the way we’re doing that is to increase manufacturing here in the United States. It helps to address the geopolitics,  the supply chain disruptions, to have manufacturing here in the US. You can begin, then, to produce more and be insulated somewhat from some of these broader risks. I think that’s the strategy being put forward.

 

 

Question

How has it been unwinding some of the trade aspects of this strategy? Because you have these existing partnerships with folks, and now moving it domestically — maybe it reduces the complexity…?

 

Answer

Well, I think it goes back to ensuring supply. A good example would be considering the US Government as a customer, requiring a certain amount of semiconductors — and we don’t have to be concerned whether all of a sudden we can’t obtain them from…let’s say Asia, because they’re produced now in the Us. When we can supply it domestically, it allows more predictability and more resiliency.

 

 

Question

And how is this affected by the recent legislation that’s come out? It was all over the news a week or two ago. The Chips act, and some others. How do these factor into the whole picture?

 

Answer

A great great question — The Chips Act: the President just recently signed this law into law, and we’re excited by this.  We’ve played a big part in working with the Government to craft this bill, and It’s probably one of the most significant pieces of legislation to address industrial policy — maybe over the last fifty years, maybe since World War II. It’s a huge  help to the industry. 

I’ll give you some examples. $52.7 billion over five years. And this is really to incentivize increased U. S. investment in better manufacturing; R and D; and workforce development. $39B in grants and loans to attract chipmakers, to build, expand, or modernize their US facilities, and upgrade the equipment for semiconductor fabrication. $11B to support semiconductor technology and advance packaging R. And D. And this includes a new national semiconductor technology center called the NSTC. $200M for semiconductor education and workforce development, a twenty five percent investment tax credit for US manufacturing of silicon vectors, and $1.5B in grants to accelerate the U. S. Deployment of open standards for interoperable five G infrastructure — and more.  

So you can see this is a significant piece of legislation, and for Intel — we’re very excited. We are planning to invest 43.5B in US manufacturing, and this will create a robust and balanced semiconductor ecosystem — and the Chips Act actually will accelerate these investments,  allowing us to build the factories in the United States that are going to produce these chips. 

Just two days ago Intel announced an agreement with Brookfield asset management on a semiconductor co-investment program, and this is really going to build on the momentum from the Chip’s Act. It’s going to show how private companies can be a force-multiplier to government incentives for semiconductor manufacturing. All of this is happening real time, and it’s very exciting to see it go forward.

 

 

Question

It is exciting, but it still seems hard to build a semiconductor manufacturing operation.

 

Answer

On that note, Kyle. I had a chance recently, for the first time in my career, to actually go into the fab, complete with the bunny suit, and walk through that manufacturing facility and see the technology that it takes — the magnitude of the machines and the equipment and the process. It’s just fascinating, and what it takes: that investment to build the factory, equip the factory, and then to run it!

 

 

Question

Now that there’s a lot of funding, what’s happening right now?  Are new buildings going up? Are we breaking ground? What do things look like today?

 

Answer

At Intel we are investing in the United States in a number of areas. So let me just walk you through this because you’ll see the magnitude of what we’re committing to, and we’ve announced all of these. 

In May of 2021, we announced New Mexico. This is a $3.5B investment to equip our operations in New Mexico, and this is for that advanced packaging we spoke about.  

In September of 2021, we actually broke ground in Arizona, with a $20B expansion project on two new factories, on our existing campus. 

In January 2023,  we are very excited to announce the first new site in a long time, and this is in Ohio, where we are planning to invest $20B to construct two new leading-edge chip factories. This is in the heartland of the United States, and there’s a lot of excitement about high tech coming into Ohio. 

Finally, in April, in Oregon, we celebrated the grand opening of what we call Mod 3, and this is a $3B investment to expand our leading edge factory. That’s currently there in Oregon.  And so,  as you can see, Intel is committed to this US manufacturing-capacity build. 

 

 

Question

The thing that impresses me when you walk through these plans — the jobs that it’s going to create. I mean, this is probably thousands of jobs. 

 

Answer

…I’ll tell you a story. When I first started at Intel many years ago, my first business trip was to Oregon, and there was one Major Intel building and a lot of farms…. And I was up there two weeks ago to visit my team, and when you go up to Hillsborough where we are, you see the size of the factory…and there’s always cranes, and the whole ecosystem that’s been built up, and the jobs that have been created, it is just phenomenal when you see that. In fact, we believe there’s a jobs and multiplier — and that semiconductor job multiplier, the number is 6.7.

So that means for every direct job in the semiconductor industry an additional six point seven jobs are created in other domestic industries. When you build a factory or a fab in a location, the ecosystem begins to build around that, and that creates jobs.



Question 

I’m interested to hear what those kinds of secondary jobs are. Is it in the transportation of those goods, or is it in other industries and in manufacturing, or what are the secondary beneficiaries of that job multiplier?

 

Answer

For example, equipment makers: the folks that supply the monkey suits, right? And you can just imagine all the different pieces and parts it takes to make sure that factory is running, and so folks will obviously locate nearby, so they can serve that need. You’ve got jobs in service, jobs in tech —  just the whole gamut of jobs that it takes to support a manufacturing facility that size.

 

 

Question

Well, that’s incredible. And on the topic of creating new jobs and going back to those funding line-items and the Chips act that you outlined earlier: one of the things that I thought was interesting was the need to address education in the Chips act. Maybe you could spend a second sharing why that was so important — to get that funding in this legislation?

 

Answer

Well, to be able to produce in the United States at the capacity we’ve talked about requires a number of skills, and some of these skills are high-tech — that’s coming from universities. We hire PhDs and others. Some are more low-tech, and we believe the workforce of the future for tech jobs is important, and so providing that education here in the United States is critical for the US to be able to source the talent, and meet the capacity that’s going to be developed. So I think, educating individuals in the United States is key for us to be successful.

 

 

Question

Yes, that makes a lot of sense.  We’ve been talking about how Intel is positioning itself to play a major role in domestic production, and all these new activities and sites that provide infrastructure to support. When you look at how that infrastructure will be coming online, What does the next year look like at these different sites? Or maybe in the next one or two years?

 

Answer

Let’s start with Ohio, because that’s our own recent big announcement, and very soon now we’re going to actually break ground. That’s kind of a formal celebration where you actually say “we’re we’re in business,” — so what you’ll find is the cranes will go up, and with the amount of construction — my CEO likes to say that we will probably hire all the cement workers here in the United States to be able to do this. So everything that goes into construction, and what I love, you see the huge cranes, and we build a huge building. We call it a shell, and then from there you begin to equip it. And with some of this equipment, there are a few pieces that take multiple airplanes to move it in, and when it arrives, it’s assembled in the building before you can actually produce it. So these are the things that will go on in Ohio over the next two years, as we get to the point where we can actually move wafers through the factory.

 

 

Question

Okay, got it. Wow!  Yes, exciting times for Intel. I mean, these are major activities that are going on. Now, if I put myself in the shoes of somebody who’s downstream in the supply chain, dying to get chips, I hear the excitement. I’m glad the infrastructure is coming, but I also have a need. So how should companies who rely on these chips to build their own products, what should their expectations be?

 

Answer

Jeff Rittener: Well, I think if you look at it from a supply chain, I think the fact that these goods will be produced in the US will ensure the supply chain is resilient. That there will be supply. If some of these customers are in the US, now you have manufacturing here. One of the things I find amazing is Intel is the only US manufacturer of advanced semiconductors still here in the US. All the rest has been offshored…and if you look at what’s going on in our world, especially in Asia, some of the risks — having that assurance that the goods will be produced here in the United States is is incredibly important, and so that I think that’s something that companies should feel better about.

 

 

Question

This also makes me think of the headlines over the last couple of years about shipping. We saw container costs skyrocket. We saw lead times across the ocean and foreclosures and things like that. So I would think also domesticating the production would help not just with resilience, but also maybe make things a little cheaper? Maybe I can get the goods faster, too?

 

Answer

Right. Absolutely

 

 

Question

So, broadening our perspective, looking at the industry over the next couple of years, how do you see this impacting trade and supply chain in the broadest sense?

 

Answer

 Well, I think I would probably describe it in two ways. The first I would, I would say, is this need, as you just pointed out, to be efficient.  …I mean, I have never seen the trade environment as complex as it is today, with almost daily and weekly, new rules being put forward. You see multiple countries coming together, and agreeing on what sort of controls are in place. And so it’s becoming complex, and it’s at risk. 

So I think the first thing is efficiency. And I think in the world of trade today, there’s an incredible opportunity to leverage technology to make trade more efficient, and that includes digitization. Think of how much around the world of trade today relies on manual processes, paperwork, and so on. And I think, using technology, we could digitize so much that would allow the whole supply chain to be more efficient. So that’s one…. 

And the second is resiliency. I just think that we’ve learned over the last two years how important it is to have a resilient supply chain.  It used to be, in the world of globalization, that the name of the game was efficiency. Just in time. Low cost. Put it all in a place where you can leverage the lowest cost. Get it to your customer quickly.  And that – well,  that’s no longer a viable option. You also have to consider resiliency. How do you plan for the potential next pandemic, the potential geopolitical situation that could happen again in Europe, in Asia, or elsewhere —   or any other supply chain disruption. So I think resiliency is going to be the key of the future, and I think companies like Intel — were looking at our supply chain very closely. As a result of these factors.

Kyle Westwood

Kyle Westwood

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