Seeking Balance: The Photonics Industry Grapples with Global Semiconductor Shortage

22 June 2021
William G. Schulz
Semiconductor chip

The global semiconductor shortage that has largely coincided with the COVID-19 pandemic-and affected virtually all industries including the photonics industry-shows few signs of easing up, though businesses and supply chain managers say they are learning to cope.

"I think global companies probably have it easier than some of the smaller local companies, because our supply chain is much more expansive," says Timothy Kennedy, vice president of global sales for Edmund Optics (EO). "You can usually find a supplier that's keeping some material on hand that you're then able to utilize at a higher price, or at a different stage in the production process."

Kennedy describes EO as an optics and imaging company for the photonics space, making imaging lenses for cameras, optics for laser systems, and other optical components for electro-optic products. The business relies heavily on the semiconductor industry for numerous components, he says, and so the global shortages started becoming apparent early in 2020 as the virus that causes COVID-19 began spreading beyond China to become a pandemic.

"Probably around March or April of [2020] after China's factories had been closed down for a considerable period of time, that's when we started seeing components for certain products, whether it be LED lights for illumination for optical systems, or the resistors or transistors for different components-they were no longer available on the market," Kennedy says.

Asked if the shortages are now easing, Kennedy says they appear to be, however, with semiconductor production increases we are seeing rising costs for the devices and supply disruptions for other supporting materials.

"We certainly are seeing some easing, but what it really reflects is lead times for [other] materials, Kennedy says. "Instead of being ok we're projecting this to be three to six weeks [to obtain non semiconductor materials] it is now taking an extra four to eight weeks." That time difference, he says, is now needed to allow for sourcing of semiconductor components.

An opportunity for innovation

The electronic semiconductor shortages might seem like an opportunity for integrated photonics, which uses light for applications traditionally addressed through electronics. Integrated photonics are indeed finding use in a wide range of areas including telecommunications, laser-based radar, data communications, sensing, and more.

According to the public-private partnership AIM Photonics, integrated photonics, specifically silicon photonics, can dramatically improve the performance and reliability of electronic integrated circuits while significantly reducing size, weight, and power consumption.

But the global semiconductor shortage is for sure hampering innovation in integrated photonics, says AIM Vice President Edward White, who is chair of the National Photonics Initiative steering committee. He says because of the semiconductor shortage and other global supply chain disruptions, AIM has had difficulty obtaining, for example, tiny 500-micron lasers. "They are the light source" for integrated photonics, he says.

Before the global shortages started becoming apparent in 2020, semiconductor foundries around the globe had been operating at about 98 percent capacity, says industry analyst Dan Hutcheson of VLSI Research. He says the current auto chip shortage began during the second quarter of 2020, when automakers reduced production and chip purchases as the virus spread across the globe. Chipmakers, meanwhile, saw surging demand for semiconductors used to enable remote healthcare, work-at-home, and virtual learning, which were needed during the pandemic.

Then, Hutcheson says, e-commerce started to skyrocket as people stopped shopping in brick-and-mortar retail, putting further pressure on chip makers. And on top of that, he says, demand for new autos started to surge again as people with jobs started to spend pandemic savings and focus on family vacations close to home.

Hutcheson and other experts note that it can be difficult to understand the full effects of the semiconductor shortage on a diverse industry like the photonics industry, which not only plays a part in semiconductor manufacturing but supplies components to many other industries as well. He says publicly traded companies are reluctant to say much about the impacts, fearing market reactions, but also because they may be hard to tease apart. For example, he says, shortages of other materials not related to semiconductors-an ongoing fallout from the pandemic-can also be factors affecting business.

According to the Semiconductor Industry Association (SIA), the industry has worked to ramp up production, "but this supply-demand imbalance cannot be remedied with the ‘flip of a switch.' Restoring market balance takes time. Semiconductor manufacturing is not suited to rapid and large shifts in demand, since it takes time to ramp up semiconductor production."

Making a semiconductor is one of the most complex manufacturing processes, SIA says. Lead times of up to 26 weeks are the norm to produce a finished chip. The trade group says most industry analysts believe the current supply shortage will ease in the coming months as supply adjusts to meet demand.

"The shortage is a reminder of the essential role semiconductors play in so many critical areas of society, including transportation," SIA says. "This trend will only continue as demand for electronics and connectivity grows. In the auto space, new vehicles increasingly rely on chips for fuel efficiency, safety, and other features. The expected growth in electric cars will only further this reliance. In the long-term, as chips play an even bigger role in an ever-expanding array of products, global demand for chips will continue to rise."

Urgent challenge: stable critical supply chains

According to a recent report from US President Joe Biden's Administration, "The COVID-19 pandemic demonstrates the importance of semiconductors to meeting the world's most urgent challenges including their use in enabling technology for finding treatments, caring for patients, working and studying from home, and ordering groceries and other essential products. Shortages of certain semiconductors during the pandemic also reveal the importance of ensuring stable, resilient supply chains for these vital products."

The industry shortage is due to multiple factors, including unexpected shifts in global demand following the COVID-19 pandemic and events that disrupted specific major semiconductor manufacturing centers, the White House report says, such as the early 2021 storms in Texas that caused a shutdown of several semiconductor manufacturing plants.

Asked if increasing US semiconductor manufacturing capacity can at least ease US shortages, Kennedy says, "at the end of the day, the supply chain is going to be driven by cost. And if the US [semiconductor industry] can be cost effective in normal periods, then that is going to help.

"I would give the example of rare earth materials," Kennedy continues. "China was the major supplier for most of those materials until 2010 when it started to reduce exports. Suddenly, France, Canada, and other countries had to really shuffle quick to turn on production to manage that and it took probably about six months to come into effect. So, if you are expecting that it's going to take longer than six months to resolve these [semiconductor] shortage issues, then having that supply chain built up in the US can help. That is, if the market is willing to pay for that and continue to keep paying for that security during the periods where you don't need it as much."

"I expect the shortages to end after there has been enough time to rebuild capacity, but at higher prices," says University of California, Berkeley Professor of Electrical Engineering and Computer Science, Eli Yablonovitch.

"The semiconductor industry runs very lean," says Yablonovitch, who is regarded as the father of the photonic band gap concept-a key concept for bringing silicon photonics to market. "And that will change owing to the long lead times. I expect that it will produce something like futures contracts, where standby capacity will become an item to bid on. Silicon Photonics will not be boosted any more than any other area of the chip industry. I am expecting more standby capacity and supplying standby capacity will in effect be a new industry."

The semiconductor shortages are pushing a sense of nationalism in the US and other countries regarding innovation and at-home manufacturing capacity, Hutcheson says. The world is watching as China continues innovating in many high technology arenas like optics and photonics while building huge, vertical semiconductor manufacturing capacity within its own borders.

Hutcheson says the solution to global shortages may not rest solely on building US semiconductor manufacturing capacity. He sees instead a multi-faceted response, that could also include the rise of "boutique" domestic semiconductor manufacturing for specific purposes like defense. All of that, he says, would come in tandem with shortage-driven innovation for nascent technologies like silicon photonics at AIM, or the 2-nanometer-sized electronic chips recently announced by IBM.

The post-COVID-19 era will be a situation akin to the US' post-World War II innovation and manufacturing boom, Hutcheson predicts. "The semiconductor shortage is the cover story."

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