Recently, Samsung- one of the world’s biggest chip manufacturers, announced that it might have to skip the launch of its latest Galaxy Note smartphone. Apple too was faced with similar challenges in the production of MacBooks and iPads, and Sony’s PlayStation 5 is expected to remain in short supply for a few coming months. Major names in the automotive industry are also struggling, including Toyota who may have to cut production output by 40% in September, while others simply had to shut down their factories over several weeks.

So what is the main reason that has challenged these giants? This post illustrates the causes of this global sourcing crisis, its impact on the Payments industry, and how leading vendors are tackling this issue.

The supply-chain problem with chips

Over the past few decades, many American and European companies in electronics adopted a new strategy leading to a factory-less business model, where the production was outsourced while research and development took the center stage. As a matter of fact, Europe held 44% of the world production capacity for semiconductor devices in 1990, which has gone down to 10% as of now. Today, these corporates focus on intellectual property-based business strategies, thus giving very little importance to in-house manufacturing. This change was primarily due to the foundation of TSMC in Taiwan by Mr Morris Chang in 1980. He started semiconductor production as a service, by making the production lines available for large enterprises, thus allowing them to focus on design rather than manufacturing. This marked the dawn of the factory-less era. The success of this model is reflected by TSMC’s market cap, which is valued at over $600 billion (2.5 times Intel’s valuation and thrice as much as Texas Instruments).

Such a business model has clear advantages: reduced amount of labour, renewed focus on core business, fueling innovation, more efficient use of resources, etc. Yet it showed some limitations last year, impacting some of the biggest industry actors. In the light of Covid-19, as people started working from home and being locked down, there was- contrary to the expectations- an increase in the demand for smart devices, computers, home appliances, Wi-fi routers, etc., while on the other hand, factories were being shut down, thus not being able to meet the requirements.

But apart from the pandemic, there have been many other roadblocks. For instance, a winter storm in Texas (where most of America’s production is located), drought in Taiwan, fire on the production line in Japan, a container ship stuck in the Suez canal, etc. Things were further complicated by China’s policy to store semiconductors before shipping to the US.

Understanding the impact How strong is the impact of this crisis?

While as many as 169 industries have been affected by Covid, due to longer delivery delays, the magnitude of the electronic components crisis is the largest with the most prominent impact on the global economy. On one hand, demand is growing speedily, and on other hand, the manufacturing capacity for which suppliers have invested for in 2021 is not sufficient to meet the requirements fully, according to the statement issued by STMicroelectronics.

In addition to the impact on smartphones, now instrumental in using Fintech Apps on a daily basis, the Banking & Payment industry is also affected by unmet demand. Delays in the delivery of Point-of-Sales terminals have been communicated to distributors around the globe. Besides, in regards to chip shortages faced by smart card manufacturers, the Payment Card Industry (SPA) is calling for payment cards issuance to be prioritized over other consumer goods.

Dealing with the crisis

According to an analysis by Goldman Sachs, the peak of the shortage was experienced in the second quarter of 2021, and the tightness is expected to ease in Q3 and Q4, but the return to normalcy is previewed only by the end of 2022. In the meanwhile, many companies like YouTransactor are dealing with the issue. Here are some of the strategies we have implemented to mitigate the impact of this shortage. 

• Identifying the key components that have the greatest impact on time-to-market and price.

• Closely monitoring procurement delays, while parallelly spotting different suppliers.

• Working in close collaboration with customers, to achieve improved transparency and obtain a more accurate and long-term forecast of the demands in various geographical regions, thus enhancing production efficiency.  

• Building strategic partnerships with suppliers to achieve priority resource allocation. Small and medium-sized firms often struggle with this issue due to a lack of proper visibility.

• Focusing on innovation and alternative approaches to reduce dependencies. For instance, in partnership with STMicroelectronics, YouTransactor implemented PCI security at the software level to reduce the dependency on the chip. This is especially crucial for firms that have certified products, which makes changing hardware a very complex process.

• For small Fintechs: leveraging the support from well-established OEM partners to minimize the risks. 

Conclusion

The last 18 months have not always been plain sailing! Though thanks to the dedicated daily efforts of our Operations team we have managed to meet our customers’ expectations. 

As cash-based transactions are rapidly vanishing from our lives, the demand for well-equipped points of sales is predicted to grow further over the coming few years. And despite the challenges currently faced by OEMs to deliver, industry experts foresee the expected volumes of 2021-2022 to be made up by 2023.