The semiconductor industry is at a pivotal moment, facing massive transition and growth. The first quarter of 2025 has introduced several challenges to an already volatile market with tariffs impacting international trade, labor shortages hindering production, and aging technology increasing obsolescence risks.
As the semiconductor industry faces rapid technological advancements and geopolitical complexities, companies must foster collaboration across the entire ecosystem to mitigate risks and ensure long-term sustainability.
The Impact of Tariffs
In 2024, the U.S. imported $139 billion worth of semiconductors and other electronic components, according to Commerce Department data. The Trump Administration’s new tariffs have increased import costs and further strained U.S.-China trade relations. These measures, coupled with export bans, have significantly hampered operations for original equipment manufacturers (OEMs), contract manufacturers (CMs), and electronics manufacturing services (EMS) providers.
The resulting increased costs are only part of the problem. Trade restrictions and ongoing supply chain disruptions — from market demand and labor shortages -- have simultaneously increased lead times for critical components. Industries reliant on Chinese suppliers have experienced delays in production and distribution. This has been especially impactful for aerospace and defense manufacturers that rely on stable streams of legacy components.
While these tariffs aim to drive investment in U.S.-based manufacturing facilities, domestic semiconductor production is not yet capable of offsetting these short-term price fluctuations. This is primarily due to the insufficient labor pool of skilled workers in the United States and decades-long use of offshoring. For example, despite recently announcing a $100 billion investment, TSMC has encountered numerous delays in getting its Arizona facilities up and running.
Even once the fabs become fully operational, many of the new facilities constructed or planned will produce leading-edge chips, often below 11 nm. Aerospace and defense companies require a significant amount of legacy chips, which many of these new domestic facilities will not produce.
The full extent of these geopolitical tensions has yet to be seen; and as companies prepare for global dynamic shifts, fluctuations in electronic component inventory supply are imminent. To remain resilient and navigate such uncertainty, companies must stay agile and adaptable.
Increased Risk of Labor Shortages
In alignment with the government’s call for companies to invest in U.S. operations, increasing demand for semiconductor engineers and technicians has put immense pressure on the industry. This has contributed to labor shortages, which affect production timelines and costs. Despite the rapid adoption of industrial automation, highly skilled workers are required to help program and oversee automation.
National security concerns and competition for technological dominance are driving the U.S. to accelerate efforts to strengthen its domestic semiconductor workforce. McKinsey forecasts that the U.S. semiconductor industry will create over 160,000 new job openings in engineering and technician support roles by 2029. However, the supply of new engineers and technicians is critically low, exacerbated by the fact that 55 percent of the U.S. semiconductor workforce is aged 45 or older. By 2029, the industry could face a talent gap of between 59,000 and 146,000 workers, including technicians and engineers.
To address this issue, companies are increasingly investing in long-term workforce development initiatives and forming partnerships with educational institutions. For example, Purdue's online programs offer tailored educational opportunities in collaboration with government agencies, private companies and non-profits. These programs are aimed at upskilling employees and preparing them for meeting evolving industry needs.
These education pipelines, while demonstrating promise in their development, will take time to mature as the next generation of engineers is trained and integrated into the workforce. In the short-term, AI has emerged as a solution for filling in labor gaps by handling manual tasks. In addition, AI applications also be leveraged to prevent knowledge loss by documenting data and assisting in training new technicians.
Managing the Supply Chain with Advanced Analytics
The rapid pace of technological advancement and market consolidation has led to a notable increase in component obsolescence. AI’s growing popularity has contributed to this issue by raising the demand for advanced chips. In 2023 alone, approximately 474,000 parts reached end-of-life (EOL), posing substantial inventory challenges for manufacturers.
Geopolitical instability and market trends have accelerated the occurrence of instant obsolescence, leaving no option for last-time buys (LTBs). As a result, OEMs, CMs, and EMS providers struggle to secure essential parts. This creates significant headwinds for high-reliability industries like healthcare, automotive, aerospace, and defense.
Proactive measures are needed to ensure the availability of alternative components, emphasizing the importance of strategic planning and innovation in managing semiconductor lifecycles. This has led to a shift away from just-in-time procurement strategies, as businesses recognize the need to build more resilient, flexible supply chains that can adapt to these rapid changes.
Additionally, manufacturers are also embracing advanced analytics and AI-driven tools to predict obsolescence trends and manage inventory more effectively. Predictive analytics uses techniques like data mining, predictive modeling, and machine learning to analyze real-time and historical data to forecast future events. In semiconductor manufacturing supply chains, it predicts customer demand and anticipates future component trends. By adopting these technologies, companies can minimize the impact of obsolescence on their operations and ensure a steady supply of critical components.
Now is the time for companies to adopt proactive measures to mitigate supply chain risks like obsolescence and component unavailability. Fostering collaboration across the entire semiconductor supply chain, including suppliers, manufacturers, and customers, will be crucial in building a sustainable industry. In an era defined by rapid technological advancements and geopolitical complexities, the semiconductor industry's ability to adapt, innovate, and collaborate will determine its success in navigating the challenges of 2025 and beyond.
