The defense & aerospace (D/A) supply chain is experiencing more strain and pressure than ever as heightened geopolitical tensions have forced countries around the world to increase military manufacturing. Global military spending reached an all-time high of $2.24 trillion in 2022, with the sharpest increase coming from Europe, fueled by the Ukraine and Russia conflict. Military spending remained high in 2023 and shows no sign of easing in the coming year. The increased demand for defense related infrastructure has caused a surge in global demand for the semiconductors required to make the D/A ecosystem function. At the same time, a backlog of electronic component supply has been eaten up over time. The recent boom of AI, EV and high-end cloud computing has resulted in a “squeezing out” effect in the electronics supply chain. Specifically, legacy components required for high reliability industries like D/A are losing semiconductor fabrication plant (fab) space to newer, more technologically advanced, and thus more expensive, devices. To navigate today’s turbulent environment and prepare for future sourcing constraints, it is critical that D/A original equipment manufacturers (OEMs) leverage long-term, data-driven planning strategies. D/A Supply and Demand Challenges New fabs are focused on supporting emerging technology markets that require smaller components (<11nm node size), such as 5G, AI, machine learning, cloud-related applications, and Internet of Things (IoT) devices. This is the fastest growing category of node sizes in terms of both supply and demand. Manufacturers are investing in new fabs and ramping up production of smaller node components, seeing the highest profit potential in the cutting-edge space. As a result, the market for legacy products, which the D/A industry depends on, is projected to experience the highest supply shortages over the next few years. Legacy components have become less available from manufacturers and traditional distribution networks. In some instances, legacy parts can only able be replaced by re-fabrication. In other cases, necessary components have been phased out and are not in production at all. While some legacy products may become obsolete and have limited use cases, others may continue to be in demand for certain applications. This creates critical challenges for the industries that rely on legacy components. High-reliability industries such as industrial, D/A and legacy automotive may continue to use legacy components for many years. These components may require specialized manufacturing processes that are no longer available, making them more expensive and harder to source. Additionally, the process and cost of replacing the equipment or infrastructure using legacy parts is not feasible for many organizations. In the D/A sector specifically, to increase effectiveness and longevity of their technology, the military relies on systems that are field-proven after many years of deployment. That reality makes finding, sourcing and manufacturing replacement parts difficult. Contributing to these challenges, the D/A sector also has stringent requirements for their components due to the higher stakes involved. Every aspect of national defense, from transportation to cybersecurity, relies on countless semiconductors to perform at the highest standard. If sub-standard chips were to enter the D/A supply chain, the consequences could be dire. To prevent this, the components must be tested and verified. When sourcing semiconductors, OEMs must adhere to strong traceability and quality control. This is time consuming and limits the number of alternative components available for their systems. Advancements in Military Applications Further Strain Semiconductor Market The demand, and the challenges, within the defense and aerospace semiconductor market will only grow in the coming decade — it is predicted to more than double between 2021 and 2031. Driving this demand, in part, are the recent advancements in wearable devices and electronic warfare. New improvements in semiconductor technology are paving the way for more functional wearable devices across a variety of military applications. Wearable technology for military use has led to better real-time health monitoring (physiological parameters such as heart rate, body temperature, and movement) and more advanced communication systems. To acquire the necessary devices, the military is expected to drastically increase its demand for semiconductors, specifically in the 20-64 nm and ≥65 nm node sizes. The next generation of military equipment will need not only more advanced chips, but higher quantities of them, which could put additional strain on an already volatile market. Building a Long-Term Strategy There are 3 key data-driven tactics D/A OEMs can implement to assert a better position in the market, and build a robust long-term plan:
Demand Forecasting : Leverage qualitative and quantitative demand forecasting to understand historical trends and coupled with current market opinions/insights.
Strategic Inventory Purchasing Planning : By combining a comprehensive view of historical purchasing data and forecasted components, D/A OEMs can better respond to current and future market needs. This mitigates the risks of future disruptions, helps plan for obsolescence and manages component lifecycle stages.
Building a network of suppliers : Casting a wide net, with both global and local suppliers, gives D/A OEMs options when shortages arise. As military spending continues to rise, it will become more challenging for D/A OEMs to secure the components they need. New fabs will continue to focus on smaller-node components to meet end-user demand for advanced tech, meaning legacy chips will be harder and harder to come by. All organizations operating within the D/A industry must prepare for hurdles and take measures to insulate themselves from the effects of a strained market.
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