How is the semiconductor shortage affecting medtech?

By Stephen Bradley, specialist leader, and Bill Murray, specialist executive, Deloitte Consulting LLP

Semiconductors, and their integrated circuits, act as the brain for millions of products—from smartphones, to automobiles, to laptops, to medical devices. However, these once inexpensive and plentiful silicon chips have been in short supply for more than 18 months, and medical device companies are suddenly competing with virtually every other manufacturing sector for limited inventory. Many medtech manufacturers are making difficult decisions to help ensure they can continue to meet the needs of the market. Some of them are likely to implement new (and often more expensive) strategies to keep their production lines moving.

About 50% of all medical devices have a semiconductor, but this represents only about 1% of the total semiconductor market.¹ These components are essential for a wide range of devices, from blood-pressure cuffs to MRI machines. As medical devices become more tech-enabled, semiconductors will become even more important (see Smart Knee Brings Future of Health One Step Closer).

How did we get here?

Kinks in the supply chain created by the COVID-19 pandemic continue to hinder many industries, including semiconductors. In China, an uptick in COVID-19 infections caused some chip manufacturers to reduce production or temporarily shut down. This has further balled-up supply chains. Russia’s invasion of Ukraine adds another layer of uncertainty. Ukraine is a major supplier of neon gas, which is essential for the lasers that are used to build the microscopic circuits in the chips.² Moreover, Russia is one of the world’s top suppliers of palladium, a precious metal used in semiconductors.³

In addition, rising fuel prices, combined with decreases in shipping volume, have increased the cost of transporting chips. The fact that some of the world’s most advanced chips are produced in Taiwan could potentially add another layer of risk to the supply chain if that region of the world becomes less stable.⁴ The shortage of chips has prompted many companies to boost inventory by ordering more than they need. But hoarding is making a difficult situation even worse.

Survey finds little near-term optimism

In July 2021, we surveyed medical device manufacturers to learn more about the supply chain issues they were facing. Most respondents admitted that it had become more challenging to acquire the semiconductors needed to manufacture their devices. Many respondents said they had figured out temporary workarounds and saw the shortage as a manageable pain. Most said they had enough inventory on hand to avoid production delays.

We followed up with a second survey in April 2022 to find out what had changed, what had stayed the same, and how semiconductor shortages continue to impact businesses and the patients they serve. We found that medtech manufacturers had grown more pessimistic. Many of them say their inventory has since been depleted, which has caused them to reduce or pause the manufacture of devices. Almost 80% of respondents said they are experiencing extended lead times, often more than 12 months. Some respondents indicated they do not expect supply chain issues to improve before the first quarter of 2023.

More than 75% of our most-recent survey respondents said that their customers have turned to alternative types of treatment for their patients. As a result, some hospitals and health systems are looking into alternate products, new usage strategies or treatment options.

Here are a few steps some companies have taken to mitigate risks and navigate shortages:

• Consider alternative suppliers: More than half of our most recent survey respondents said they previously relied on a single source for 75% of their chip supply. All of them are now pursuing alternative sources.
• Evolve broker relationships: In the past, medtech manufacturers had little need for brokers. Now, nearly one-third of respondents said they have reached out to brokers as an alternate source of supply. Some companies have turned to brokers because they don’t have any other way to acquire the semiconductors they need for their products. Additionally, brokers can provide safeguards against counterfeits, which has become more of a challenge since our first survey.
• Increase inventory: In the past, medical device manufacturers usually didn’t stock a large chip inventory. For example, 13% of respondents said they did not have a chip inventory prior to the pandemic. That has since changed. More than 70% of respondents said they have recently increased their semiconductor inventory levels.
• Focus on agility: Building speed and flexibility into component substitutions—through planning, manufacturing, and regulatory processes—could make it easier for manufacturers to switch to alternate suppliers when needed. Many companies are revalidating components to increase sourcing options even though the process can be cumbersome.
• Use digitization to enhance supply chain visibility: There are typically multiple tiers between a medtech company and the chip manufacturers. Since our 2021 survey, most companies have increased their multi-tier visibility. Increased visibility can help medtech companies identify issues more quickly, which can mitigate risk. Digitization of the supply chain can provide visibility from the suppliers all the way to the customer and help enable a quicker response. Advanced analytics could enhance the ability to be more proactive in every step of the supply chain.

Today’s challenges could make medtech more resilient

Medtech manufacturers historically have not paid close attention to the semiconductor supply chain because chips had been plentiful and inexpensive. Prior to the pandemic, some semiconductors could be purchased for pennies. In some areas, we have seen costs increase by a factor of 100 or more.

Semiconductor shortages, supply-chain delays, and rising fuel costs have made it difficult and costly for some medtech manufactures to purchase the inventory needed to keep their production lines moving. Industry trade group AdvaMed is working with the White House’s Joint Supply Chain Resilience Working Group to develop a national strategy to create a more resilient public health supply chain.⁵ While supply-chain constraints are unlikely to be resolved in the near future, ongoing efforts to increase resilience and fortify supply chains could help medtech companies respond to future challenges.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Acknowledgement: Kathleen Foote

Endnotes:

¹ Why patients deserve priority in global semiconductor chips shortage, AdvaMed, June 6, 2022
² Russia’s attack on Ukraine halts half of world’s neon output for chips, Reuters, March 11, 2022
³ Russia is one of the biggest producers of palladium, Barron’s, March 4, 2022
⁴ Commerce secretary warns US needs to secure a future for its chip industry, CNBC, May 25, 2022
⁵ AdvaMed joins Biden administration working group to address medtech supply-chain concerns that could soon affect patient care, AdvaMed press release, May 19, 2022

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