Medical device manufacturing, for example, has yet to return to normal, and that’s reflected in the profit-and-loss statements of many manufacturers. ResMed, Medtronic, GE Healthcare, and NuVasive Inc. all recently downgraded their expected earnings. And while medical technology hasn’t suffered as much as other sectors of the economy, that’s small comfort to the users of these products, whose very lives depend on CPAP and other machines.
The CPAP shortage is especially bad, with wait times of several months in some cases. And these shortages have been made worse by unexpected recalls. Medical device suppliers are still recovering from the 2021 Class I recall of more than 5.5 million sleep apnea and ventilator devices by Royal Phillips.
The Great Supply Chain Miscalculation
It wasn’t just supply chain disruptions that led to the ongoing chip shortage. Some chip buyers also miscalculated—and that mistake has cost them dearly. In the early days of the pandemic, major buyers expected a global recession, and scaled back their chip orders accordingly. But the recession didn’t materialize. In fact, the opposite occurred. Demand for telecommunications technology and consumer electronics surged, catching chip makers and their customers by surprise, and contributing to chip shortages in other industries as well.
Back in January, the U.S. had only five days of chip inventory, at a time when demand for chips was actually increasing. As U.S. Commerce Secretary Gina Raimondo said at the time: “We aren’t even close to being out of the woods. The semiconductor supply chain is very fragile and it’s going to remain that way until we can increase chip manufacturing.”
CHIPS Act Designed to Ease Semiconductor Shortage
In August, the government took direct action to alleviate the semiconductor shortage with the passage of the CHIPS and Science Act. The act is designed to turn the U.S. into a major manufacturer of semiconductors and to counter China’s dominance in this arena. It provides $280 billion for domestic research and manufacturing of semiconductors. More than $50 billion of that funding is being used to entice manufacturers to open domestic production centers. And the carrot is working. Intel, Samsung Electronics, and Texas Instruments are all moving forward with new U.S.-based factories that should come online sometime in 2024.
While that’s good news, it will be a while before chip production reaches comfortable levels. The war in Ukraine has disrupted the global supply of krypton and neon, two critical chip-making ingredients. Similarly, COVID-19 outbreaks in China—and the government response to those outbreaks—have reduced the industry’s lead frames stockpile. So even though chip-making costs have dropped from their highs earlier this year, they are still running nearly 20% above pre-pandemic levels. And lead times for some chips can be nearly 50 weeks.
MedTech Companies Learn to Adapt
While the supply chain is recovering, the process has been a slow one, and there is still a lot of uncertainty. To cope, some companies have redesigned their products, even changing their functionality in some cases. When ResMed Inc. found it nearly impossible to acquire cellular communication chips, for example, it redesigned its CPAP and APAP machines to work without those chips, and rebranded the products as card-to-cloud devices.
Other companies have adapted to the chip shortage by switching from custom to standard parts. PRIDE Industries recently helped one of its long-time customers redesign a best-selling Class II medical device. The custom chips the product relied on were simply no longer available, so PRIDE Industries reworked the design to use widely available standard components. The new design performed every bit as well as the previous one, with no loss in product functionality. And the entire effort—from initial redesign to finished assembly line—was accomplished in three months, minimizing disruptions for the customer.
Hope on the Horizon
There’s no question the chip shortage is still causing problems. But U.S. companies are responding with inventive solutions. Through redesigns and rebranding, they’re managing to meet customer expectations, and slowly but steadily regaining normalcy in their product delivery.
Long term, the future looks bright. Semiconductor availability is improving, and when it comes to the chip supply, the end of 2022 is definitely better than the beginning. Domestic production is already ramping up, and if trends continue, 2023 could be a happy new year for both electronics manufacturers and their customers.
