Governments and Data Center Processor Companies Confronting Supply Chain Calamities

Currently, the global supply chain cannot meet the growing demand for data center processors, notably Graphics Processing Units (GPUs). For decades, this geographically split and highly specialized supply chain has been well-suited to meet demand, while keeping manufacturing costs low. But the synthesis of geopolitical tensions, prolonged COVID-19 constraints, and macroeconomic headwinds has given way to supply chain disruptions.

Market Overview

• Currently, the global supply chain cannot meet the growing demand for data center processors, notably Graphics Processing Units (GPUs). The synthesis of geopolitical tensions, prolonged COVID-19 constraints, and macroeconomic headwinds has given way to supply chain disruptions.
• The United States and the European Union (EU) are coming under closer scrutiny over how they will keep economic and technological growth healthy for the long term given an over-reliance on a single region (Asia, in this case) for data center processors
• Key players like fabless companies, Integrated Device Manufacturers (IDMs), foundries, and national policy makers are assembling their resources and looking to spur investment.
• Server spending will increase substantially over the next 8 years, especially as edge computing and Artificial Intelligence (AI) continue to mature. Growing at a Compound Annual Growth Rate (CAGR) of 36%, ABI Research anticipates US$22 billion in annual server spending by the end of the decade.
• 70% of the global fabrication market and 80% of back end manufacturing is done in Asia-Pacific. The lack of domestic manufacturing is the most significant risk to U.S./European Union (EU) economic and technological progression.
• The United States and EU have substantial control over the highly crucial Semiconductor Manufacturing Equipment (SME) market, and the U.S.-led bans on exports to China will maintain this leader status.
• In 2022, 23.2 million data center processor shipped worldwide, but, by 2030, that number will nearly triple to almost 66 million shipments.
• Central Processing Units (CPUs), GPUs, and Application-Specific Integrated Circuits (ASICs) account for 90% (more than 59 million shipments in 2030) of the entire data center processor market.
• In all cases of foundry investment, with Intel raising the most funding for its foundries in Ohio and Germany, government backing is no more than a third of the total investment.
• Until at least 2025, ABI Research expects persistent excess demand for data center processors. For example, next year’s supply will miss the mark by 4.7 million units.
• In terms of regional investment, North America is the most substantial, with US$63.9 billion in 2022, followed by Asia-Pacific at US$46.4 billion, and Europe at US$16.2 billion.
• By 2030, there will be a total of US$885.4 billion in cumulative processor investments, with North America leading the pack at US$575 billion that year. However, the gap between total cumulative investment (including other regions) and required investment (about US$1.3 trillion) will have widened further—US$414.6 billion short.

“Although governments are making subsidies and support available to private companies, the delay in receiving funds will increasingly exasperate companies looking to deploy capital quickly. It is essential that governments limit bureaucratic hurdles and regulatory complexity to attract investment.” – Reece Hayden, Analyst at ABI Research

In the chart below, ABI Research summarizes worldwide government contributions to announced early foundry projects.

Key Decision Items

Western Governments Must Support Processor Ecosystem in Improving the Processor Supply Chain

Governments have an enormous role to play in reshoring the supply chain in the face of geopolitical tensions and lingering COVID-19-related capacity constraints in Asian manufacturing facilities. As evidenced by the U.S. CHIPS and Sciences Act  and the European Chips Act, Western governments clearly recognize their overreliance on China and Taiwan for the processor supply chain. The reshoring and diversifying of the processor supply chain will take a long time, especially considering the Chinese and Taiwanese governments are far ahead of the U.S./EU governments in terms of support.

One of the main bottlenecks in the Semiconductor Manufacturing Equipment (SME) market is the lack of funding to expand the ecosystem. In addition to manufacturing, expanding the ecosystem would also involve investing in talent and green energy infrastructure. Generally speaking, current tax incentives simply aren’t effective. This makes it imperative for Western governments to continue ramping up fiscal and policy support to chipset manufacturers.

Moreover, the relationship between governments and companies must be ironclad. Only then will Western economies be able to identify and fill supply chain gaps. As current investments are largely ineffective at rebalancing the processor supply chain, ABI Research recommends optimizing legislation that incentivizes private external investment in technology leadership and bolstering processor manufacturing capacity—both key to ecosystem growth.

As one final word of caution, Western governments—in their efforts to strengthen the supply chain—should strategically reserve limited funds for vulnerable areas, such as fabless companies’ overreliance on TSMC and Samsung for leading-edge foundry capabilities.

Invest in Digital Transformation

Given the prevalence of high interest rates and geopolitical feuds, funding is a big challenge for data center processor companies. One solid way to free up some capital is by preparing operations for digital transformation.

Through automation and advanced data analytics, processor companies will benefit from improved remote monitoring, predictive maintenance, and lower manufacturing downtime. Amalgamated, these factors will result in higher capacity, increased manufacturing efficiency, and reduced equipment failure rates. On the last point, digitalization is a major money-saver, as replacing equipment, such as Extreme Ultraviolet Lithography (EUVL) machines, can be pricey.

Weed Out Unprofitable or Low-Growth Business Units

Another way for processor manufacturers to bolster their investment efforts is to allocate their supply chain resources to the highest-growing processor segments. Some verticals, such as the Personal Computer (PC) segment, have seen stagnated growth. On the other hand, demand for data center processors is expected to consistently experience sharp growth going forward.

Therefore, it may be wise to spend less time and fewer resources supporting PC processors and prioritize the data center processor segment. Doing so, like investing in digital transformation, will reduce operational/supply chain costs and help untangle budget constraints for processor manufacturers.

Consider New Technological Avenues

To help conquer the market, there should be increased investment in Artificial Intelligence (AI)/Machine Learning (ML) processor Research & Development (R&D) and manufacturing. Moreover, the spirit of sustainability should be evident in R&D. This is due to green data center legislation, corporate social responsibility, and the need for energy efficiency as the cost of energy has increased.

On the technology front, two other points of increasing interest will be Application-Specific Integrated Circuits (ASICs) and Field Programmable Gate Arrays (FPGAs). These technologies will lessen the burden on CPUs.

Revisit Your Business and Operating Models

First and foremost, processor companies need to develop and nurture long-term partnerships with equipment manufacturers in the face of uncertain supply chains. Not only will these partnerships mitigate the risk of long supply cycles, but they will enable processor companies to get their hands on cutting-edge technology before others can.

In addition to striking long-term supply chain partnerships, processor manufacturers must not neglect the value of ecosystem investment. In other words, if foundries are to expand their ecosystem, education and training are in order.

Some final recommendations regarding business and operating models include:

• Maintain close relationships with governments, which often requires providing them with assistance. These efforts can ensure that subsidies used to remedy domestic supply chain vulnerability are properly incorporated.
• Due to ongoing geopolitical tensions, dependency on TSMC needs to be eradicated. Although this will take time, it’s part of the path to supply chain resilience.
• With their sights on long-term success, IDMs and foundries must entice private investors to fund operations.

Key Market Players to Watch

• Advanced Micro Devices (AMD)
• Amazon Web Services (AWS)
• Broadcom Inc
• GlobalFoundries
• Google
• Intel Corporation
• NVIDIA
• Qualcomm Inc
• Samsung
• Semiconductor Manufacturing Corporation (SMIC)
• STMicroelectronics
• Taiwan Semiconductor Manufacturing Company Limited (TSMC)

Dig Deeper for the Full Picture

This Research Highlight only scratches the surface of all the supply chain updates and trends in the global data center processor market. To dig deeper into the topic—and explore possible solutions to ongoing market disruptions—download ABI Research’s Data Center Processors: Global Market and Supply Chain Analysis research report.

Not ready for the report yet? Check out our 6G’s Potential Lies with Distributed Compute and Edge-to-Cloud Research Highlight. This content is part of the company’s Distributed & Edge Computing Research Service.