5 Risk Factors for Electronic Component Disruption You’re Not Accounting For

The electronic supply chain has always been unstable and unpredictable, but the pandemic introduced a new level of chaos to it. Unprecedented imbalances between supply and demand triggered huge shortages and left strategic sourcing professionals and component engineers struggling to navigate government lockdowns, factory shutdowns, component shortages, and a succession of crises in transportation and shipping. 

As a result of this experience, these individuals are now more focused on risk than ever before.  Electronic component risk, however, continues to grow in both its complexity and pervasiveness. Component engineers and strategic sourcing experts zeroing in on lifecycle management, government sanctions, and the burgeoning list of import restrictions may be leaving themselves vulnerable to a range of other forces of disruption in their industry. Because beneath the more frequently discussed, headline-grabbing concerns, there are a range of subtler factors capable of jeopardizing electronic components and painting industry professionals into a corner. 

Because beneath the more frequently discussed, headline-grabbing concerns, there are a range of subtler factors capable of jeopardizing electronic components and painting industry professionals into a corner. 

1) The Evolving State of Environmental Compliance 

The EU’s RoHS Directive

When the European Union’s Restriction of Hazardous Substances (RoHS) Directive went into effect in 2006, it was a major source of disruption for the electronics industry and the electronic component supply chain. The RoHS Directive restricted use of key materials that it deemed hazardous substances—including lead, cadmium, and mercury—in electronics and their parts. The regulation triggered a wave of obsolescence and forced engineers and sourcing professionals to restructure their electronic component supply chains in short order. Fortunately, these effects were experienced within a finite period. 

Electronic component manufacturers adapted, strategic sourcing specialists identified new suppliers, and component engineers tweaked their BOMs by swapping out noncompliant parts. Over the next 15 years, the EU expanded the scope of RoHS just twice, in 2013 and 2019. In other words, in the nearly two decades since it entered into force in the EU’s 27 member countries, RoHS has remained a relatively fixed, known entity. For professionals working with electronic components every day, it became an environmental regulation they rarely had to fret over. 

RoHS, REACH, PFAS, and More

Today, environmental compliance is not nearly as static and predictable. The EU’s Registration, Evaluation, Authorisation, and Restriction of Chemicals (REACH) regulation, for example, is a far more dynamic, changeable directive. REACH’s Substances of Very High Concern (SVHC) Candidate List is updated twice a year, requiring manufacturers to assess their products, materials, and BOMs on a regular basis to ensure they are remaining compliant with REACH and retaining access to the EU’s massive commercial market. 

The regulation of per- and polyfluorinated alkyl substances (PFAS), meanwhile, arguably presents an even more daunting challenge for the compliance professionals and component engineers assessing parts. REACH lists several groups of PFAS on its SVHC Candidate List, and restricts the use of several types of PFCAs (a type of PFAS). In 2023, several countries in the EU and the European Economic Area (EEA) submitted a proposal to dramatically expand the number of PFAS restricted by REACH, to around 10,000 chemicals. And while the U.S. federal government may be behind the EU in terms of PFAS regulations, individual states are moving aggressively to pass legislation prohibiting use of the sprawling chemical family across a broad constellation of product categories. 

The bottom line is that the nature and composition of environmental regulation has shifted over the past half-decade. Regulations like REACH are now expanding on a regular basis, new directives are emerging with greater frequency than ever before, and the level of scrutiny on chemicals and other potentially hazardous raw materials has ramped up significantly. Procurement professionals and component engineers need to understand and master this regulatory landscape with a higher level of fluency than in decades past. 

2) Single-Site Dependencies

In the post-pandemic era, there’s been no shortage of discourse around multisourcing. Many original equipment manufacturers (OEMs) and other companies have learned the hard way that single-source dependencies can be a major vulnerability in times of crisis and disruption. As a result, they’ve learned to establish relationships with multiple suppliers, preemptively identify potential backups, and spread out their sourcing so it doesn’t rely too heavily on geographical bottlenecks or single points of failure. 

The Importance of a Multisourcing Strategy

But for manufacturers to be truly comprehensive in their risk management efforts, they need to be looking beyond their own multisourcing strategies. Suppliers who themselves rely on a single factory, facility, or other site for the manufacturing of a specific part are leaving their customers at heightened risk. Suppliers with single-site dependencies are vulnerable to a slew of different unforeseeable events. These include everything from extreme weather events and factory fires to equipment breakdowns and labor strikes. For suppliers who use just one site to manufacture a specific component, any of these developments could snarl manufacturing for an extended period, leaving their customers scrambling to keep up production figures and avoid costly slowdowns. 

When vetting potential suppliers, companies should be treating single-site dependencies as a legitimate risk factor, one equal to the risk of single-sourcing practices at the OEM level. Businesses that seek out electronic component suppliers that employ a multi-site strategy for manufacturing will be proactively mitigating the many threats that can befall an individual factory. 

Businesses that seek out electronic component suppliers that employ a multi-site strategy for manufacturing will be proactively mitigating the many threats that can befall an individual factory. 

3) Supplier Risk 

When conceptualizing risk in the electronics industry, component engineers and strategic sourcing professionals often think in terms of disruptions that directly affect their supply chains. 

These factors include the ever-present specter of obsolescence, sudden changes to the market’s supply and demand dynamics, and the bevy of consequences that arise out of extreme weather events. But seeing disruptions in this way—as a collection of largely unforeseeable events roiling and rattling supply chains—overlooks one of the weightiest risk factors for any OEM or other electronics manufacturer: suppliers. 

Suppliers: The Underestimated Risk Factor

A company’s suppliers aren’t just the building blocks of its supply chain; they’re also large, complex vessels that contain a multitude of different varieties of risks. While these threats don’t typically constitute striking or newsworthy developments—they usually lack the vivid action and gripping stakes of pirates hijacking container ships in the Red Sea or violent typhoons decimating critical infrastructure—they are just as meaningful to a business’s risk management efforts. 

Read Also: What Should a Good Risk Analysis of Semiconductor Suppliers Include? (Part 1) - Z2Data

The Diverse Risks Suppliers Present

Each supplier carries a raft of discrete risks. These include financial liabilities and the potential for bankruptcy; cybersecurity risks; weaknesses in their sustainability practices and ESG performance; and vulnerability to geopolitical events. The latter risk, in particular, often carries disproportionate significance. A supplier’s country, region, and even its relationship to its national government can render it susceptible to tariffs, sanctions, and import controls. Taken together, these factors add up to a serious cluster of threats that can throw a manufacturer’s operations into disarray just as easily as a natural disaster or a major international conflict. 

While the term supply chain risk management (SCRM) might have entered the popular lexicon to refer to the ways businesses mitigate threats to their operations, the idea of supplier risk management should carry equal currency. 

4) Key Raw Materials Availability and Shortages 

Chipmakers need several key raw materials in order to manufacture semiconductors, including silicon, germanium, and gallium. The U.S. and other countries source much of these raw materials from China, which holds an overwhelming market share of production. The country is responsible for producing roughly 98% of the world’s gallium, around two-thirds of the global supply of refined germanium, and up to 80% of all raw silicon. This global chokepoint at the level of raw materials was on stark display during the COVID-19 pandemic, when a vicious cycle of outbreaks and lockdowns in China had a significant impact on the nation’s production of these critical elements. 

What’s Threatening Shortages

While the supply of these raw materials so integral to semiconductor manufacturing has remained relatively steady over the past year or two, the prospect of shortages is again emerging on the horizon. Late last year, Deloitte predicted that multiple geographical regions could face shortages of gallium and germanium as soon as late 2024, while 2025 could usher in scarcities of critical minerals like lithium. 

Geopolitical forces also threaten the global stocks of these materials. In what was widely perceived as a retaliatory act in the ongoing “chip wars” last summer, China imposed export restrictions on gallium and germanium, citing national security concerns. While many of the world’s largest semiconductor foundries responded swiftly by downplaying the impact of the controls, the maneuver may represent a harbinger of more dire resource battles to come. 

5) Component Carbon Footprints

It seems like the sustainability framework known as ESG has been on the tip of everybody’s tongue in the business world over the past few years. But more recently, the term—which refers to the environmental, social, and governance “pillars”—has moved beyond the realm of rhetorical lip service. A bevy of studies and statistics indicate that ESG categories are now making impressive inroads in corporate accounting and reporting. 

The Rise in ESG Reporting

According to a survey conducted by the Wall Street Journal, two-thirds of U.S. public companies disclosed ESG information in 2022. This represents a significant jump from the prior year, when only 56% reported environmental, social, and governance data. Similar studies and reports are demonstrating that the proportion of public companies making such sustainability disclosures has been steadily increasing for some time now, and has yet to statistically plateau. Disclosures specifically related to greenhouse gas (GHG) emissions have surged arguably even faster: while less than a quarter of U.S. companies disclosed their scope 1 emissions in 2018, nearly half did so four years later. (The figures are comparable for scope 2 emissions.)

ESG is a Growing Part of Corporate Accountability

What these statistical trends signify is that ESG reporting is not a temporary phenomenon destined to become a relic of an ephemeral trend in corporate accountability. Rather, it’s an increasingly permanent fixture in what businesses disclose to their governments and the public. This popularization and institutionalization of ESG reporting means that OEMs and the component engineers and procurement professionals that work for them need to start accounting for carbon emissions along their supply chains. This includes the carbon footprints of individual components. 

While calculating and reporting scope 3 emissions is not a widespread practice yet, it almost certainly will become one in the years to come. And when that time does arrive, electronic components that have large, unsustainable carbon footprints will become regulatory liabilities. Companies that can foresee this impending risk factor—one lodged within the very semiconductors, transistors, and capacitors that go into their products—will be better positioned to restructure their sourcing around more sustainable parts. 

Identifying and Mitigating Hard-to-See Risks 

OEMs and other companies that want to stay ahead of the many potential sources of disruption for electronic components need to have a nuanced, malleable way of perceiving risk. Beneath the top tier of threats to parts and electronic supply chains are subtler vulnerabilities that are much harder to see than a cascade of factory shutdowns or a spike in obsolescence for legacy chips. 

Beneath the top tier of threats to parts and electronic supply chains are subtler vulnerabilities that are much harder to see than a cascade of factory shutdowns or a spike in obsolescence for legacy chips. 

Organizations that can analyze both their suppliers and the components they use in their products with depth and precision—something supply chain risk management (SCRM) tools can play a vital, even transformative role in—are going to have the actionable data to adapt faster and more effectively than their counterparts. Because disruptions aren’t always events that spontaneously occur at geographical bottlenecks or along delicate shipping routes. They also spring from risks embedded in the places where you’re not accustomed to looking—the ones right in front of you.

What’s Disrupting Your Supply Chain?

Contact Z2Data’s product specialists to see your risk for disruption. From changing regulations to missed EOLs, Z2Data’s all-in-one solution gives you end-to-end visibility on risks your supply chain faces–so you can mitigate them before they cause disruptions. Contact us to learn more.