The Semiconductor Rush

Protecting Taiwan's Semiconductor Supply Chain

Q: In a recent article, Bloomberg reported that the world’s supply of chips is in danger unless Taiwan gets vaccines. With Taiwan being the leading provider of semiconductors chips, how will the Covid-19 situation and lack of vaccines affect related exports and supply chain?

A: The global semiconductor supply chain has become increasingly vulnerable to Covid-19 vaccination programs and geopolitical disruption, due to key suppliers being based in distinct regions of the world.

Taiwan is the biggest manufacturing base for some of the world’s most advanced chips, the integral component from smartphones to supercomputers. Recent studies show that Taiwan Semiconductor Manufacturing Co’s share of the market’s most advanced nodes currently in production is up to 90%. In view of less than 5% of the Taiwan population vaccinated against Covid-19 and the backlog of vaccine orders, any further disruptions would add on to the already much prolonged lead time for semiconductor products (currently at 16 weeks, up from 11 weeks as at end of 2020).

tsmc semiconductor revenue chart trade credit insurance
Semiconductor sector market size: Pure-play foundry revenue, 2020 (%)

We continue to expect APAC, and Taiwan in particular, will definitely outperform the wider industry. For one, it is because local chipmakers and the wider electronics industry have a firm grip on the manufacturing of components found in the largest final markets (smartphones, computers, servers, etc); for two, these products themselves are seeing turbocharged growth. According to IDC, shipments for smartphones and computers are growing by 8% and 18% in 2021 respectively.

Evidently, TSMC has said that it will invest $100bn in capacities over the 2021-23 period, vs $10.7bn, $15.2bn and $17.6bn in capex in 2018, 2019 and 2020 respectively.

Q: What should companies in the electronics and semiconductor related sectors be equipped with credit management tools to protect from such supply chain disruption?

A: Knowing the financial stability and creditworthiness of customers is critical for these companies. To do so, ensuring market visibility and knowledge in the long-term is key. It’s also important to evaluate potential customers using alternative intelligence, beyond financial ratings and look into whether their strategy and culture are in line with your own. Businesses can also consider whether they have risk coverage and cash flow protection, like trade credit insurance . This usually indicates strong corporate governance, the ability to take on calculated risks and an avenue to manage potential exposure, this this case, supply chain disruption.

With multifaceted trading conditions and bankruptcies on the rise, exporting to new markets and customers is becoming more complex. On a global level, we expect insolvencies to rise worldwide by the end of 2021. Cash flow protection is especially important for small and medium enterprises (SMEs). 


Q: How does a business protect itself against customer insolvency?

A: Here are four steps:

1.       Analyse continuously. Ensure you have the data to make informed credit line decisions.

2.       Exercise caution. Know how to identify early warning signs so you can manage customer debt proactively.

3.       Understand your customer. Become familiar with the political and legal systems in the markets you are operating and doing business in.

4.       Have a Plan B! Contingency planning is key. This is most effective at the local level and should involve insolvency risk.

Q: Is Letter Of Credit as effective as Trade Credit Insurance?

A: Firstly let’s define letter of credit (LC) and trade credit insurance (TCI).

A LC is a bank guarantee that the payment of a buyer's obligation will be received on time and in the correct amount. Some advantages of LC are it provides security for both seller and buyer, uses financial standing of the issuing bank and because of the guarantee, seller can borrow against the full receivable value from its lender. However LC comes with significant disadvantages:

  • May only cover a single transaction for a single buyer and can be tedious and time consuming
  • Expensive, both in terms of absolute cost and credit line usage with the additional need for security
  • Ties up working capital for the buyer
  • Competitive disadvantage when competitors are offering open terms
  • Lengthy claims process
lc and trade credit insurance comparison chart
Comparison: Letter of Credit vs Trade Credit Insurance

Credit insurance, on the other hand, is a business insurance product that protects a seller against losses from nonpayment of a commercial trade debt. It is designed to cover accounts receivable. TCI will pay out a percentage of the outstanding debt if the company does not receive what was owed due to a buyer’s bankruptcy, insolvency or other issues, or late payment.

The key differences between letter of credit and trade credit insurance are:

    Trade credit insurance empowers companies to confidently grow sales without credit concerns as they are annually renewable protection, instead of single transaction basis

    Trade credit insurance enhances efficiency of a company's internal credit department with fast credit limit requests and ongoing buyer monitoring, whereas LCs ties up working capital

    Trade credit insurance allows exporters to offer safe, open export terms fast, LC relies on the buyer handling the burden of obtaining guarantee from their banks

    Trade credit insurance cost  is considerably cheaper than LC, with the cost being absorbed into a smoother transaction rather than presented to the buyer at an additional cost

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