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The Rise of AI: Fueling Semiconductor Demand and Supply Chain Challenges

The Rise of AI: Fueling Semiconductor Demand and Supply Chain Challenges


The rapid advancement of artificial intelligence (AI) technologies is driving an unprecedented boom in the semiconductor industry. As AI continues to revolutionise various sectors, the demand for high-performance Graphic Performing Units (GPUs), predominantly manufactured by Nvidia, is skyrocketing. The California-based chipmaker, not only reported stellar earnings but also projected a massive growth for the current quarter. Anticipating revenues surpassing US$11 billion in the June-August fiscal quarter, Nvidia's forecast far surpassed the expectations of even the most optimistic analysts, who were predicting figures ranging from US$7.5 billion to US$8 billion. [1]

The recent announcement by Nvidia regarding its projected growth in the current quarter did not come as a surprise, considering the findings of a report published by Technavio in March 2023. This report highlighted the remarkable growth expected in the AI chips market between 2022 and 2027, with an astonishing compound annual growth rate (CAGR) of 61.51%. The estimated increase in market size during this period is a staggering USD 210,506.47 million.


Source: Global Artificial Intelligence (AI) Chips Market 2023-2027, Technavio

With AI technology still in its infancy, its adoption rate is rapidly increasing across multiple industries, including adoption of AI chips in data centres, the development of AI chips for smartphones, and the integration of AI chips in autonomous vehicles are key drivers. It is estimated that approximately 70%-75% of businesses will have adopted AI technology in some capacity within the next 20 years. [2]

Morgan Stanley predicts that application-specific integrated circuit (ASIC) chips could constitute 30% of the total AI semiconductor market by 2027, which itself could reach a value of $182 billion, accounting for 15% of global chip demand. [3] This remarkable growth underscores the importance of establishing a stable and efficient semiconductor supply chain to support the expanding AI sector. 

The Scarcity Dilemma: Unpredictability and Risks in Semiconductor Supply 

However, the booming demand for AI chips has led to shortages and bottlenecks in GPU supply, causing significant challenges for the industry. Many AI companies anticipate that the shortage will persist until at least next year. The scarcity of GPUs has become a major concern as AI applications increasingly rely on these powerful components for training and running complex algorithms. Tech giants like Microsoft have reported internal shortages of server hardware required for AI operations. [4] OpenAI's CEO, Sam Altman, has expressed concerns about the processor bottleneck during a congressional hearing. [4] Customers and server manufacturers have reported waiting periods of over six months to procure the latest Nvidia GPUs. [5] This chip shortage has created immense stress for generative AI companies and startups while driving Nvidia's stock value to a trillion-dollar valuation. Furthermore, alongside the tighter supply of GPUs, there is also increasing demand for Central Processing Units (CPUs), application processors (AP chips), and high-capacity memory chips for servers. This trend bodes well for companies like Samsung and SK Hynix, the world's two largest memory chipmakers. [6] 

Securing Supply Chains in the AI Era: Leveraging Independent Component Distributors

Supply chain uncertainties and risks further compound the challenges faced by the semiconductor industry. Chip fabrication is susceptible to natural disasters, accidents, sabotage, and geopolitical tensions, all of which can disrupt the supply chain. Additionally, chip foundries operate at close-to-full utilisation, leaving little room for redundancy or excess capacity. The high costs of building buffer capacity and the low margins in the chip fabrication business pose significant obstacles to addressing supply and demand mismatches. 

To effectively navigate the AI chip shortage and unleash the full potential of artificial intelligence, a collaborative and adaptable approach is required to ensure supply chain success. Independent electronic component distributors emerge as crucial allies in establishing a resilient supply chain. However, not all independent distributors are created equal. It is crucial to choose trusted independent distributors that invest heavily in robust quality and supplier management systems that ensure traceability of components, preventing counterfeits from getting mixed into your supply chain, ultimately safeguarding the integrity and reliability of your products. Manufacturers can leverage their expertise by devising an independent distribution plan that incorporates strategies such as diversifying supplier bases. Through strategic collaborations with independent distributors, businesses can navigate the intricate supply chain landscape, identify alternative sourcing channels, and monitor real-time supply chain dynamics in the face of ongoing chip shortages.


[1] What's all the fuss about Nvidia and the AI bubble?, The Edge, 2023
[2] Global Artificial Intelligence (AI) Chips Market 2023-2027, Technavio, 2023
[3] 5 AI chip stocks that could take Nvidia’s market share, BusinessNews, 2023
[4] The elephants in the room at Computex, Techcrunch, 2023
[5] A blog post detailed a Sam Altman freakout about a huge chips shortage threatening OpenAI. Then it was taken down, Fortune, 2023
[6] Server factory: have to wait 6 months to get Nvidia's latest GPU, iNews, 2023
[7] AI-driven GPU, advanced chip shortage: Boon for Samsung, SK Hynix, The Korean Economic Daily, 2023
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