Outsourcing strategies and the learning effect in the semiconductor industry

Abstract

Many industries are affected by outsourcing and the relocation of production to other countries, mainly due to cost optimisation. The main idea behind in-house production is to exploit the benefits of learning-by-doing; however, learning is a slow process, so the short-term benefits of outsourcing manufacturing may override the long-term benefits of accumulating productivity knowledge. The semiconductor industry – in addition to the fact that there are clear examples of both ‘make’ and ‘buy’ models – has acquired a key role since the outbreak of the pandemic: the chip shortage has rippled through many sectors, slowing down or even paralysing production. In this study, we construct a model to capture the outsourcing decision of a chip production company, considering the effect of learning-by-doing and supply resilience. Numerical simulations are used to present the situation of the semiconductor industry before and after the pandemic. We show that although outsourcing was the optimal strategy in the pre-pandemic period, since then the relevance of in-house production has increased. The stability of the current strategies is greatly influenced by external conditions such as relative production costs and the economic effects of chip shortages, which underlines the relevance of industrial policies aiming to the semiconductor industry.