Why Are Chips Accelerating Their Discontinuation? What Can Be Done?

01
The Life Cycle of Semiconductor Products

First, let's consider the life cycle of semiconductor products. Generally speaking, the life cycle of ordinary semiconductor products can be illustrated in Figure 1.

                                Figure 1: Semiconductor life cycle

Beyond semiconductor products, from the perspective of product development, a product typically starts with "product planning", proceeds through the development phase, and then enters mass production. After mass production commences, it will continue for a certain period of time, followed by a gradual reduction in output, and finally the termination of production. This entire sequence of processes is referred to as the "life cycle". The focus of this article is on the length (duration) of this life cycle.

Here, we cite a document. Compiled in 1998 by Japan's Nippon Keidanren (Japan Business Federation), this document is titled Survey Report on the Current Status of Enhancing Industrial Technological Capabilities (Sangyou Gijutsuryoku Kyōka no Tame no Jittai Chōsa). In this report, regarding enterprises' initiatives to strengthen their technological capabilities, it investigates the relationship between the development cycle and product life cycle across various business fields. Although this document is more than 20 years old, the trends reflected in it have not undergone fundamental changes to this day, so we can refer to some of the data contained therein.

Development Cycle and Product Life Cycle by Business Domain  Source: Compiled by Rochester, based on data from Keidanren (Japan Business Federation)

As can be seen from this table, compared with the life cycle of semiconductors themselves, the life cycle of end products that use these semiconductors is usually longer. To take an extreme example, in the field of heavy electrical equipment, the product life cycle is about 23 years, while the life cycle of the semiconductors used is only about 3 years—roughly 10 times shorter than the former. In recent years, the life cycle of semiconductor products has even been shortened to approximately 2 years. In contrast, the life cycle of end products adopting these semiconductors has shown a trend of further extension.

It is evident from this that when using semiconductor products, it is essential to fully understand the life cycle status of the semiconductors themselves and formulate corresponding countermeasures in advance. This article aims to provide some reference materials to assist readers in addressing this issue.

02
Factors Affecting the Semiconductor Life Cycle

Then, what exactly influences the life cycle of semiconductors? Generally speaking, the manufacturing process of semiconductor products is illustrated in Figure 2.

                                                 Figure 2: Semiconductor product manufacturing process

In the past, almost all of these manufacturing processes were completed in-house by enterprises. However, as shown in Figure 3, in recent years, there has been an increasingly obvious trend of outsourcing each manufacturing link to professional companies.

                                                                                         Figure 3: Division of Labor in the Manufacturing Process

In other words, semiconductor companies used to complete all processes in-house, from circuit design to testing and quality inspection. Today, however, not only links such as wafer fabrication and packaging assembly are outsourced, but an increasing number of cases also see even design being entrusted to external enterprises.

The advantage of this model lies in the fact that enterprises can select the most suitable manufacturing plants based on product characteristics, thereby better enabling the development of high-performance and high-quality products. At the same time, since there is no longer a need to build production equipment in-house, it can reduce financial risks related to fixed assets and help shorten the development cycle as well as mitigate risks in the manufacturing process.

While this may seem like a highly beneficial approach, it actually harbors significant risks. As each outsourcing company focuses on its own process areas, they tend to prioritize the production of products with higher profit margins to achieve greater profits. Furthermore, they continuously update their equipment to enhance profitability. Consequently, it becomes increasingly difficult to sustain the production of products adopting outdated processes, which in turn affects the long-term supply of semiconductor products and shortens their life cycles.

Another important influencing factor is the so - called "industry restructuring", namely the mergers, acquisitions and integration among semiconductor enterprises. The following table shows the annual merger and acquisition amount of semiconductor enterprises from 2010 to 2019 (Unit: billion US dollars).

As can be seen from this table, merger and acquisition (M&A) activities in the semiconductor industry have been frequent over the past few years. What impact will this have on the life cycle of semiconductor products?

Through mergers and acquisitions, enterprises usually aim to expand their market share and sales networks, increase their business scale, while absorbing the other party's technologies and experience to improve operational efficiency and competitiveness, thereby strengthening their position in the semiconductor market.

However, although the merged enterprises are larger in scale, they must re-examine their original businesses and promote rationalization and cost reduction. These adjustments often involve production equipment and product lines. More commonly, many mergers and acquisitions take place between former competitors for strategic purposes. After the completion of the merger, an increasing number of enterprises are selling their production equipment and shifting to outsourcing production.

This gives rise to the following series of problems:

Products with overlapping product lines or low return on investment (ROI) resulting from mergers are discontinued (EOL);

Due to the sale of specific production equipment, products that can only be manufactured in that factory are forced to be discontinued (EOL), and subsequent products cannot be launched;

To streamline operations, product divisions lacking future potential are sold in their entirety, making it impossible for these products to continue production;

Enterprises struggle to maintain excessive inventory and cannot hold more than the minimum necessary inventory when products are discontinued;

If the cooperative enterprises engaged in outsourced manufacturing decide to phase out the production lines in use, the original products will no longer be able to be produced.

Such scenarios are all likely to occur, leading to a significant shortening of the life cycle of semiconductor products in recent years.

This gives rise to the following series of problems:

Products with overlapping product lines or low return on investment (ROI) resulting from mergers are discontinued (EOL);

Due to the sale of specific production equipment, products that can only be manufactured in that factory are forced to be discontinued (EOL), and subsequent products cannot be launched;

To streamline operations, product divisions lacking future potential are sold in their entirety, making it impossible for these products to continue production;

Enterprises struggle to maintain excessive inventory and cannot hold more than the minimum necessary inventory when products are discontinued;

If the cooperative enterprises engaged in outsourced manufacturing decide to phase out the production lines in use, the original products will no longer be able to be produced.

Such scenarios are all likely to occur, leading to a significant shortening of the life cycle of semiconductor products in recent years.

03

How to Address Semiconductor Product Production Discontinuation

First, we will learn about the procedure for discontinuing the production of semiconductor products. JEDEC (J-STD-048: Product End-of-Life Notification Standard) provides the EOL (End-of-Life) standards, as shown in Figure 4.

                                              Figure 4: Production shutdown process

As shown in Figure 4, after issuing the end-of-life (EOL) notification, final orders will be accepted for a certain period. Final production will be carried out based on the received orders, and products will be delivered to customers. Once delivery is completed, the product will be officially discontinued. At this point, the cycle from notification issuance to final delivery is at least 1 year, and usually about 2 years. In other words, within 1 year of receiving the EOL notification, it is necessary to calculate the final required quantity and complete the order. Unless the target end product is produced under a customer contract that specifies the total output, the required quantity must be ultimately determined by comprehensively considering factors such as historical shipment trends, market dynamics, and the development progress of subsequent models.

However, at this juncture, it becomes extremely difficult to determine "what quantity constitutes a safe inventory." Specifically, enterprises hold the notion that "since production will not be increased further, they are unwilling to hold excess inventory," while also worrying that "they may need more inventory than expected due to certain reasons or impacts." Additionally, depending on the application scenarios, there is the concern of "how to respond to potential spare parts shortages in the event of unexpected failures during the contract maintenance period." To address these concerns, many enterprises adopt the strategy of over-ordering semiconductor products in their final orders (sometimes even several times the required quantity). If this move can ensure the smooth transition to new models, it will not pose a problem for the enterprises.

However, there are also cases where production discontinuation cannot be achieved as expected. For example: a sudden surge in end-user demand, production cycle extensions due to delays in the development of subsequent models, and frequent failures of equipment requiring maintenance. Such situations often result in demand exceeding the expected quantity. Once caught in this predicament, the original semiconductor manufacturer has already ceased production and cannot accept additional orders; authorized distributors also have no inventory to allocate, falling into a dilemma where increasing production is impossible, and ultimately failing to meet the delivery deadlines required by end customers.

Enterprises undoubtedly aim to avoid such situations to the greatest extent possible. In the past, enterprises had to find inventory through contracted sales agents, but nowadays, the internet environment has become increasingly sophisticated, making global information easily accessible. Therefore, enterprises often discover websites selling semiconductors based on online information and consider purchasing products directly from them. However, some of these distributors may be shell companies lacking enterprise information, physical addresses, and telephone numbers. Should one purchase from such companies? If possible, it is best to avoid them.

The following are recommendations put forward by the World Semiconductor Congress (WSC):

Purchase products directly from Original Component Manufacturers (OCMs) or through authorized official distributor channels;

Plan in advance the measures to be taken upon receiving product change notifications or end-of-life (EOL) notifications;

When necessary, use "aftermarket distributors" certified by OCMs.

In summary, we recommend taking the purchase from official sales agents certified by the original manufacturers as the basic principle. Production discontinuation is unavoidable; the key lies in how to respond when demand does not match the product life cycle. In this regard, the following two solutions can be considered:

On the premise of eventual disposal, ensure that the reserve quantity reaches several times the expected total usage;

Based on the assumption that inventory will eventually be exhausted, select certified sales agents supported by original semiconductor manufacturers that can provide continuous supply.

 04 Concluding Remarks

 By proactively addressing the discontinuation and obsolescence of semiconductor products, enterprises can not only reduce the risk of production disruptions but also adopt a

 tough stance against counterfeit components. Alternative solutions for discontinued semiconductor products may trigger various faults and sometimes lead to hidden

 incompatibility issues—including both easily identifiable faults and those that are difficult to diagnose. To eliminate these potential hazards, it is imperative to select solutions that

 are both highly reliable and cost-effective.