The semiconductor sector has huge opportunities. Demand is surging for microchips from an international customer base — for uses ranging from artificial intelligence to deployment in electric vehicles. A recent report suggests the global market for semiconductors could be valued at more than $1 trillion by 2030, up from $600 billion in 2021.
However, exploiting that opportunity is challenging, particularly in the context of the risks explored throughout our recent industry report. Mounting tensions between China and the West — as well as the experience of supply chain disruption during the Covid-19 pandemic — have heightened concern about individual companies’ domination of advanced chip manufacturing. The need for greater diversification throughout the semiconductor industry supply chain is clear. The broader economic backdrop poses dangers too, with levels of inflation still elevated in many markets.
Against this backdrop, trade credit insurance could be a crucial tool for semiconductor companies. For suppliers seeking to manage both the natural growing pains of increased sales and the challenges of political and economic risk, these policies could prove hugely valuable.
The most obvious use case for trade credit insurance is centered on risk mitigation. At each tier of the semiconductor industry value chain, suppliers now have opportunities to sell to new customers, both in their own market and on the worldwide stage. However, each new contract win exposes them to a new payment risk exposure. Often, moreover, suppliers may know very little about these new customers, particularly as they receive orders from new markets, including emerging markets considered to be higher risk (and where there is less publicly-available information on corporates and other customers).
Trade credit insurance protects them from such exposures, ensuring payment in the event that a customer defaults. Insurers are also a very useful source of intelligence on customers throughout the supply chain, maintaining comprehensive databases on individual buyers. That data and analytics can help fill in the blanks as suppliers work with new customers.
Trade credit insurance is not only about protection. In a wider context, it can also be a critical enabler of increased revenues and profitability.
First, trade credit insurance can be hugely valuable for businesses looking for finance as part of a growth strategy. Suppliers may need to expand their manufacturing capacity to fulfill new orders, but that will require potentially significant upfront investment — and therefore support from a financing partner.
Securing that support may be more straightforward for semiconductor suppliers with trade credit insurance in place, particularly at a highly-rated insurer. Usually, banks will be more comfortable offering credit in the knowledge that should the borrower suffer cashflow disruption because of a customer default, insurance is in place to resolve the difficulty.
Insurers are able to offer indemnities of up to 90% on typical policies — and possibly even 95% — offering finance providers a high degree of comfort. That may substantially increase the amount of credit that the supplier can access to fund its investment program.
A second way in which trade credit insurance can enable growth is by helping suppliers themselves to manage increased risk exposure. As a supplier’s sales increase, it is inevitably exposed to greater credit risk. Its aggregate exposure will be larger, but its exposures to individual customers may also be higher — where larger orders are secured, say, or where it is deemed necessary to offer longer terms of credit.
Finance leaders and credit managers rightly get anxious about such exposures; they may even set risk limits for the business, impinging on the ability of the sales team to take full advantage of emerging opportunities. A new customer may be deemed too large in its own right, or it may take the business’s total credit exposures past an acceptable threshold.
Trade credit insurance tackles this challenge head on. It reduces the size of the business’s exposure by the value of the indemnity on the policy, enabling suppliers to press ahead with their growth strategy. The policies may even make it possible for the supplier to offer more attractive terms of credit as it competes for new business.
A related advantage of using trade credit insurance in this way is that it can be an effective mechanism for managing the impact of higher inflation — another risk with which the semiconductor industry has had to grapple in recent times.
Higher prices automatically increase a supplier’s risk exposure: a given order volume, now costing more, requires increased credit. However, trade credit insurance heads off this danger, enabling suppliers to carry on with the same volumes of business without having to worry about their increased credit exposure.
It is also worth pointing out that higher inflation usually prompts tighter monetary policies from central banks and other policymakers. This may increase semiconductor businesses’ own costs and has the potential to drive an increase in defaults from struggling customers. Again, trade credit insurance provides important protection and mitigation.
The bottom line is that semiconductor businesses will not be able to exploit emerging growth opportunities without a clear strategy for managing the additional risks they will face. Trade credit insurance can play an important part in that strategy and many in the industry recognize this. A number of businesses in the semiconductors industry already use trade credit insurance, as well as protection such as political risk insurance, either through local policies or via regional and global programs. By following their example, others in the industry can begin to unlock the huge growth potential throughout the semiconductor value chain.
For smarter ways to manage your trade credit risk, please contact our team.
