The global chip shortage, now dragging into its second year, has shaken the electronics industry to its core, crimping the world's ability to build everything from cars to consumer goods and raising prices, and there are a lot of variables complicating the recovery.
Nearly every digital electronic device today is powered by semiconductors, which contain silicon and are critical for creating integrated circuits, also referred to as microchips. Cars use ICs for things like digital displays, entertainment systems and more complex features like assisted parking.
Semiconductor chips are also used in everyday appliances; they enable advances in computing, communications and applications used by nearly every industry.
Previously, computers were made of tubes and dials, which were not only fragile but required a lot of electricity. Tubes were eventually replaced by semiconductor chips, which are faster, cheaper and more efficient.
What is the global chip shortage?
Since anything that needs to compute or process information contains a chip, they are extremely important in our lives. And because demand for ICs is greater than the supply, there is a global shortage of them.
The rapid acceleration of the Internet of Things was one of the culprits even before the COVID-19 pandemic and the Internet of Things “is driving semiconductors to take the lead over oil as the world’s key commodity for growth,” according to economic investment firm TS Lombard.
While the U.S. leads the world in developing and selling semiconductors, accounting for 45% to 50% of global billings, manufacturing has shifted to Asia. Taiwan and Korea account for 83% of global processor chip production and 70% of memory chip output, and the region’s lead is projected to continue to expand.
Taiwan dominates the foundry market, especially Taiwan Semiconductor Manufacturing Co., which is more commonly known as TSMC and accounted for 54% of total global foundry revenue last year.
There wasn’t always a shortage. Worldwide semiconductor sales declined between 2018 and 2019, but by 2020, sales grew 6.5%, according to trade organization the Semiconductor Industry Association. The rapid growth continued into 2021, and sales in the third quarter of 2021 were 27% higher than the same time period in 2020. More semiconductor units were shipped during the third quarter of 2021 than during any other quarter in the market’s history, the SIA said.
What caused the global chip shortage?
A shortage in the supply of semiconductors first hit the automotive industry during the COVID-19 pandemic and has had a cascading effect, causing global disruption. The shortage can be traced back to the first half of 2020, when overall consumer demand for cars declined during the lockdown. This forced chip manufacturers to shift their focus to other areas, such as computer equipment and mobile devices, which spiked in demand with more people working remotely.
As 5G and cloud-based services grew, more chips were needed for communication platforms like Zoom and video streaming services.
Part of the problem is that the return on investment hasn’t been compelling enough to build new foundries - which cost billions of dollars and take years to construct - to satisfy the demand by automakers. Automakers usually operate on a just-in-time environment, so supply chain disruptions can be critical to business planning.
When car manufacturers canceled orders early on in the pandemic, in order to compensate for the lack of demand, chip suppliers turned to other markets that were still doing well, such as consumer electronics. In turn, automakers became low priority.
Early on in 2021, companies like Huawei stockpiled supplies in advance of U.S. tech bans on China to ensure they had the components they needed in case supplies dried up.
When will the global chip shortage end?
Despite a reluctance by some manufacturers to build new plants, there has been momentum. Intel said it will spend $20 billion to build two new fabs in Arizona, and TSMC plans to spend $28 billion on new chips and building plants to increase capacity.
Texas Instruments announced in November 2021 plans to build as many as four new semiconductor plants in Texas at an estimated $30 billion. Construction on the first two fabrication plants is slated to begin in 2022, and production of TI’s 300-millimeter wafers is expected to start by 2025, according to the company. TI will have the capacity to build two additional plants at the site in the future.
With Samsung announcing it will build a $17 billion plant in Texas starting in 2022, other states and cities around the country are trying to woo the company with incentives in the hope of attracting chip production to their areas.
How long will the chip shortage last? That depends on who is doing the forecasting. Some in the industry estimate that the semiconductor shortage will extend well into 2022, with a year’s lead time for wafer orders. Others expect that the chip shortage will continue through 2022 and into 2023.
The Institute of Electrical and Electronics Engineers (IEEE) expects that supply will grow, with older chip fabs and foundries running older processes to manufacture non-cutting-edge wafers. More than 40 companies’ combined capacity will increase by more than 750,000 wafers per month by the end of 2022, the IEEE said.
How can my business cope with the global chip shortage?
Organizations should identify elements of their infrastructure that would be significantly impacted if a component or two failed and they could not get a replacement due to a supply shortage and use that as the basis for planning, wrote TechRepublic contributing writer Patrick Gray.
For manufacturers dependent on semiconductors, Gartner recommends four steps to take to mitigate risk and revenue loss during the global chip shortage:
- Extend supply chain visibility beyond the supplier to the silicon level.
- Guarantee supply with companion model and/or pre-investments and partner with similar entities to gain leverage.
- Track leading indicators such as capital investments, inventory indexes, and semiconductor industry revenue growth projections.
- Diversify supplier base and create strategic partnerships with distributors, resellers and traders.
Over the short term, among the strategies McKinsey suggests is holding a joint discussion between an OEM, its tier-one suppliers and semiconductor suppliers to help align the goals of all participants. It might also help to offer extra payments to expedite the production of wafers when capacity amounts to less than 5% of the production volume, the consulting firm said.
Other options include replacing back-ordered components with similar but more feature-rich units, such as swapping in chips with more memory and using consumer-grade chip sets that receive additional quality tests.
One longer-term solution for the automotive sector is to reconsider the just-in-time delivery strategy and look at more regional sourcing with less dependence on single suppliers and faraway countries for chips.
Automakers can learn from the pandemic, but even before that, with automobile electronics systems predicted to make up half of the total cost of a car by 2030, with safety sensors, powertrain parts and instrument panels, manufacturers should move secure reliable supply chains with alternate backups.
Supply chain bottlenecks can occur from the lack of any component. Of all component shortages, by far the most severe has been the global extent of the semiconductor shortage.
The COVID-19 pandemic kickstarted the chip shortage, and its long-reaching effects - including virus outbreaks, labor challenges and geopolitical uncertainties - have fueled it. Each link of the global supply chain continues to be extremely disrupted. Unfortunately, there are no signs of recovery in the near term. As for consumers and enterprises, there is the option of just keeping your current devices, cars and other equipment and holding off on upgrades until the crisis abates.