In this blog post
Computer chips, or microchips, or semiconductors are the lifeblood of our modern society. They are an essential component of everything from cars to electronics such as computers, smartphones, etc. However, industries have been hit with a shortage of microchips, which has a substantial impact on prices, employment, company profits, inflation, and even national security.
The demand for microchips is only going to increase with newer areas of application coming up. Alan Priestly, an analyst with Gartner, says, “The average person on the street is bound to be impacted by microchip shortage in one form or another. What it means is that they cannot get something, or the prices are slightly higher than usual.”
Reasons for the Shortage
What caused the chip shortage? There are two significant factors, 1. Demand dynamics and ongoing geopolitical tensions between U.S. and China. 2. The COVID-19 driven disruption to the supply.
The demand for day-to-day gadgets surged during the pandemic as billions of people were forced to study and work from home. Global computers shipments spiked up by 10.7% in the 4th quarter of 2020 and 4.8% for the complete year with almost 275M units shipped in 2020. This is the highest boom in the past 10 years in the field of computer manufacturing. During the same period, demand for auto chips declined as the orders for new cars took a dip in the first half of 2020.
The COVID lockdown hit production lines across the world and operations came to a standstill. When production resumed, microchip factories shifted to supply for consumer products, which offer greater margins. This shift led to the shortage of industrial chip production.
Microchip manufacturers depend on US software and machines to produce microchips. After the US government imposed restrictions on technology exports to China in 2019, Chinese microchip companies started stockpiling chips and machines, contributing to the shortage. Chinese imports of microchips rose to 14.6% year-on-year in 2020 to $350B, while its R&D and technology investment grew from 1.2% of GDP to 1.5% of GDP.
Automobile manufacturers had cut back drastically early in the pandemic. They hadn’t estimated that car sales would rebound, leading to a rush in re-upping the order late in 2020. The chip manufacturers, on the other hand, faced difficulties in fulfilling these orders as they had to supply to the computing and smartphone giants like Samsung, Huawei, and Apple Inc.
Computer manufacturers warned about the tight supplies in early 2020. And around mid-year, a Chinese smartphone manufacturer, Huawei Technologies Co. – that dominates the global market of 5G networking gears started to build its inventory to ensure it could survive the U.S. sanctions which were set to cut it off as its primary supplier. Other companies followed suit and China’s imports for microchips climbed to $380B from $330B in the previous year.
Global Chip Shortage and COVID
The second wave of COVID had hit the microchip manufacturers in Taiwan, the world’s leading microchip producer. At King Yuan Electronic & Co., one of the largest chip testing and packaging companies, over 200+ employees had tested positive, and another 2000 workers had to be quarantined.
The world’s largest semiconductor manufacturer, Taiwan Semiconductor Manufacturing Company Ltd.’s (TSMC) capacity is booked till fall this year, forcing some automakers to halt production. The automobile sector has taken a hard hit which relies on microchips for all purposes from the computer management of engines to driver assistance systems. Automakers like Ford, Volkswagen, Landrover, and Jaguar had to shut down their factories, reduce vehicle production, and lay off their workers. Nissan is leaving the navigation systems out of their cars, while Ram Trucks has stopped equipping standard intelligent rearview mirrors which can monitor the blind spots.
Nations are now forced to think about how they can increase the production of microchips. A huge amount of the world’s microchips is made in and around China, while the US is the second-largest producer. The executive arm of the EU, the European Commission, has said that it wants to build chip manufacturing foundries in Europe in an effort to become more self-reliant on what it sees as, ‘critical technology’ at present.
Europe accounts for less than 10% of global chip production at present. Europe wants to boost this figure to 20% and is exploring to invest 20B – 30B euros (approx. $24-36B). U.S. technology giant, Intel has offered to help.
When will the microchip shortage end?
Advancements in technology are not going to come to a standstill. As we continue to progress, so will the demand for microchips. But in the present situation, the manufacturing load capacity cannot respond to meet the expectations.
To overcome this, the foundries must increase the supply. But constructing microchips manufacturing foundry requires billions in capital investment and considerable time. Experts are of the opinion that things might be back to ‘normal’ by early 2023.