The global chip shortage explained
Finding yourself on a wait-list for the PS5? Thank the global micro-chip shortage: Supply disruptions are once again back in the forefront of news. This time it’s with electronic devices and car production, which have been hit by a shortage in semiconductors — the building blocks of microchips that power everything from washing machines, smartphones, refrigerators, cars, and laptops to essentials such as medical devices and military equipment. While the semiconductor industry is massive, it has seen a shift in the past period that has led to supply chain gaps and overreliance on chip producing countries (which could potentially leverage the need for chips in geopolitical relations), according to CNBC (watch, runtime: 09:26).
Who are the players in the semiconductor industry? Fabless chip companies design the chip, while foundries actually undergo the semiconductor manufacturing process. While there are still a few integrated device manufacturers (who both design and manufacture chips) such as Intel, more and more US semiconductor firms are adopting the fabless model and are outsourcing manufacturing to foundries such as Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung. While the US semiconductor industry has captured 47% of global sales, they’ve only locally manufactured around 12% of the world’s chips.
How did this all start? Covid-19, lockdowns and stay-at-home boredom: When the pandemic set it, everyone transitioned into doing everything from home from work to schooling to entertainment. This pushed many people to begin to upgrade computers, smart speakers, tablets, and gaming consoles. WFH also forced businesses to scramble to set up and improve remote work systems and cloud infrastructure. The demand for semiconductors rose, and the supply couldn’t catch up. To put this phenomenon into figures, the global sales of semiconductors increased 6.5% y-o-y in 2020 to USD 439 bn, while December 2020 alone saw an 8.3% increase to USD 39.2 bn.
Demand is only expected to increase in 2021, with the onset of new 5G networks needing more 5G-enabled smartphones, coupled with the increase in internet-of-things devices and remote work expected to stay on for a while longer. American semiconductor firm AMD is expecting shortages for the company’s processors to continue through the first half of 2021 as AMD’s manufacturing partners continue to build capacity, CEO Lisa Su had said in January, according to tech news outlet CRN.
De-globalizing chip manufacturing: While there isn’t a way to up chip production in the short-term, countries are looking at ways to avoid this crunch in the future. China has earmarked USD 1.4 tn in its five-year plan to gain semiconductor independence through its homegrown industry, reported The Financial Times. Meanwhile, US President Joe Biden ordered economic and security experts to look for gaps in the semiconductor supply chain, to be able to shore up the country’s chip supply using local resources as well as working more closely with trade partners, according to a White House briefing.
Why the auto industry should pay attention to this: Cars now require a good amount of chips to run complicated in-vehicle computer systems as well as older semiconductors to run processes such as power steering. The automotive industry is feeling the squeeze more acutely after cancelling orders of chips last year over fear of the pandemic hitting sales. When they decided they needed these chips, they were put on a long backlog of other orders from computer and electronics firms. Automaker General Motors has said it could lose some USD 2 bn because the semiconductor chip shortage forced it to temporarily shut down some auto manufacturing plants, reported Reuters.
And EV makers have to contend with other shortages: Tesla is shifting some cars to a type of battery that uses iron instead of nickel, amidst shortages and rising prices, CEO Elon Musk tweeted on Thursday.