Chips may be found in virtually every electronic device you own, from your phone to your computer to your automobile- even in unexpected places, such as your washing machine, electric toothbrush, and refrigerator.
However, these small components that fuel so much of our lives are becoming dangerously scarce. To understand this shortage, we first need to understand what a chip is and how it works.
What Are These Chips?
The chips, also known as semiconductors or microchips, serve as the brains of modern gadgets. They are small technical wonders that contain billions of transistors. However, the size of the chip might vary. Their creation takes several processes, several days, and the presence of specialists. IBM’s latest chip, for example, crams 50 billion transistors into a two nanometer, fingernail-sized area.
These chips are the lifeblood of contemporary society, yet the demand for them outstripped the supply even before the epidemic.
This year, economist Rory Green dubbed transistors “the new oil,” pointing out that Taiwan and Korea now hold the majority of chip production. Unfortunately, although these chips were invented in the United States, the number of US firms producing them has significantly decreased.
According to James Lewis, senior vice president and head of CSIS’s Strategic Technologies Program, America produced 37% of all chips in 1990. By 2020, that figure had dropped to 12%.
For decades, the tech sector has been fueled by a 1965 forecast made by Intel co-founder Gordon Moore, which said that “the number of transistors integrated into a chip will nearly double every 24 months.” Building a facility that can produce these chips, which have been steadily decreasing over the years, can cost $10 billion, which is prohibitively expensive for most businesses. “These are multibillion-dollar research centers on the leading edge of science,” Lewis adds.
What is a Chip Shortage?
As the globe shut down due to the COVID-19 epidemic, many companies shuttered as well, rendering chip manufacturing materials unavailable for months. Increased demand for consumer electronics produced rippling effects across the supply chain. As the market took a steady hike, manufacturers tried to produce enough chips to match the rising demand levels. The pile grew with no intention of halting anytime soon.
Car firms, such as Ford, must forecast the number of chips required to construct their vehicles and order them in advance from one of the chip producers. According to Penfield, a chip order can currently take at least half a year to arrive. The current demand for chips is so strong that manufacturers are unable to produce enough chips to fulfill it, which means customers may soon face higher costs for fewer items.
However, the problem was not limited to manufacturing. As COVID worked its way through Asia, ports were forced to close for months at a time. 90% of the world’s electronics pass through China’s Yantian port, which was recently blocked, leaving hundreds of cargo ships stranded.
It is evident that the worldwide chip deficit is not going away anytime soon. In fact, it appears to be deteriorating. While the White House is pushing to boost chip production in the United States to avert future shortages, it may be years before the government’s project takes off for consumers. For the time being, the chip business will be hindered by the repercussions from the Covid-19 crisis, with devices shipping with basic features and increased pricing – frequently after lengthy delays.
Let’s take a look at how we ended up in this shortage.
According to Mario Morales, program vice president of IDC’s semiconductor division, one difficulty is there’s no return on investment in building foundries to meet manufacturers’ demand. Many people are also not investing in “legacy technology,” according to Morales.
Another issue is a lack of planning. During the second quarter of 2020, automobile OEMs “shut down, as did the rest of the globe, but they canceled orders from a lot of the supply chain,” Morales added. “As a result, many unhappy suppliers sought for other markets that were still thriving despite the epidemic.”
These include the eight major cloud infrastructure providers, who saw demand rise as individuals started working from home and kids began going to school remotely, resulting in a tremendous increase in PCs, tablets, and consumer gadgets, he added.
Additionally, Trade Sanctions and Phone Rollouts Were Also Causes of This Chip Shortage
Gartner researchers predicted earlier this month that the global semiconductor shortfall would persist until the second quarter of 2022.
Add to that the deployment of the 5G smartphone and the trade restrictions imposed on China before the epidemic, according to Gaurav Gupta, a VP Analyst at Gartner. This meant that Huawei, one of China’s major 5G smartphone manufacturers, would be unable to purchase processors after a set period of time, according to Gupta. “They knew they wouldn’t be able to get chips for their products… so they put large purchases.”
Similarly, Apple and other smartphone makers made huge chip orders, “which kept the foundries really busy, and then you had the unexpected spike in demand for COVID-19,” adds Gupta.
Increasing demand and shortage in supply generally creates an imbalance in production and market economy. Hence, the global shutdown during the pandemic created a huge shift in chip production, leading to a global shortage.
It’s no surprise that manufacturers are trying to keep up, but the epidemic has also highlighted pressure points in the global chip supply chain, with the vast majority of manufacturing being handled by two companies: Taiwan’s TSMC and South Korea’s Samsung. These foundries are especially powerful when it comes to manufacturing advanced semiconductors utilized in mobile devices or military applications.
Nissan has stated that owing to the chip shortage, it would produce 500,000 fewer cars. Since August, General Motors has again suspended manufacturing lines at numerous pickup truck facilities due to a lack of computer chips. The factories had just been back in operation for a week after a week-long closure in July, which was also prompted by a chip shortage.
These production halts are unlikely to end very soon. “I believe we will continue to see the effect this year, with a tail into next year,” CEO Mary Barra said in an interview. Last month, Intel CEO Pat Gelsinger projected that things would not return to normal for a long time.
The impact of the supply shortage is already extending to consumer technology. Apple CEO Tim Cook warned last week that a lack of chips might harm iPhone sales. Microsoft is having difficulty producing enough Xbox consoles and Surface computers. Elon Musk said in court last month that a chip shortage would limit Tesla’s ability to produce around half as many Powerwall home batteries as it believes it can sell.
While consumer technology companies like Apple and Samsung began hoarding chips sooner, saving them from the massive delays that the auto industry is experiencing, Apple announced recently that the chip shortage is predicted to delay iPhone production and is already affecting sales of iPads and Macs. Xboxes and Playstations are also in scarce supply. Nevertheless, consumer and auto industries took the hardest hit due to this semiconductor shortage.
The Impact on Auto Industry
The chip shortfall has impacted almost every major carmaker. Last month, Ford Motors revealed that its second-quarter earnings had dropped by 50 percent, totaling more than $500 million, owing primarily to a shortage of semiconductors. Stellantis, a Dutch automotive group, halted manufacturing its Jeep Gladiator truck in July due to a lack of chips. Subaru’s chief financial officer, Katsuyuki Mizuma, recently stated that, as a result of the chip scarcity, the firm has just seven days’ worth of inventory in hand, as opposed to the automaker’s typical 45-day supply.
Car purchasers are already seeing the effects of the difficult-to-predict epidemic in the shape of vehicles lacking features, increased pricing, and a lack of alternatives.
Some of GM’s most new trucks and SUVs were marketed without sophisticated gas management systems or wireless charging capabilities. Renault has ceased installing the big displays behind the steering wheel of its Arkana SUV models, while Nissan has removed navigation systems from thousands of vehicles.
The Impact on Consumer Technology Industry
Consumer electronics firms are also running short of semiconductors, despite having snatched up the chips that cars abandoned earlier in the epidemic. As a result, the prices of computers and televisions are rising, and orders for cellphones and game consoles are being delayed.
According to market research firm Strategy Analytics, the worldwide wholesale price of phones increased by 5% on average between April and June. Prices for laptops, televisions, and accessories have also risen.
An investment research company informed the Wall Street Journal that HP alone had hiked printer prices by more than 20% in a year. Xiaomi, a Chinese electronics manufacturer, has delayed the distribution of a new gadget model in India. Sony also informed customers in May that the PlayStation 5 will not be widely available until at least 2022.
The issue has become so severe that smugglers are stealing chip shipments. Fraudsters have even begun selling counterfeit chips to defraud smaller electronics manufacturers. According to the Journal, sales of sophisticated X-ray equipment used to detect counterfeit components are increasing.
How to Fix This Chip Shortage?
Chip demand is quite strong, and there is no reason to anticipate a sudden excess of semiconductors in the coming weeks. Currently, there are just a few chipmakers across the world, and the majority of the world’s supply of semiconductors comes from a single firm located in Taiwan: TSMC.
According to Falan Yinug of the Semiconductor Sector Association, a trade and lobbying body representing the semiconductor industry, chipmakers are already operating at full capacity. “In reality, chip manufacturing has grown significantly, and more chips have been delivered in recent months than ever before,” Yinug told Recode.
Again, manufacturing a single chip takes an inordinate amount of time. Simultaneously, expanding chip production factories, also known as fabs, takes years of engineering, construction, and billions of dollars.
The White House is still attempting to provide some temporary respite. Officials in the Biden administration have previously mediated discussions between semiconductor manufacturers and automakers, assisting with the reintroduction of additional chips into the hands of automakers. This has pleased the automakers while irritating others.
Medical device manufacturers, who rely on chips for everything from patient monitoring systems to surgical assistance robots, urged Commerce Secretary Gina Raimondo to avoid “prioritizing one industry over another.”
The Commerce Department recently completed a 100-day study of the US semiconductor supply chain, which resulted in engagement with the chip sector and a task force to detect possible supply chain disruptions. The government is also advocating for a $52 billion initiative to encourage increased chip production in the United States, which would require legislative approval.
When Will The Chip Shortage Be Resolved?
Opinions differ on when the scarcity will end. The CEO of chipmaker STMicro predicted that the shortfall would be resolved by early 2023. Stellantis’ CEO predicted that the shortfall “would easily stretch until ’22.” According to Intel CEO Patrick Gelsinger, the shortfall might continue another two years.
“We’re probably looking at nine to ten months of this,” Lewis adds. “If you have the patience to wait, prices will fall.”
Yoffie anticipates that some demand may begin to decline during the next 6 to 12 months. However, he believes that it will take at least two years for supply to catch up with demand and establish equilibrium.
Well, you may ask, is this rocket science? Some will definitely say yes, and rocket science cannot be resolved in days, weeks, or months. In his case, one has to be patient and give it time.
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