Why are we facing a global chip shortage, and how does it impact us?


We have all be hearing about the “global chip shortage” in the news for some time. According to industry analysts and manufacturers, there seems to be a breakdown in the supply chain and distribution of semiconductors and chips adding to months-long shortage that remains widespread and is likely to continue through the end of the year.

Global manufacturing sector that had slowed down during the pandemic last year is making a comeback in most industry sectors. Supplies of semiconductors that are used in most modern products are in short supply and are trying to catch-up with the pent-up demand. The shortage is being felt acutely in the automotive industry and will for as long as two years, analysts say.

Why are we facing a global chip shortage?

When it comes to the global Chip shortage, there seems to be a bit of a butterfly effect at play here.

Analysis of data from chip industry seem to point to carmakers, which shut plants during the COVID-19 pandemic last year. By itself, the automotive industry is not a huge consumer of chips. Although a modern car can easily have more than 3,000 chips, the auto industry accounts for only about 3 percent of global demand.

As automakers emerged from the pandemic and began ramping up production, they began to compete for chip supplies with other industries including the consumer electronics industry. According to a New York Times article, “one big reason automakers can’t find enough chips is that semiconductor manufacturers have given priority to manufacturers of smartphones, video game consoles and other consumer electronics, which tend to be more lucrative customers.”

The article interviewed Ola Källenius, the chief executive of Daimler, who said that the most sophisticated chips were not the ones currently giving him headaches. “We are missing the most simple of chips, that maybe only cost cents or dollars. That’s holding us up from building a product that costs $75,000.”

During the pandemic, most of the automotive Original Equipment Manufacturers (OEMs) shut down and simply canceled orders for microchips. In turn, when the OEMs began opening, a lot of disgruntled suppliers moved them to bottom of their list as they had found other, more lucrative customers – manufacturers of smartphones, video game consoles and other consumer electronics. IT infrastructure providers also saw huge demand as people continued to work from home and children were attending school remotely, causing a massive spike in PCs, tablets and consumer electronics.

The impact

According the Wall Street Journal, Semiconductors that power electronic displays have surged in price by as much as 40% in the first half of 2021 from a year earlier, market researcher Counterpoint Research says.

Despite the scarcity, higher prices and shipping volumes have boosted bottom lines for distributors, which typically take a 10% markup on chips, and even more when providing consulting for alternative parts or product designs, estimated Peter Hanbury, a partner at Bain & Co. who specializes in the semiconductor supply chain. During the same period, some image sensors and processors used in phones and personal computers have seen prices increase by 15% to 20%, Counterpoint estimates, while memory-chip prices have risen 5% to 10%.

Prices are often staying high because companies can’t afford to wait to make purchases. Dan Hetnar, senior buyer for a U.S. circuit-board manufacturer, used a broker to buy some 1,500 microchips—at more than triple the typical price of $2.75 per part.

Chip supply chain and impact on global economy

The chip shortage has also exposed the highly connected and globalized nature of the chip industry. According to reuters, “The majority of chip production occurs in Asia currently, where major contract manufacturers such as Taiwan Semiconductor Manufacturing Co Ltd (TSMC) and Samsung handle production for hundreds of different chip companies. U.S. semiconductor companies account for 47% of global chip sales, but only 12% of global manufacturing is done in the United States.”

According to another WSJ article, the chip shortage is hitting almost every aspect of our lives from Tablets to Sex Toys, and that the scarcity means higher price tags for consumers, longer waits for goods, empty store shelves and swaths of the business world racing to secure whatever supply they can.

“It has hit makers of home appliances, heavy-equipment, servers and sex toys. It is confounding multinationals to startups. Even companies that don’t use chips as their core business, such as freight operators and retailers, find themselves affected. The scarcity means higher price tags for consumers, longer waits for goods, empty store shelves and swaths of the business world racing to secure whatever supply they can.”

Bottomline:

Semiconductor industry is capital intensive and it takes years to operationalize a chip manufacturing plant. It is not easy to increase production capacity to meet short term spurt in demand and most industry watchers agree that the tight supply for many chips is likely to persist through 2021.


Articles:

  • A Tiny Part’s Big Ripple: Global Chip Shortage Hobbles the Auto Industry (New York Times, April 23, 2021)   
  • From Tablets to Sex Toys, the Chip Shortage Is Far-Reaching (WSJ, April 30, 2021)
  • Explainer: Why is there a global chip shortage and why should you care? (reuters)
  • Hyundai Plant In Alabama Pauses Manufacturing Due To Car Chip Shortage (NPR -June 14, 2021)
  • Making Chips Requires Lots of Water and, Gulp, Taiwan Has a Drought  (BloombergQuint February 26 2021)
  • Chip Shortage Brings Frustration but More Business to Industry’s Middlemen (WSJ June 13, 2021)
  • New COVID-19 outbreaks in Asia could exacerbate the global chip shortage (The Verge, Jun 12, 2021)
  • The global chip shortage is creating a new problem: More fake components (ZDNet June 9, 2021)

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