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 “forever moves semiconductors ahead of oil as the world’s key commodity input for growth,” according to economic investment firm TS Lombard.
SEE: Computer hardware depreciation calculator (TechRepublic Premium)
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 last year. 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 isn’t compelling enough to build new foundries—which cost billions of dollars and take years to construct—to satisfy the demand by automakers, according to IDC. Automakers operate in a just-in-time environment without business continuity planning, according to Mario Morales, program vice president of the semiconductor group at IDC.
SEE: Foundries are raking in big bucks and record revenue amid global chip shortage (TechRepublic)
After they canceled orders early on in the pandemic, disgruntled suppliers turned to other markets that were still doing well, such as consumer electronics, and automakers found themselves lower on the priority list.
Some customers are hoarding supplies and buying more components than they need in case supply dries up, as companies like Huawei stockpiled supplies in advance of U.S. tech bans on China earlier this year.
How did the global chip shortage lead to the rise in counterfeit components?
One of the inevitable consequences of the global chip shortage is an increase in counterfeit products. When companies find themselves in a distress purchasing situation, they let their guard down and may not be aware right away that they have been sold illegal parts, according to The Center for Advanced Life Cycle Engineering.
Companies have to be vigilant when they are dealing with independent distributors because they buy and sell components on online open markets, the CALCE said. Because parts can change hands various times, it can be difficult to trace the origins and credentials of the original seller.
The center advised checking the records of the company that is selling the components and conducting thorough tests on the parts, while acknowledging that often businesses don’t have the time to do this.
When will the global chip shortage end?
How long the chip shortage will last depends on who is doing the forecasting. Gartner has estimated that the semiconductor shortage will extend well into 2022 and has warned that there could be a year’s lead time for wafer orders.
Forrester said it expects the chip shortage to continue through 2022 and into 2023.
Supply will grow “from older chip fabs and foundries running processes far from the cutting edge and on comparatively small silicon wafers,” wrote the IEEE. More than 40 companies will increase capacity by more than 750,000 wafers per month to the end of 2022, the IEEE said.
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 option to build out two additional plants at the site in the future.
With Samsung announcing it will build a $17 billion plant 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.
SEE: As the chip shortage continues, companies and governments look for solutions (TechRepublic)
In terms of federal efforts, the Senate in June 2021 passed a $250 billion spending bill—one of the largest industrial bills in U.S. history—which included $54 billion to increase production and research into semiconductors. However, five months later, the legislation has stalled in the House of Representatives because House members said they want to write their own bill.
No timeline has been given for House consideration of the measure.
Earlier this year, Micron said it was working to mitigate the impact of broad electronics industry shortages to its production output through “proactive and disciplined supply chain and inventory management strategies,” as well as placing a greater focus on building supply chain resiliency with data analytics.
Experts have said the U.S. could be at a strategic disadvantage in the years ahead if semiconductor production is not expanded in the country.
How will the global chip shortage impact holiday shopping and beyond?
Some estimates are that 169 industries have been impacted by the global chip shortage.
Global smartphone shipments dropped 6% in the third quarter as vendors struggled to meet the demand for devices due to the “chipset famine,” according to Ben Stanton, principal analyst at Canalys.
Apple has reportedly cut production of the iPad in half and is repurposing older iPhone parts for use in the iPhone 13. Nintendo is cutting production of its Switch OLED consoles by 20%, with a spokesman citing the chip shortage as affecting production.
“The inability to meet consumer demand during the biggest shopping season will take a toll on companies’ bottom lines,” wrote Gadjo Sevilla for eMarketer. “And with no end in sight for the chip shortage, it’s impossible to say how long it will take for companies to recover losses.”
Retailers should be placing orders now—if they haven’t already—to ensure they have the right products in stock for the holidays.
Since so many toys and other holiday items contain chips, before you buy, research sellers and compare prices. If something sounds too good to be real, it probably is. Pay by credit card in case you have to dispute a charge and keep records of online orders. If you find a scam while holiday shopping, report it to the Federal Trade Commission.
Over the longer term, industry observers have said the foundries may be reluctant to invest in new factories because the chips do not yield large profit margins, and the industry is known to have sharp peaks in demand followed by declines. Down the road, they are concerned that a glut of chips would drive prices lower.
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.
Also, consider what alternatives are available, such as whether employees can remain productive using their personal devices. Do a cost-benefit analysis and don’t let the low cost of acquisition be the sole driver for stockpiling inventory.
Forrester suggests buying used or refurbished parts and choosing another provider if one PC maker doesn’t have the laptop you want, for example.
SEE: Global chip shortage: Where to buy used laptops and other office tech online (TechRepublic)
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 index and semiconductor industry revenue growth projections.
- Diversify supplier base and create strategic partnerships with distributors, resellers and traders.
In the hard-hit automotive industry, McKinsey noted that leading OEMs have established “dedicated war rooms” that combine their supply and demand data to provide better transparency. These automakers are also using analytics to match supply with demand to reduce errors and manual processes.
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.
SEE: The chip shortage: How should your business approach buying tech and components? (TechRepublic)
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.
It behooves automakers to heed this advice. Even before the pandemic, Deloitte predicted that by 2030, electronics systems would make up half of the total cost of a car with safety sensors, powertrain parts and instrument panels, wrote Mickey Meece for TechRepublic.
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.