It has been more than 20 months and the world is still facing a shortage of semiconductor chips.
Semiconductors are embedded in every digital electronic device and household appliances like smartphones, computers, cars, washing machines, refrigerators, electric toothbrushes, headphones, gaming consoles, etc that we use on an everyday basis.
It is the backbone of all emerging technologies like artificial intelligence, 5G, blockchain, Internet of Things (IoT), etc
Therefore, a shortage has affected a wide range of sectors from automobiles to electronics
An analysis by Goldman Sachs suggested that at least 169 industries have been impacted by the global chip supply shortage.
The automobile sector has been the worst affected. The shortage will cost the passenger car market a combined hit of nearly Rs 3,000 crore
Why there has been a shortage of semiconductors?
- COVID-19 lockdown forced chip-making factories around the world to shut down. Therefore, there was a supply crunch [The major suppliers of chips in the world are Taiwan, South Korea, Japan, China, and the USA. Taiwan’s TSMC (Taiwan Semiconductor Manufacturing Company) and South Korea’s Samsung manufacture as much as 70 % of the world’s semiconductors.]
- COVID also sent people into their homes and because of remote working and education demand for consumer electronics like computers, TVs, and gaming systems increased. This led to an increase in demand of semiconductors/ microchips. To put it into context, worldwide semiconductor sales declined between 2018 and 2019, but by 2020, sales grew 6.5%. This rapid growth continued into 2021, such that sales for May 2021 were 26% higher than the same time last year.
- US-China trade war: The US had imposed sanctions and restrictions on China’s Huawei on September 2020, which also impacted supplies
- Taiwan (the world’s biggest exporter of semiconductors) experienced its worst drought in over a century. This affected supply as semiconductor production require a lot of water. TSMC’s facilties used more than 63000 tons of water daily.
- There was also a fire in Japan’s Renesas Electronics in March 2021, which supplies microcontroller units (one of the 65 equipment used to manufacture semiconductors). This also disrupted production.
As a result of the above factors, the gap between when a chip is ordered and when it is delivered shot up from 12.4 weeks in March 2020 to 21.9 weeks in October 2021
Why automakers have been most badly hit?
The demand for chips from auto manufacturers has been increasing due to increased dependence on automation. Cars need semiconductors for technology like power steering, navigation system speedometers, entertainment systems, assisted parking, etc. Moreover, Delloite has predicted that by 2030 electronics systems would make up half of the total cost of a car.
Automakers were badly hit because most carmakers used Just-in-time (JIT) deliveries, that is, they kept a low inventory of raw materials like microchips. Therefore, when COVID stuck, the carmakers anticipated a recession and slashed their order for chips. This led chip makers to shift their focus on manufacturing chips for consumer electronics
As a result, when vehicle sales rebounded, the automotive industry faced a massive chip shortage as they were low on the priority list
How long will the shortage persist?
Experts believe that the shortage can continue into 2023.
Why is it taking so long to resolve the crisis?
Many countries like the US, China, South Korea, India have announced investments in semiconductor production. But, the crisis will take some years to be resolved.
This is because the manufacturing of semiconductors cannot be increased at a short notice. Building a facility takes a minimum of 3 years and it is the most expensive factory on earth.
The semiconductors plant also requires uninterrupted power and water supply.
To sum up, this shortage has increased the strategic importance of Taiwan. Taiwan and Korea have monopoly in chip production; like OPEC had for oil. And increasing automation has moved semiconductors ahead of oil as the world’s key commodity input for growth.
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Good Article. Nicely Explained. The article could have been written earlier. Also, few words could have been written from Indian perspective and future prospects for Indian Exports. Nonetheless Informative.