The global semiconductor shortage is likely to be a headline that is familiar to many at this point in time. But exactly what is the cause of this supply shortage and how far reaching is its impact?
The term “semiconductor” refers to a type of material with specific physical properties. However, it generally has come to refer to a final product in the form of microprocessors, or more colloquially “chips”. Semiconductors are the hardware brains behind virtually every single digital device or service used by us daily. As businesses across all industries continue to try and innovate their products and services, the need for more processing power – both in terms of total physical processors and total computational power – is constantly growing. Whether in the form of a new home appliance, a connected smart home automation system, or a self-driving Tesla, the need for semiconductors is at an all time high with no signs of demand waning.
Many might assume the COVID-19 pandemic is the cause of the global semiconductor chip shortage, but while true to a large extent, this is not the whole picture. Prior to the pandemic, the few major semiconductor fabrication companies were already starting to face challenges with both increasing and shifting demand. In addition to forecasted demand from numerous industries including smartphones, PCs, IoT devices and cloud-based data centres, the ongoing expansive rollout of 5G and higher chip demand from electric vehicles has added pressure to manufacturing capacity. Certain foundries were further challenged from political events such as the US sanctions imposed on China’s Huawei – forcing them to source chips from non-US based manufacturers that were already under pressure.
With the pre-pandemic situation as it was, the industry could not cope with what came next. Initial uncertainties surrounding COVID-19 resulted in some businesses stockpiling components and placing new orders, thereby affecting supply to other businesses as chipmakers juggled demand. The shift to remote work arrangements and households looking to keep themselves entertained while under lockdown also led to massive surges in demand for consumer electronics. Supply to the automotive industry was particularly hard hit. Initial predictions for reduced car demand saw big cuts in semiconductor orders, which led chipmakers to shift focus to other production lines and longer-term contracts. However, the demand for new cars quickly ramped back up, but limited stockpiling in the automotive industry, and chip manufacturers struggling to meet demand elsewhere, has led to an ongoing crisis for car makers. All in, the conditions leading up to COVID-19, the rapid changes in demand during the pandemic, and manufacturing capacity being affected by lockdown restrictions have all combined together, resulting in the current problem.
It is worth noting that luck has not been on the side of semiconductor foundries either. A few unexpected events occurred during the past year that halted or reduced chip production in various regions, thereby adding more fuel to the fire. For instance, a massive winter storm in Texas cut power to multiple production sites; a fire at a facility in Japan hampered production for months; and the worst drought in Taiwan in half a century affected chipmakers across the country – a region that accounts for over 60% of the world’s semiconductor manufacturing revenue.
The obvious question then is why can’t we just manufacture more chips? The industry is certainly trying to do this, with hundreds of billions of dollars being committed to the development of new manufacturing plants globally. However, semiconductor fabrication is an incredibly complex process. In addition to the large capital outlay required, and the obvious risks associated with such expenditure for manufacturers, the other major hurdle is simple: time. New plants can take up to three years to become meaningfully operational and contribute to supply.
Many experts have offered views on when the shortage will ease, but there is no consensus as to when this might happen. While some are hopeful that supply will exit the “shortage zone” by Q2 2022, others are not as optimistic. Intel’s CEO Pat Gelsinger, who arguably is highly qualified to speak on the topic, remains doubtful that supply will meet demand until at least 2023.
Until then, consumers will continue to be affected by this global shortage. Many will wait months for new electronics or PC stock to arrive; scalpers will continue hoarding graphics cards the moment inventory hits online stores; gamers will anxiously await availability of next-gen consoles; and excited car buyers will be forced to accept delayed delivery of new vehicles with missing features. But if ever there was an industry that would do all it can to get back on track, semiconductor manufacturing is likely the one given its immense global impact.