Global Microchip Shortage: When and How Will it End?
The world is facing a severe semiconductor shortage right now, and it shows no signs of abating anytime soon. Besides the combined efforts of top semiconductor manufacturing facilities and government initiatives, the microchip shortage continues as the demand has skyrocketed amidst the disrupted supply chain.
From smart devices to tumble dryers, cars to electric toothbrushes, machinery to dishwashers, and everything in between harness the power of microchips, the building block of technology. Like many other current global challenges, the shortage of semiconductors initially began with the COVID-19 pandemic, but the continuous shortage of chips has brought a range of production lines to a halt. The global silicon chip shortage appeared as a surprise to many investors that rely on the tiny and ubiquitous electronic item for manufacturing electronic products and automobiles. Besides investors, consumers are also facing the brunt of an unprecedented semiconductor shortfall that has led to delayed car deliveries, shortage of home appliances, costlier smartphones, and these effects are going to last until at least the first half of 2022.
Every Industry at Risk
According to an analysis by investment bank Goldman Sachs, the semiconductor shortage is affecting at least 169 different industries, from small manufacturing hubs to big conglomerates. As the bulk of chip production remains concentrated in a handful of suppliers, the shortage could worsen. One of the world’s biggest buyers of semiconductors, Apple Inc. had to postpone the launch of the iPhone 12 by two months due to confronting microchip shortage. South Korean tech giant Samsung is also experiencing crippling effects of chip imbalance in the IT sector, especially around certain set products and display products and hence, the company might skip the launch of the next Samsung Galaxy Note smartphone till 2022. Siemens, one of the leading suppliers of automation systems for power grids, buildings and trains is continuously putting efforts to mitigate the potential risks from component shortages. Industries manufacturing televisions, washing machines, refrigerators, and other commonly used household goods are next in line to face the grave consequences of microchip shortages in the coming months.
An average car requires somewhere between 50-150 microchips. The shortage resulted in automakers like Volkswagen, Honda, Toyota, and General Motors to temporarily shut down production facility. Some automobile makers are leaving out high-end features in their vehicles as a result of a limited supply of electronic components. While Nissan is leaving navigation systems out of the car, Ram Trucks has topped equipping its trucks with intelligent rear-view mirrors that monitor blind spots and Renault is no longer including digital screen behind steering wheels in certain models. The rental car industry is also suffering from the impact of chip shortage as they are not able to receive new vehicle orders quickly at a time when demand is already high. Companies in China are boosting the stockpile of in-demand chips to reduce the global effects of semiconductor shortage, but it is only adding to the difficulty for other firms to get a hold of the microchips.
How did Global Semiconductor Shortage Happen?
- Coronavirus Pandemic
The lockdown restrictions imposed during the COVID-19 pandemic had a severe impact on the manufacturing industries as plants were closed and production halted. The temporary ban on production activities coupled with tighter restrictions on ports and international borders resulted in slowing down the mobility of items. At the same time, demand for new electronic equipment exploded due to work from home policy, rising need for online classes, and up-gradation of existing home entertainment options. Most of the electronic devices such as mobile phones, laptops, etc. require semiconductors, but due to halted production, many industries manufacturing these devices did not order enough semiconductors to meet the rising demand in the future. Not only the electronic sector, but also healthcare, cosmetics, construction, defence, and many others had to face the brunt of the disrupted supply chain of semiconductors. Now as the pandemic is slowly starting to abate, the pent-up demand for electronic devices and vehicles is putting strain on the existing supply chain.
- Panic Buying
As the news of the semiconductor shortage began to emerge, many industries started to stockpile chips. The panic buying added to the overall shortage, reducing the limited supply and lead to high costs. Commenting on the rising incidences of panic buying, Tesla CEO Elon Musk tweeted, “Fear of running out is causing every company to overorder – like the toilet paper shortage, but at epic scale” as the chip shortage continues to create havoc on Tesla’s supply chain.
- USA Government Sanctions on Chinese Technology
USA ex-President Donald Trump exacerbated the semiconductor shortage starting a trade war with China during the coronavirus pandemic. Trump’s administration’s actions against key Chinese chip factories caused a major supply chain disruption. First, the White House banned Chinese telecommunications giant, Huawei to purchase chips made with American technology. Huawei stockpiled semiconductors ahead of the ban to keep building products whereas its rivals started snapping chips to increase their market share. Secondly, some of SMIC’s customers are looking for different chip factories as there is lingering fear among manufacturers of potential disruption in production with new US government rules.
- Extreme Weather
Global warming is causing extreme weather changes around the world, that are disrupting businesses and supply chains. Semiconductor manufacturers are facing the brunt of extreme weather scenarios as most of the manufacturing hubs are concentrated in areas prone to power cuts. During extreme weather conditions, utility services prioritize service to residential areas instead of manufacturing hubs, which put a halt on the production of factories that run for 24 hours. Currently, Taiwan dominates the advanced microchip market, supplying chips to customers like Apple and Nvidia. The region is currently experiencing its worst drought in more than 50 years, which has led to the drying up of reservoirs. TSMC requires around 156,000 tons of water a day and the water shortages are making the microchip shortage even worse.
- Failed Forecasts
The industry experts could not contemplate the spike in demand for electronic products, which led to a huge gap between demand and supply. Many smartphone and automotive manufacturers were expecting a downtrend in demand, so they had cut their semiconductor supply. Since the majority of industries are dependent on manufacturing facilities for access to microchips, the failed forecast led to gaping holes in supply.
How to Alleviate Global Microchip Shortage?
The half-trillion-dollar semiconductor supply chain is one of the most complexes so there is no easy fix to end the global semiconductor crisis. A single microchip undergoes more than 1000 steps and passes through international borders multiple times before it reaches the end-user. Therefore, changes in policies of one region affect the global semiconductor supply chain. The worst of semiconductor shortage is yet to come, so one just needs to bolster up and focus on things that can be revitalized like resources and a network of providers.
- Expanding Production Capacity
The global chip shortage has heightened the need to invest billions in new production lines and upgrading equipment to meet the surge in demand. Taiwan Semiconductor Manufacturing Co (TSMC) is accountable for producing 80% of microchips used for cars. To fulfill the global demand, TSMC has planned to invest around USD2.87 to expand mature capacity at its fab in Nanjing, China as well as invest USD12 billion to establish another chip factory in Arizona. US biggest chip maker, Intel Corp. is expected to invest around USD3.5 billion to increase production at its wafer fab in New Mexico. US-headquartered semiconductor maker GlobalFoundries is also planning to build a new fabrication plant in Singapore making an investment of more than USD4 billion for supporting fast-end growing automotive, 5G mobility, and secure device segments.
- Gearing towards Tech Sovereignty
About three-fourth of the semiconductor supply comes from China, Japan, Taiwan, and South Korea, but the COVID-19 pandemic disrupted the global supply chain, therefore countries around the world are making billions of investments to increase production of microchips and reduce dependency on foreign nations to meet their demands. On February 24, 2021, US President Joe Biden signed an executive order calling for a review of the US semiconductor supply chain. Biden is also seeking USD37 million worth of investment to accelerate the domestic production of semiconductors. Europe currently accounts for less than 10% of global chip production. In an effort to become more self-reliant, the European Commission wants to ramp up chip manufacturing capacity to 20%. US tech giant Intel has provided USD8 billion euros to public subsidies towards the establishment of semiconductor manufacturing companies. Federal incentives to industries can increase US fab capacity and help in minimizing the imbalance between supply and demand but the aid need to be available throughout the semiconductor design and manufacturing supply chain.
- Cost-effective Fab Upgrades
While fab expansions can take up to 12 months, fab upgrades can put capacity on line in as little as three months. Investing in the standard mechanical interface (SMIF)-upgrade to an existing 200-mm fabrication facility utilizing supplementary tools, upgrading cleanroom space, etc. can increase the production capacity of wafers without any incremental costs for additional starting material, labor, or processing costs. A typical 1.3% improvement in line yield from hands-off characteristics of SMIF and automation could result in 325 additional wafers per month. Upgrading a 200-mm fab with SMIF can significantly improve wafer-environment control and extend the life of the facility.
Conclusion
Supply constraints are demand-driven rather than supply-driven so reduced demand can only help to subside pressure on chip supplies. Some industry experts believe that the strong demand is a bigger problem not the pace of production. However, increasing manufacturing capacity by building new facilities could take up to two years and fabs could not fill the extra demand despite running at full capacity, so one cannot expect the global microchip shortage to end before 2023.
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