The world’s shortage of semiconductors has had ramifications for the entire globe. Shortages have caused a drastic decrease in the production of electronic parts for renewable energy industries, consumer electronics, and most of all, the automotive industry. If Taiwan’s manufacturing factories experience other lockdowns and closures due to further outbreaks of Covid-19, the effect of the semiconductor shortage could last longer and be more damaging over time.
Right from the beginning of 2020, the world as we know it ground to a halt. The pandemic shut down businesses, factories, and most forms of work, causing a sudden halt in production in the semiconductor industry. These small semiconductor chips power our lives because they are essential in the makeup of any electronic product, from computers and cars to even toothbrushes and washing machines. Internet connections, world telecommunications, banking, security, healthcare, transportation, and manufacturing industries rely on semiconductors. Not only are these semiconductors a key component of almost everything that we buy and use, but they also power the factories that manufacture everything, making them essential to modern living. The ever-growing need for semiconductors makes the global shortage of semiconductors detrimental to many industries, exacerbated by the pandemic-induced shift towards digital technology.
The Impact of the Pandemic on Semiconductors
Due to the absence of in-person work, the pandemic forced the globe to go online. Working from home, going to school from home, and even conducting seminars from home became the norm. People decided to upgrade their laptops, buy monitors, and upgrade their home speakers.
In the chart below, representing worldwide semiconductor revenues, we can see that despite the pandemic and factory shutdowns worldwide, revenues still rose from 2019 to 2020.
The newfound rise in demand put enormous pressure on the supply chains of chip manufacturers. Companies like Samsung, a well-known foundry that manufactures these chips, stated that the chip shortage hit television and appliance production. Even LG, a South Korean electronics company, admitted that the shortage is a risk to the business. To make matters even worse, the rise of the price of silicon — needed to manufacture their chips and PCs — rose due to its use in COVID-19 vaccine vials.
There are two types of companies within the semiconductor industry: those who design the chips (fabless companies) and those who manufacture the chips (foundries). Notable examples of fabless companies are semiconductor giants Nvidia, AMD, and Qualcomm. Contrary to popular belief, these three companies do not manufacture their products; they design the product and send their concepts to foundries. Companies like TSMC (Taiwan Semiconductor Manufacturing Company), UMC (United Microelectronics Corporation), and GlobalFoundries go and physically manufacture the chips. With most foundries based in East Asian countries, countries like the USA have become more and more reliant on these regions to produce their chips. Despite this, companies have adopted the ‘fabless’ model and sent contracts to foundries like TSMC and Samsung. The precious supply of semiconductor chips is disproportionately produced by a small pool of companies, further complicating the shortage.
The Automotive Industry
The auto industry has been the most impacted by the semiconductor shortage. From controlling the battery to controlling the numbers on the dashcam, semiconductors are an essential part of the makeup of any modern vehicle. These semiconductors manage engines, driver assistance systems, ignition timings, and even fuel cuts. During the summer of the pandemic, auto companies cancelled all their orders, based on the assumption that there would be a recession and that demand for the foreseeable future would decline.
Additionally, factories had to send workers home to prevent them from getting sick, shutting down all the assembly lines and production from the factories. Furthermore, even when workers were allowed to go back, new restrictions and regulations further hindered production. Automakers like Ford, Volkswagen, and Jaguar Land Rover shut down factories, laid-off workers, and slashed vehicle production. The industry had underestimated the demand for cars in the second quarter of 2020 and this paired with a decrease in production, caused a huge decrease in quantity supplied.
Companies like Nissan are leaving navigation systems out of cars because of the semiconductor shortage. Ram Trucks have stopped equipping pickups with standard ‘intelligent’ rear-view mirrors that monitor blind spots. General Motors, the largest American automobile manufacturer, stated that they could cut 2021 earnings by 2 billion dollars because the semiconductor shortage caused it to shut down manufacturing plans.
Moreover, the production of chip supply for the automotive industry is controlled by few. A notable manufacturing company, TSMC (Taiwan Semiconductor Manufacturing Company), produces 70% of the global semiconductor supply for the automotive industry. Even Mother Nature played a part in the shortage: from the winter ice storms of Texas leaving factories out of commission to a fire that wiped out a major facility in Japan, this all led to higher car prices with less supply. Experts say that because there are no easy fixes to the supply chain issues, inflated car and used car prices are here to stay until at least the end of 2021.
In response to the semiconductor shortage, President Biden stated:
“We need to stop playing catchup after the supply chain crisis hits. We need to prevent the supply chain crisis from hitting in the first place, and in some cases, building resilience will mean increasing our production of certain types of elements here at home.”
Countries being able to create jobs domestically and produce their own semiconductors are vital to their national security. Tapping into such a large addressable market will strengthen their economy. Bringing back lost jobs from foreign countries to the US was particularly emphasised and highlighted by former President Donald Trump. The dependence of (Eastern) Asian countries has especially highlighted this problem to the American people and everyone around the globe. Each country would ideally not depend on foreign countries to produce their semiconductors and invest in production facilities and production domestically.
Much of production is dependent on Taiwan, the largest producer of semiconductors. If they were to see a rise in Covid infections, this could negatively affect the global chip shortage. The chip shortage had stemmed from the dependence on Taiwan and the effect of the pandemic. Having countries build their own manufacturing companies, and industries could help prevent such a shortage from ever happening again. TSMC is looking to pump tens of billions of dollars into factories in Arizona, which could lead to the US increasing its resilience to any future chip shortage. Having a robust domestic chip-making centre would be vital to national security and for economic growth. If countries were to build their own manufacturing companies and industries, it would further improve overall economic growth and national security.
How Long Could the Shortage Last?
There is no way to pinpoint exactly when the world will solve the semiconductor shortage. Due to the chip shortage being so impactful to surrounding industries around the globe, the Biden administration is taking steps to shore up the chip supply chain in the United States.
Colette Kress, the chief financial officer of Nvidia, at the annual investor day on April 12, said that ‘we expect demand to continue to exceed supply for much of this year […] Overall demand remains very strong and continues to exceed supply while our channel inventories remain quite lean.’
Most of the solutions to the chip shortage, such as adding capacity to existing factories or redesigning electronic parts, require at least nine months to implement. According to research by Bain and Company, ‘that means that the shortage is likely to continue into 2022 at least.’
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Hold on! Oh wow, you just made me realize that we should be mindful with our chip usage since its supplies are still recovering at the moment. My sister-in-law’s brother owns a small electronic factory and the demands for his products have been increasing over the past few weeks. I’ll remind him about this latest development so he’ll arrange the right purchase later.