The demand for semiconductor chips has exploded with the rise of technology consumption in the last couple of years. Semiconductor chips are used in every electronic device from smartphones, laptops, game consoles, to smart IoT appliances that we use everyday. The automotive industry also heavily relies on semiconductor chips, especially with increased production of electric cars and autonomous self-driving vehicles.
Semiconductor chips are like the nuts and bolts of our digital world: we use them every day but don’t often give them much thought. Chips are essential in powering modern day technology, which is why the global chip shortage can have a huge impact on our daily lives.
We have been in a severe global chip shortage since 2020. In fact, chip suppliers are finally catching up and increasing production to pre-pandemic levels, but the demand for chips has only increased since then. The fact that companies are still ramping up IoT production underlines that the silicon shortage will continue to be an issue in the coming years.
So what’s causing this chip shortage? And how can we navigate this global problem?
The Globalization of Semiconductor Supply Chain
Semiconductors have been called the “brains” of modern society because they function as the building blocks for most electronic hardware, from smartphones and wearables to laptops and IoT devices. The semiconductor industry is globalized in nature. For more than a decade, the global electronics industry has been slowly consolidating its production in Asia. Most semiconductor foundries are located in Asian countries such as Taiwan and South Korea, while the design houses that create new chips are mostly based in North America, Europe, and Japan. This industry-wide globalization has led to a highly concentrated supply chain, which means any disruption to the chip manufacturers would affect everyone else down the production chain.
Only a handful of chip makers are capable of producing the latest chips, and about 75% of all semiconductor manufacturing is done by Asian foundries. Most consumer electronics brands don’t make their own chips — they procure them from these foundries. Taiwan Semiconductor Manufacturing Company (TSMC), which manufactures chips for Apple, Nvidia, and AMD, is the largest chip manufacturer with more than 50% market share. The rest of the market is made up of other chip manufacturers such as Samsung Electronics, Intel, Global Foundries, UMC. This Nikkei Asia article talks more in depth about how the structure of the chip industry contributes to the chip shortage problem.
Covid-19 Effects: Increased Demand and Disruption of Supply Chain
Even before the Covid-19 pandemic, there were already signs of increased demand for semiconductor chips. According to the World Economic Forum, the semiconductor industry has grown significantly in the last decade due to rapid development of the technology sector and the increased need for cloud computing and memory storage devices. This trend of increased growth in profitability is expected to continue as forecasted by McKinsey’s report (see below).
The Covid-19 pandemic has disrupted the semiconductor industry on many levels. Wafer production capacity has been reduced while demand for chips in consumer electronics and automotive has surged. The impact of these competing dynamics has been felt across the entire supply chain: chip manufacturers are overwhelmed by orders while device makers are struggling to secure enough chips. On top of that, any disruptions at chip manufacturers would affect everyone else down the value chain: foundries depend on wafer suppliers for raw materials, design houses need silicon wafers to test their new designs, and OEMs rely on both wafer and design houses for semiconductors to meet their customers’ demands.
The demand for electronics dramatically increased as people around the world tried to cope with the effects of the pandemic such as working from home and quarantine measures. However, supply chains and manufacturing plants for semiconductor chips were forced to shut down during the pandemic, making it difficult for companies to produce the number of chips needed to keep up with consumer demand. This chip shortage has affected companies all across the industry such as Apple, Nintendo, Sony, Samsung, and Ford—and it’s not going away anytime soon.
Manufacturing plants have been struggling to recover from Covid-19’s disruption to their supply chains, and now they are facing additional challenges such as rising costs and increasing competition. The auto industry has been hit especially hard by the semiconductor shortage – automakers like Volkswagen, Ford, Honda, and Toyota had to delay the production of certain models because they don’t have enough microchips to build them.
Russian-Invasion of Ukraine: Further Shortage of Materials
The global pandemic has caused a huge shortage of semiconductors, and while there are signs that the shortage is slowly recovering, recent events have shown that the shortage of semiconductors is likely going to get worse for an extended period of time before the supply chain returns to normal.
Tech companies and automakers are still not able to keep up with the demand that skyrocketed during the pandemic. The CEO of Nvidia stated last year that the chip shortage is expected to continue well over 2022. This comes after previous statements from other chipmakers like Samsung and Intel, who also predicted that it could take until 2022 for chip supplies to recover.
However, unexpected global events can delay the chip shortage recovery even further. Neon, a gas that is an essential component in semiconductor manufacturing, has been in short supply since Russia invaded Ukraine earlier this year. Ukraine has been a major producer of neon for much of the world, but the war has halted Ukraine’s neon production with no near end in sight. This Vox article discusses in detail the effects of the neon shortage on the semiconductor industry. The neon shortage is another example of how semiconductor production is interconnected globally and any changes to the supply chain can have ripple effects across the world.
How do we navigate the global chip shortage?
The effects of the global semiconductor chip shortage are severe and long term, and many companies are faced with the difficult question of how to navigate the prolonged chip supply chain issue. There are no fast and easy answers to the question, but there are a few strategies companies can adopt to adapt to this changing landscape.
One way to adapt is to shift production closer to home. Many countries have started initiatives to invest in their own semiconductor production capabilities. In Japan, for example, companies like Sony and Nikon have begun looking into building local chip manufacturing plants. In the US, Texas Instruments and Intel recently announced construction of chip plants in Dallas and Arizona. This would help mitigate the risk of relying on foreign suppliers and speed up the process between production and delivery.
Another solution is to embrace new technology like virtual prototyping and digital twinning to help speed up hardware product development cycle even when there is a component shortage. Digital twinning utilizes digital adaptation of a physical component to let developers test hardware prototypes throughout the lifecycle of a product, not just at its conception. Since products and prototypes exist virtually, it is significantly easier to replicate, test, and solve for a wide range of failure conditions. Creating prototypes digitally can also help reduce costs and excess waste during the production process because engineers can test their designs without creating additional physical prototypes.
The chip shortage is a big problem in the semiconductor industry. The globalized nature of semiconductor manufacturing has contributed to the chip shortage problem, and it’s time for the industry to embrace new technologies that will utilize these resources in a more efficient way than ever before.
What are your thoughts on how we can navigate the global semiconductor chip shortage? Comment below and let us know.