‘The Chips are Down’- Global Chip/Semi Conductor Crisis

Pradyun discusses how Covid-19 has caused a global semi-conductor crisis

The IT industry is at a critical stage. Innumerable products and services rely on computer chips, also known as semiconductors. Many popular items are facing an acute short supply crisis across several industries. Automobiles, smartphones and medical machinery are a few of many examples of sectors that are impacted. As the shortage extends let’s review how it started and why it still exists.

A chip/semiconductor enables a range of electronic items. The demand across industries was exceeding supply before the pandemic, however restrictions to workplace access during Covid-19 lockdowns and social distancing regulations hampered efficiency and volume of production. Manufacturing could not be completely adapted to the online and work-from-home practices. At the same time, the same remote working trends increased demand for electronics, reaching an unprecedented high. A backlog started to form and even at present, shows negligible signs of improvement.

Reduced and restricted access to ports, airports and road borders for lengthy time periods was another crucial factor. Once reopened, the supply chain could not handle the tremendous burden of cargo backlog ranging from the four to six months of lockdown. “The lead time—the gap between the ordering and delivery of semiconductors—increased from four days to 22.3 weeks.”- Susquehanna Financial Group (2021). Companies across sectors will not stop placing new orders and issuing fresh invoices which makes the shortage or “chipageddon” last longer.

Despite dominant firms such as Intel, Samsung and TSMC announcing new plants in the recent past, it will have a minimal impact in the immediate future. The key issue here being that even with the current market situation marked by extremely high demand, manufacturing cannot be boosted on a short term period as the very foundation of the semiconductor business is its time consuming foundation and development capacity. “It takes about 18 to 24 months for a plant to open after they break ground and even once you’ve built one, you have to tune it and get the yield up, which also takes a bit of time.” according to analyst Richard Windsor.

Geo-political implications also have a part to play. In addition to key regional manufacturing hubs such as Taiwan and South Korea which account for 83% of global chip manufacturing, India tried setting up units but never prospered due to lack of planning and government incentives. The Indian government has now proposed tax breaks for semiconductor production in order to ensure maximum yield by undertaking this rare opportunity during a time of supply chain malfunction.

Experts do not predict the shortage to meet the demand any time soon. Intel warns it could take 24-26 months to catch up. “We expect semiconductor industry supply constraints on both wafer and substrates to only partially ease in second-half 2021, with some leading-edge (computing, 5G chips) tightness to extend into 2022,” according to Bank of America. The Wall Street Journal was told that it could take up to 40 weeks to complete fresh orders by carmakers. This could lead to 47 billion pounds in losses due to impacted output according to AlixPartners consultancy. However that projection is incomplete without mentioning that the automobile industry usually generates sales worth 2 trillion dollars per annum. If the market leaders such as Apple and Samsung are stockpiling and hoarding chips, we can only wonder how adversely impacted the small scale firms would be.