Chip supply is critically endangered at an international level. The COVID-19 pandemic has distorted supply chains in the highly globalized semiconductor industry and shattered the economic forecasts of companies.
This has caused a shortage of components that affect all sorts of product manufacturing processes.
Chips are essential in many products we use in our daily lives. We can say today’s world runs on them, but there are not enough to meet the demand.
The products affected by this crisis are not only computers, mobiles, tablets, televisions, etc. Cars are equipped with dozens of them, household appliances (like coffee machines or toothbrushes) also have them, but they are needed in industrial processes critical for the IT sector.
And, what happens when a product is scarce but indispensable? Chip prices have skyrocketed, delivery times have increased, more provision costs are incurred and (if nothing is done) manufacturer margins are cut.
For some companies, this is the perfect storm. Companies can find themselves unable to manufacture goods despite there being demand for them, as well as delay or cancel the launch of new products.
Why have we reached this situation?
A chip is a small-sized high-technology component with a great number of internal circuits and a complex design. As such, manufacturing is difficult and has to meet many requirements.
Manufacturing is not instantaneous, and this situation has not been caused by a single factor. The main ones are:
The pandemic and its aftermath in the global economy.
During the 2020 pandemic, some industrial sectors (like the automotive industry) stopped buying chips to cut back on production since they thought consumer spending would drop and people would not be interested in non-essential goods. However, many who were forced to work or study online invested in computers, game consoles, videogames, etc.
Given the shift in market requirements, chip manufacturers reorganized their production systems to meet the demand (leaving out the sectors with lower demand).
During 2021, all sectors have benefitted from economic growth and pre-pandemic manufacturing levels have been reached. The supply chains of chip providers are not ready for this. In addition, fulfilling all prior commitments involving the delivery of components has resulted in a bottleneck.
Geopolitical uncertainties and commercial wars.
US sanctions against a Chinese telecommunication manufacturer this past year left the latter without chips from external providers. As a result, the Chinese telecommunications manufacturer bought additional components to build up stock before sanctions entered into force on 15 September. This move pushed other Chinese phone manufacturers to buy more semiconductors to gain market share. These purchases aggravated the shortage and reshaped the global mobile industry (altering the chip offer/demand balance).
The appearance of new 5G devices
Technological breakthroughs and the deployment of 5G wireless services mean the demand for semiconductors will keep growing and manufacturers will have to do their best to catch up. The chip requirements for 5G devices will increase by 40% – 80% (when compared to the 4G era), according to Feng Jinfeng, member of the Shanghai Integrated Circuit Industry Association. As a result, the industry has put a massive strain on chip production for a newly deployable technology.
Who wins and who loses?
Semiconductor companies are often regarded as responsible for this chaos and the main beneficiaries of the current situation since they can sell their products at a higher price. For instance, an important semiconductor company has already announced a 53% increase in quarterly earnings.
Given the potential crisis during 2020’s Q1 and Q2, chip manufacturers reached agreements with many companies offering favorable conditions that they must now keep. Increasing manufacturing capabilities does not only take time, but also requires costly investments. As a result, some are losing customers that look for alternative solutions (often locally).
However, chip-consuming manufacturers are obviously in a worse position: price increases related to these components mean less profit margins and jeopardize the profitability of certain product lines. Moreover, product delivery delays can make them lose out on business opportunities.
And now what?
This situation is expected to last until the end of 2022.
Demand for chips keeps growing and, now that economic recovery is expected to hit all sectors, it is probably going to increase in the short term. The main chip providers, , are doing their best to meet the global demand but their strategy is neither cheap nor quick enough.
In the long run, the EU is trying to increase its share in the global chip manufacturing market from 10% to 20%. To do so, it has come up with an action plan to build new plants in Europe and wants to sign cooperation agreements with the US to minimize, as much as possible, dependence on Asian manufacturers.