What to Know About the Global Chip Shortage

What to Know About the Global Chip Shortage
Photo : Image by axonite from Pixabay

If you're in the market for a new car, you may have heard dealerships talking about how they're being affected by a global chip shortage. In fact, driving by many dealerships around the country, you may notice they're a lot emptier than usual.

That can be good news if you're going to sell a used car since you may be able to get a premium for it, thanks to the reduced supply of new vehicles.

Beyond an impact on cars, there are a lot of other effects of the global chip shortage. Below are some of the ways it's affecting businesses and even daily life.

The Basics of the Chip Shortage

Semiconductor chips are also known as integrated circuits. Semiconductors are affecting many industries, and they are at the heart of microprocessor chips and also transistors. Essentially anything using radio waves or that's computerized depends on semiconductors.

Many semiconductor chips and transistors are made with silicon-this is where Silicon Valley gets its name.

A diode is the simplest type of semiconductor.

You might also hear them called a computer chip. Some people describe the semiconductor as the greatest achievement of humanity ever. They're central to almost everything we do in our modern, daily lives.

Companies, including software and internet companies, are where they are today because chipmakers and their advancements. Innovation in semiconductors is what paves the way for innovation in general.

The U.S. chip industry also directly employs hundreds of thousands of people and generates $164 billion in sales annually. When there are semiconductor factories built, they can then lead to sub-industries revolving around them.

The chip industry can allow governments to have leverage over each other. For example, the U.S. Department of Commerce ordered a ban on sales to ZTE. The phone maker, without having access to Qualcomm's processors, had to stop production. Without a reprieve from the Trump administration, the company might have gone out of business.

The U.S. is overall a leader in manufacturing semiconductors, although China realizes they need to catch up. China is the largest purchaser of semiconductors in the world.

It's been difficult for China to catch up with the U.S. production of semiconductors because they're very complex to design and produce. The research and development needed for chip design can take decades. It can take a company in America years to develop one chip.

Along with design challenges, there are manufacturing barriers. It can cost more than $10 billion to set up a manufacturing facility, and inside each are a complex set of machines that work at the microscopic level.

Integrated circuits have to be produced consistently and quickly and have little to no defects.

So what are the specific reasons for something so critical right now?

What is the Chip Shortage?

When the world shut down because of COVID-19, so did many factories. These shutdowns meant the supplies needed for chip manufacturing went unavailable for months. Then, at the same time was an increased demand for consumer electronics, significantly affecting the supply chain.

Orders started to get backlogged, and manufacturers were trying to create enough chips to meet demand.

The backlog didn't let up.

Car companies have to predict the number of chips they'll need to produce vehicles and then order them in advance from the manufacturers. It can take around half a year for a chip to come in, and the demand right now is simply so great that they aren't making enough to meet it.

Along with manufacturing issues, there have been a number of other problems.

Ports shut down in Asia because of COVID, often for months. Around 90% of all the world's electronics go through the Chinese Yantian port. It was closed recently, and hundreds of container ships were left waiting to dock.

When ports did reopen, there were bottlenecks because of so many items waiting on shipment.

Transportation supply chains aren't capable of handling this kind of buildup, and then labor shortages have been furthering the crisis.

So bad decisions, poor luck, and high demand all came together for a serious chip shortage.

During the pandemic, people were at home using their devices more than ever in history. They were then creating demand for electronics faster than what manufacturers could provide.

The auto industry's bad decisions also contributed. Once COVID started, car companies were canceling chip orders to anticipate a longer-term and more significant hit to the economy. Chipmakers switched to semiconductors for consumer electronics due to canceled orders and because of COVID demand, leading to car chip shortages.

There were even weather events that have become part of the chip shortage. There are few of these manufacturing plants in the world and several sustained natural disasters.

For example, in Texas, winter storms led to a halt in production at one of America's few manufacturing plants. Droughts in Taiwan affected production, and in Japan, one of the primary plants was damaged by a fire.

There are geopolitical concerns that lead experts to say the issue could get worse. Taiwan is a crucial chip producer for the world. If there were to be a conflict between Taiwan and China, access to the chip industry could be jeopardy.

President Joe Biden is pushing for investments into American chip manufacturing, and the Senate passed legislation offering incentives like tax credits for manufacturers.

Intel is an American chip manufacturer that's announced plans to scale up production. Taiwan Semiconductor Manufacturing Co. and Samsung are looking for locations to build factors in the U.S., but it will take years for them to ramp up production.

The Effects of the Shortage

Prices are going up for things that require semiconductors, which is part of why there's significant inflation, but the shortage isn't the only reason for that. Some products aren't going to ship at all, or they're going to be significantly delayed.

The car industry is going to be heavily affected. Estimates indicate manufacturers will make anywhere from 1.5 million to 5 million cars less this year, at least. Ford and General Motors are already limiting production. Tesla changed its software to support alternative chips so that it could maintain production.

Consumer electronics companies like Apple started stockpiling chips, but they did recently announce the shortage would likely affect iPhone production. Already affected are the sales of iPads and Macs.

PlayStation and Xboxes are in short supply too.

The chip shortage is one of the reasons analysts keep warning of a difficult holiday season.

Samsung said the chip shortage affects their production of appliances and TVs, and LG said the shortage was a risk for them.

Low-margin processes are used in household appliances like washing machines and even certain types of toasters. These are starting to be affected, and the problems may get worse in the coming months.

Some carmakers are starting to leave off high-end features because of the chip shortage. For example, Nissan says it's leaving navigation systems out of vehicles, and Ram Trucks has stopped including the standard intelligent rearview mirror that monitors blind spots.

Even rental car companies are affected because they can't buy the new vehicles they want or need. For example, companies like Hertz traditionally profited by buying new vehicles in bulk and then renting them out. Now they're being forced to buy vehicles at auction instead.

Hertz says it's supplementing its fleets by buying low-mileage pre-owned vehicles from dealerships and auctions.

When Will the Situation Get Better?

We don't know when the semiconductor shortage is going to get better largely because it's unprecedented. For example, the chief executive of the German chipmaker Infineon recently said the industry is in unchartered territory.

It could be well into 2022 before the situation gets better. Some expect headwinds could remain into 2023, although there might be balance and improvement in the situation by next year.

The CEO of Marvell Technology said he anticipates the shortage could extend past 2022. The Marvell CEO spoke at a CNBC Technology Executive Council event, saying he has been in the industry for 27 years and has never seen something where every end market for semiconductors is up at the same time.

Unfortunately, in some areas, the impacts of the chip shortage aren't even being seen yet.

Countries are looking at ways they can increase their chip production. The EU, for example, said it wants to build up its own chip manufacturing capacity to become more self-reliant. Europe currently accounts for less than 10% of all global chip production, and it wants to boost that by 20%.

Ultimately the semiconductor crisis is just one of the compounding elements that are disrupting the supply chain. There are others, but the chip shortage might be the most impactful.

What's going on globally is leading to different ways of thinking about the supply chain. Companies relying on chips will have to be more strategic in how they work with their suppliers and will likely have to be more generous with their agreements with them.

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