With the world facing a considerable semiconductor microchip shortage, we take a look at the causes and effects of the shortage plus some potential solutions.

Why Is This Important?

Microchips are now included in virtually everything from watches to white goods and crucially in larger, high demand, big industry items such as cars.  Many products have more than one chip and as the IoT market expands, so does demand for more microchips.

Why The Global Shortage?

The global shortage of semiconductor microchips has been caused by a ‘perfect storm’ of many factors.  These include:

– Car companies slimming down manufacturing following a 50 percent slum in car sales, due to the COVID-19 pandemic.

– Microchip producers switching to smartphone, laptop, and tablet chips in response to a surge in demand due to remote working because of the pandemic, thereby disrupting chip markets.

– Manufacturers of semiconductor microchips, which require huge investment in plants over many years, tend to operate with low stock levels to minimise costs. The surge in demand for chips (particularly for cars) following the first lockdowns therefore meant there were no backup supplies, chip manufacturers would need time to adapt to switch back to car chips, and manufacturers could not meet demand.

– With most chips being manufactured in Taiwan, the US trade war with China during the Trump administration caused supply problems due to sanctions (e.g. US chip firm Xilinx having to stop supplying to China, and Huawei being put on a trade blacklist).

– Under-investment in 8-inch chip manufacturing plants owned by Asian companies. Also, most of the production in Asia is concentrated into mainly the Taiwan Semiconductor Manufacturing Co Ltd (TSMC) and Samsung, who manufacture on behalf of hundreds of other different chip companies.

– Weather and other events disrupting supply and worsening the global shortage of semiconductor microchip (e.g. droughts in Taiwan as water is needed in chip production), winter storms in February shutting-down the NXP semiconductor plant in Texas, and a fire at the AKM semiconductor plant in Nobeoka, Miyazaki, Japan last October 20. The AKM factory (owned by Renesas Electronics Corp), for example, accounts for a massive 30 per cent of the global market for the microcontroller units used in cars.

The Impact

Examples of some of the main impacts caused by the global shortage are:

– Massive disruption, damage to profits, and potential job losses in the car industry and in car supply chain businesses.  For example, Ford, Toyota, and VW are partially mothballing factories. Car manufacturers are also producing fewer of their less profitable vehicles.

– Phone manufacturers delaying model releases (e.g. Samsung considering delaying the launch of the latest Galaxy Note).  This, of course, will affect the phone company’s profits and competitiveness and will have a knock-on effect towards phone retail businesses.

– Games console shortages (also compounded by an increase in demand over lockdown).  For example, Microsoft has been facing production challenges with Xbox Series X/S. This may have knock-on effects for games console retailers.

– Knock-on effects into the development of 5G networks (e.g. in the UK and US).

Possible Solutions

The main solution to tackling the global shortage has been for countries implementing the costly and time-consuming measures of setting up their own semiconductor microchip factories to try and guarantee at least some increased level of supply, and to reduce reliance upon countries between whom there may be a difficult relationship. For example, U.S. President Joe Biden is looking for $37 billion for legislation to boost chip manufacturing in the U.S. with a view to setting up four new factories in Arizona and Texas. Also, US sanctions have forced China to start investing heavily in its local tech companies such as Zhaoxin, Huawei, and SMIC to help deal with the shortage.

These developments will take time, and with the majority of 2021’s output already sold, it is anticipated that the shortage and many of its effects may carry on for another year.

What Does This Mean For Your Business?

For any businesses that require semiconductor microchips for manufacturing, or for business that supply and sell goods and devices that include these chips, the near future may hold uncertainty and potentially damaging disruption and shortages which could impact upon operational decision-making, hit profits, and have a negative impact across supply chains.