Chip Shortage Explained: How We Got Here And Why It Persists

What Is It?

A chip or semiconductor is a crucial component that powers a whole host of electronic items right from smartphones and automobiles to washing machines, refrigerators and even electric toothbrushes.

Their demand had far exceeded the supply even before Covid-19 but the pandemic-induced lockdowns forced the chip-making facilities across the world to shut down. As more and more people started to work from home, increased demand for electronics inundated the supply chain. Manufacturers struggled to create enough chips to meet the rising demand, a backlog began to form and it continued to build.

Ports closing down, sometimes for months, was an additional factor. Even after the ports reopened, the problem continued as many parts of the transportation supply chain don’t have the capacity to handle congestion in the ports.

According to research by Susquehanna Financial Group, the lead time—the gap between the ordering and delivery of semiconductors—increased from four days to 22.3 weeks last month as compared to October. This gap is the highest since the firm began tracking data in 2017.

Why does it persist?

Even in the face of high demand, manufacturing can’t be amped up on short notice as it is difficult and time-consuming to set up chip foundries. Companies like Intel, Samsung and Taiwan Semiconductor Manufacturing Company (TSMC) have all announced new chip fabrication plants over the past few months but these fabs take years to build. This can make the shortage last longer as these companies are likely to place more orders and hold on to more inventory.

Chip fabrication plants are expensive to set up and involve a lot of risks. According to The Indian Express, India has tried setting up chip manufacturing units in the past but it never took off due to lack of long-term vision and government incentives, and poor planning. The government now wants to boost chip production in India and has suggested tax breaks for those who set up semiconductor fabs in the country.

What are the effects of the shortage?

The semiconductor shortage is bound to directly impact the consumers. It has disrupted the global supply chain and constrained the production of electronics. Chip prices are on the rise and as a result, prices of electronic devices are also rising.

Companies like Apple and Samsung had begun stockpiling early on. Even then, Apple faced issues with the production of iPhone 13. The brand took a major hit with a 20% dip in the quantity produced in September-October as against the previous prediction. If the larger corporations are plagued by so many issues, one can only imagine how distressed the smaller businesses would be.

The gap between supply and demand is fast increasing. This discrepancy has started to reflect in the increasing costs of electronics, longer waiting time, unavailability of goods and so on.
Stockpiling might have saved smartphones from being ravaged but the shortage has greatly affected the automobile sector.

The auto industry has been the worst hit by this crisis. During the early days of the pandemic, most auto companies feared an economic downturn and some even reneged on long-term contracts. Microchip foundries then retooled their manufacturing to produce items for electronic goods. As a result, automakers were left high and dry.

Passenger vehicle sales fell 18.6% to 215,626 units in November even after local demand went up. This was the third consecutive month that saw a double-digit dip in sales, as per the Society of Indian Automobile Manufacturers. Total two-wheeler sales declined sharply by 34% last month, the lowest in 11 years for two-wheelers. Three-wheelers sales hit their record low in 19 years.

Many domestic manufacturers are being forced to raise vehicle prices as a result of higher chip prices and low availability. Global automobile manufacturers, too, are losing market share to this crisis.

When will the issue be resolved?

Varied opinions are emerging as to when the shortage will draw to a close. Foxconn, an Apple supplier, has said that the shortage could last till the second half of next year. A major supplier of automobile chips, Infineon, stated that supply won’t be able to catch up with demand ‘on a broader scale within 2022’. Intel CEO Patrick Gelsinger has said that the shortage could last for two more years. On the other hand, a Chinese automotive industry group has declared that the worst of the global car chip shortage is over.