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Introduction
There has been a global shortage in semi-conductors that has affected the whole industry of technological products; from televisions and cars, to mobile phones and game consoles.
These shortages are steadily worsening, resulting in higher prices for chips. This has further led to higher prices for technology reliant on these chips, plus delays in the release of new products. Apple, the world’s biggest buyer of semiconductors, had to delay the release of the new iPhone 12 by two months due to the shortages. Samsung, the second biggest purchaser of semiconductors, also had to postpone and is considering scrapping the release of their next high-end phone.
The impact on the car manufacturing industry is no better. Ford had to cancel two shifts at car plants and has predicted a $2.5 billion hit to profits. US General Motors is experiencing similar issues, forecasting a profit hit of $2 billion.
Though the shortages can be plainly attributed to the global pandemic, there are more factors at play, such as the US-China trade war, under-investment and weather-specific factors, that have exacerbated the severity of chip shortages.
Factors Contributing to Chip Shortage
The pandemic had a unique effect on the car manufacturing industry. Unlike the smartphone and game console industry, which benefitted from increased demand as a result of the shift to working at home and a need to find a way to spend spare-time while self-isolating, the car industry experienced a slump of up to 50% as there were less people travelling and low consumer confidence. Experiencing this slump, the car industry cancelled orders for chips, which were then redirected towards laptop and smartphone producers. However, demand for cars resurged sooner than expected and car manufacturers were unable to retrieve cancelled orders.
Beyond the pandemic, exceptional weather-related conditions further strained supply issues. The production of chips in Taiwan uses 156,000 tonnes of water daily. However, a drought in Taiwan has meant that reservoirs are drying up and has left the firm bringing in water by trucks. In Texas, the influx of cold artic wind further disrupted production as plants had to be shut down. On top of all this, in October 2020, a fire struck a chip factory in Japan, exacerbating existing supply-chain issues.
Prior to even the pandemic, the US-China trade war was straining the global supply of chips and semi-conductors. Quilter Cheviot, a research analyst, stated that “growing trade tensions between the US & China put semiconductor industry in uncertainty, even before the
pandemic”. Rather than prioritising increasing the global supply of chips and semi-conductors, the two nations have been engaged in an aggressive economic rivalry. Xiliinix, a US chip firm, had to suspend sales to the Chinese electronics company, Huwaei, as Trump had blacklisted the latter firm over national security issues. The US even prevented the Dutch firm, ASML, from exporting advanced machinery to SMIC, China’s biggest chipmaker. Though the investment in factories (born out of the trade war) is a long-term solution to the current crisis, it has exacerbated the severity of supply-chain issues on a global scale.
Lastly, analysts say that the industry has been struggling from under-investment, making the current crisis seem inevitable. “Poor earnings, low margins and high debt ratios”: these aspects of chip production make it non-profitable to set up factories and increase production. The SIA reported last year that it costs up to $20 billion to set up a factory and could take years before these factories even see profit. Costs have been going up with each new generation of chips, as companies try to manufacture the smallest possible transistors. Consequently, chip factories have been struggling with capacity over the years and are unable to cope with fluctuations in demand, resulting in several “chip famines” in the past and the current shortage.
A More Nuanced Understanding of The Impact
Koh Dong Jin, the Co-Chief Executive of Samsung, has said that there are “serious imbalances” in the pecking order of who gets the supply of semi-conductors. The supply shortage has revealed who is at the bottom of the supposed pecking order: car manufacturers. The entirety of the global car industry only accounts for the purchase of $37 billion worth of chips. The two biggest car manufacturers, Toyota and Volkswagen, account for $4 billion annually. In comparison, Apple buys $56 billion worth of chips a year. Car manufacturers lack the buying power that smartphone companies possess and have found themselves at the back of the queue for semi-conductors. Therefore, the car industry has been most impacted by the semiconductor shortage, the backlogs being so big that it has been reported it could take up to 40 weeks to fulfil any order a carmaker put in today.
On a more positive note, those who hold stocks in chips have seen a rise in the price of their stocks. The PHLX Semiconductor index, which tracks the largest-chip related stocks, gained more than 70% in the past 12 months. A reason for such a rise of prices can be attributed to the tendency to respond to supply issues and or increasing demand by raising prices rather than increasing production, due to the difficulty and cost of the chip-manufacturing process. The rise can also be expected to stay for some time, as some predict that it will take a year for manufacturing to get back on track and a further six months for stock levels at various companies to reach normal levels. Microsoft has forecasted that supply issues are expected to continue until the second half of the year.
Going Forward
As already noted, under-investment in the production of semi-conductors has been a significant factor contributing to existing supply issues. However, the governments of multiple nations are seemingly seeking to resolve this by trying to become self-reliant and investing in factories within their borders.
In the US, Biden has signed an executive order for a review of the US’s manufacturing supply chains that rely too much on China, and this includes a provision of $37 billion to bring greater manufacturing capacity to the US. Already, the US has invited the Taiwan Semiconductor Manufacturing Company (TSMC) to build a $12 billion factory on the nation’s shores.
Similarly, Beijing has announced its fourteenth five-year plan (2020-2025), which lists “integrated circuits” as one of the seven technology projects which will benefit from a7% annual boost in overall research and development investment.
The EU Commission has recently proposed a Digital Compass strategy, which includes plans to produce the bloc’s first quantum-accelerated Computer by 2025 and to ensure that all households have access to gigabit internet speeds. Underneath this plan, the EU has also announced an aim to ensure that 20% of chips are manufactured within the EU by 2030 (was at 10% in 2020).
Sources
1. Guardian, Global shortage in computer chips 'reaches crisis point' (21/03/2021), available here, Accessed (23/05/2020)
2. CNN News, Computer chip shortage starting to hit automakers where it hurts (22/03/2021), available here, Accessed (23/05/2020)
3. BBC News, Chip shortage: Samsung warns of 'serious imbalance' (18/03/2021), available here, Accessed (21/05/2020)
4. New Scientist, There's a global shortage of computer chips – what's causing it? (18/03/2021), available here, Accessed (21/05/2020)
5. BBC News, EU seeks to supercharge computer chip production (09/03/2021), available here, Accessed (20/05/2020) 6. BBC News, How will 'chipageddon' affect you? (04/02/2021), available here, Accessed (20/05/2020)
7. MarketWatch, Worldwide chip shortage expected to last into next year, and that’s good news for semiconductor stocks (24/02/2021), available here, Accessed (20/05/2020)