The Global Chip Shortage

Let's rewind the clock a bit

The story starts on December 23, 1947, at Bell Laboratories in Murray Hill, New Jersey. This was the day the first transistor was successfully demonstrated, marking the beginning of a paradigm shift in technology. To call this, a revolution would be an understatement. Fast forward to 2023, Integrated Circuits (ICs), a.k.a chips, are ubiquitous, from mobile phones to cars to refrigerators and many more!

What I wish to talk about in this article is that the current chip shortage is due to strong demand and no supply. Not to exaggerate; there is supply, but it is simply not enough! ¹

So, what is causing the global chip shortage?

Well... it's complicated. Many factors play a role in the short supply of chips worldwide. Let's talk about those.

COVID-19

This goes back to COVID-19 lockdowns when all our parents worked from home, and we had online classes. What did we do? We bought laptops and had Wi-Fi access points installed in our homes. This massive growth led the manufacturers to work day and night to meet the demand of electronics companies.

At the same time, automakers decided to avoid ordering chips for their cars. Why? Because it was a global pandemic, people spent on necessities, not luxuries.

Okay! That sounds like a beautiful plan, right? Nope. It wasn't clear when the pandemic would settle, so many companies failed to meet the demand once people started buying more cars.

So what happened next? We'll talk more about it in the impact section later on.

China-United States Trade war

Here's my favourite topic! Allow me to get into my zone.

It is common knowledge now that the US and China are rivals in many aspects.

The US placed restrictions on China's largest chip manufacturer in September 2020 due to the ongoing economic conflict between the two countries.

US, come on, really? Most of your businesses, whether it's Apple, Tesla, Dell, or another industry, rely on China.

What was the result of these restrictions?

The Semiconductor Manufacturing International Corporation (SMIC) found it more challenging to do business with American connections. Companies like GlobalFoundries (AMD's semiconductor manufacturer) shut down their facility in China in 2020.

Severe weather

Taiwan endured its worst drought in more than 50 years in 2021, which caused issues for semiconductor producers who need a lot of ultra-pure water to clean their facilities and wafers.

For instance, TSMC's facilities required more than 63,000 tonnes of water daily, more than 10% of the amount available from two nearby reservoirs.

Taiwan Semiconductor Manufacturing Company Limited (TSMC) is the world's largest producer of chips.

Fires at facilities

This one caught me by surprise.

In March 2021, a fire broke out at a Renesas Electronics-owned facility in Japan, which produces microcontrollers used in automobiles for 30% of the world market!

The Russia-Ukraine war

$^{10}Ne_{20.18}$ Okay, okay, no more chemistry. The thing is, Neon gas is used in laser chip manufacturing.

The price of neon increased sixfold between December 2021 and March 2022 due to the COVID-19 pandemic and political tensions in Ukraine. Ukraine supplies over half of the world's neon supply and 90% of the semiconductor-grade neon used in the United States.

Semiconductor makers have looked for alternate sources in China. Still, any new supply would have to raise output for at least nine months. The supply of noble gases like Krypton and Xenon, of which Ukraine is a significant supplier, was also disrupted.

Le China - I'm the boss.

We all know that various countries imposed many sanctions on Russia after the invasion. I don't know if they forgot that approximately 40% of the world's palladium supply comes from Russia, a critical chip component. So there you go, the West dragged themselves into a mess.

Market Breakdown

Taiwan is the country that produces the most chips globally, thanks to TSMC - Taiwan Semiconductor Manufacturing Company, which controls 56% of the global chip market.

TSMC manufactures chips for various companies which don't manufacture chips but design them, such as Qualcomm Inc and Apple Inc.

World's top semiconductor producers - in a nutshell, Asian countries, such as Taiwan, China, South Korea, and Japan, are the biggest semiconductor producers in the world. Taiwan, China, and South Korean foundry companies account for 87% of the global market.

The Impact

Automobiles

Okay, coming back to cars, what happened next?

People are coming to normalcy, and the demand for automobiles hit back. This demand increased, particularly at the higher end of the autos market, as low-interest rates aided the affordability. Now, they need more chips to complete the assembly. Meanwhile, the chip manufacturers had diverted their share of chips provided to automobiles to consumer electronics.

IoT and 5G

Demand for cellular IoT chipsets and modules has been surging as companies work to implement 5G technologies. Every connected device uses chipsets, which could further delay the long-awaited conversion from 4G to 5G.

I can't wait to get 5G!

The chips will likely be first allocated to cars and smartphones rather than the simpler microcontrollers and sensors used in IoT devices.

Few reports on IoT in 2022 predict that it will take longer for the IoT market to regain the supply of chips needed to meet demand. The full effects of the shortages have yet to be seen in 5G's rollout. However, several telecommunications companies warned that a lack of chips could significantly impact the deployment of 5G connections.

Smart Phones

It's taken longer, but the smartphone market also feels the impact of chip shortages. Smartphone sales rebounded throughout 2021 after a 2020 dip, but in Q3, global shipments slid 6% compared to Q3 of 2020; supply couldn't meet demand.

Desktop computers and graphics cards

It is not an exaggeration to say that our life's work is on our laptops.

The worldwide chip shortage has significantly affected the availability of nearly all the parts needed to assemble a desktop computer. The leading manufacturers of CPU chips, AMD and Intel, have had difficulty meeting the increasing demand for their products due to the global COVID-19 pandemic.

Furthermore, the worldwide chip scarcity has made acquiring graphics cards difficult, with the availability of new and old GPU cards being exacerbated by a rise in cryptocurrency mining in 2021. Scalpers frequently use online bots to automatically purchase a retailer's stock in seconds. These cards are then resold at 300% of their original price.

During the epidemic, AMD and Nvidia, the primary GPU card makers, introduced new flagship card models; these newer models have been in extremely high demand and are seldom available in stock.

Video game consoles

Gamers, this one's for you.

During the COVID-19 pandemic, we had no theatres open, and many of us started watching series from streaming sites. Students like us got into video gaming.

I'm not an expert on consoles and gaming. These are the consoles that have the most demand. Because the inrush of many guys into gaming led to the shortage of consoles. Companies like Sony mentioned that there would be a shortage of PS5 even in 2022.

2022 is coming to an end. Did you guys get your hands on one of those sweet PS5s yet?

The mess happened when Microsoft and Sony released the ninth generation of video game consoles.

Both companies use AMD chips manufactured by TSMC in their ninth-generation consoles, which puts extra strain on the supply chain.

TSMC be like - I'm done with this.

As supply problems persist, scalpers resell the consoles on websites such as eBay for 50% to 100% above their retail price.

What are some potential solutions?

There are few, but the effectiveness of those is a big question.

The manufacturers have already ramped up production. They are running with more than the maximum capacity.

So you guys might be thinking, how about constructing new plants?

Well, it's a nice thought in the case of other products. Still, it's risky or even a terrible idea in the semiconductor industry because getting the plans done takes years. And the manufacturing facility construction will be based on the new emerging technologies requirements and demands, which are very hard to estimate.

The key aspect I forgot to mention is that the semiconductor industry is capital-intensive. It requires billions of dollars.

Another option that is currently being practised is waiting. Yeah, seriously. The automobile and electronics companies are just asking their customers to wait.

During this semester, I have read newspaper articles that mentioned that it is taking at least 6-8 months to assemble and release for the big players like Maruti Suzuki, Ford, General Motors, Mahindra and others.

I want to take a moment and appreciate Tesla; they haven't done the stupid thing of cancelling their chip orders. Instead, they maintained and even utilised the opportunity of getting the chips as early as possible. And we all have seen how the sales of Tesla cars have been throughout the years 2020 and 2021. The shares of Tesla rose from 60$to 400$ by the end of 2021.

Okay, now the shares have fallen. That's a story for another time.

What's India doing?

Actually, this is a sad part.

India lost many opportunities starting from the IT revolution, Semiconductors, EVs and Renewable Energy.

The first belonged to the US, and the other two were in China's hands (predominantly). South Korea also played a significant role in the Semiconductor revolution.

You guys might say we are good at IT, but the thing is that most of the work from the US and Europe is outsourced to India. I feel we break our backs, and the West enjoys it.

We are currently hearing the news that the Government of India is investing around 80,000 crores into the electronics industry. Tata is also planning to dive into this arena. I feel we should be thanking Tata for everything they have done. Let it be the vast number of jobs, starting airlines, hotels, manufacturing, whatever it be. They have always played a crucial role in the development of our country.

We must watch how the government and private sector take this problem as an opportunity and develop new solutions.

Closing thoughts

In conclusion, the current global chip shortage is caused by a combination of factors, including the COVID-19 pandemic, the China-United States trade war, severe weather, fires at facilities, political tensions in Ukraine, and market breakdowns. These issues have led to strong demand for chips and a limited supply, causing disruptions in various industries that rely on chips for their products. It is uncertain when the chip shortage will be resolved. Still, companies must adapt and find ways to navigate the current challenges to meet their customers' demands.

If you have reached here, it means you want to do something exciting. This is what drives us students. Let us put this energy to good use.

India is now in the startup era. Try to use this moment to devise innovative solutions to existing problems and make a difference. We can create something impactful that will help advance technology and our nation.

References

• Why The Chips Are Down: Navigating the Global Chip Shortages and Beyond
• 2020 - present global chip shortage
• OEMs steer clear of new plants
• Japan chipmaker Renesas halts plant due to fire