Global Shortage of Semiconductor Chips: What caused it and its impact on economy and how long will it last?

Several Industries are making a comeback after languishing during the pandemic and the supply of semiconductor chips which are used in most of manufacturing industries to manufacture various electronic goods are miniscule compared to the rising demands of electronic goods and components globally. A chip that costs hardly a few dollars has caused a billion dollars losses globally among major companies.

The start of the Covid-19 crisis in early 2020 prompted a global spending spree on electronic items right from extra monitors to laptops and smartphones as people rushed to set up home offices, to televisions and games consoles for beating lockdown boredom and it has then intensified over the last couple of months as several major companies across various sectors struggle to cope up with the rising demands of goods globally due to the shortage of semiconductor chips.

An analysis by Goldman Sachs suggested that at least 169 industries have been impacted by the global chip supply shortage. With no solution to avail till at least 2022, all countries around the world are staring at a massive hurdle. It has already started impacting bigger economies like the United States.

But what is behind of all this shortage of chips and why are they of utmost importance? Let’s try to take a deeper insight on the crisis.

What are Semiconductor chips?

Semiconductors, also known as microchips and integrated circuits (ICs), are literally the ‘heart’ of every electronics product, whether it be a simple remote-control unit for changing channels on the television, or a supercomputer used to simulate weather patterns.

Semiconductor chips are made from silicon as it is a good electricity conductor. These chips are fitted into microcircuits that powers numerous modern-day electronic goods and components. It may be noted that all active components, integrated circuits, microchips, transistors and electronic sensors are built with semiconductor materials. They play a key role in manufacturing modern technology products.

Some popular facts about semiconductors

• Semiconductors are primarily created from silicon (Si), which in turn is produced from silica (SiO2), the major component of sand.
• Every modern technology is dependent on semiconductors ranging from smartphones, data centres, computers, laptops, tablets, smart devices, vehicles, household appliances, life-saving pharmaceutical devices, agri-tech, ATMs and more.
• Some of the global renowned chips manufacturing companies are Intel, Samsung, Taiwan Semiconductor Manufacturing Company (TSMC), Broadcom and Nvidia.
• The production of such semiconductors is complex and can involve more than one thousand steps and multiple country border crossings.
• Taiwan leads in the assembly, packaging and testing functions of semiconductors while the US leads in R&D (Research and Development). However, a vast majority of chips are currently manufactured in China.

What caused the shortage?

The covid 19 pandemic triggered a global  surge  in consumption of electronic goods in the form of smartphones, TVs, gaming consoles , laptops, desktops etc which the companies are finding difficult to fulfil due to the global chips shortage.

Some key reasons behind the global chip shortage are supply chain disruptions due to the pandemic, a sharp rise in demand for electronic goods as more people are now working from home and lack of investment in chip building capacities.

The pandemic played a big role, said Glenn O'Donnell, vice president research director at Forrester, in a recent blog post.  "Demand for cloud computing services from providers like AWS, Microsoft Azure and Alibaba continues to skyrocket. They buy lots of semiconductors," O'Donnell wrote. "Mobile phone sales remain hot. Makers like Apple, Samsung, and Huawei buy lots of chips. PCs are hot … Piled atop all that is a shortage of GPUs and other chips gobbled up by cryptocurrency gluttons. Demand is hotter than ever, and it's only getting hotter."

The pandemic isn't the only factor. A winter storm had briefly halted production at several plants in Texas in February, and a fire ripped through a Japanese semiconductor fabrication plant in March contributed to the global shortage of chips.

When the US banned foreign companies whose chips use American technology from selling to Chinese tech giant Huawei, over espionage allegations. Huawei, sensing the restrictions began to stockpile semiconductors much ahead of the sanctions coming into effect contributed to further straining supplies.

Automotive, industrial sectors suffering most due to global chip shortage

The car industry has been the most visible victim so far, with many brands forced to slow their output in recent months. As automakers slashed production early in the pandemic, their chip suppliers turned to clients from other sectors -- namely the makers of electronic goods in high demand due to the pandemic.

Major car manufacturers like Volkswagen, Ford, Renault, Nissan and Jaguar Land Rover are already facing the crisis. All these companies are likely to lose billions due to the shortage of chips, which are used in many car components such as digital speedometers, infotainment systems, computerised management of engines and driver assistance systems. Most companies have said that the disruption in vehicle supplies could last till at least 2022.

Meanwhile major automotive manufacturers in India like Maruti Suzuki and Tata hit by the global shortage of chips, had to increase their prices of vehicles due to the increased cost of production.

Smartphone makers had been relatively protected so far as they had existing stockpiles of chips, but they too are starting to suffer.

Does the Chip Shortage affect you?

The shorthand answer is definitely. With the increased cost of production due to the crisis of semiconductor chips, the prices of every electronic goods from Tv to smartphones have seen a massive surge.

The shortage of semiconductor chips has forced carmakers to increase the prices of vehicles. In India, Maruti Suzuki, Tata hiked car prices recently due to the increased cost of production.

TSMC, which is responsible for producing about 80 per cent of microcontroller chips used in cars, said it would invest US$2.87 billion to expand mature capacity at its fab in Nanjing, China. The additional capacity is expected to begin volume production in the second half of 2022.While major chip manufacturing companies have announced investments to ramp up producing lines, analysts feel it would take at least two to three years to build the new semiconductor chip production plants.