The reliance on semiconductors is increasingly present across a range of industries, and, in the wake of the COVID-19 pandemic, a shortage of semiconductor chips is disrupting a wide range of industries. The computer, medical device, and auto-manufacturing industries are all affected, to name a few. This shortage has been building for a long time, as demand for semiconductors kept growing due to the increased movement toward smart devices and Artificial Intelligence. During the lockdowns caused by the pandemic, demand for consumer electronics grew by 7% as everyone needed laptops, webcams, and more in order to work from home, thus constraining supply and leading to cost-driven price increases. Global supply chains were also disrupted due to COVID-19, which only worsened the impact of this shortage. As lockdowns eased in July 2020, the demand for semiconductor chips increased further as auto-manufacturers ramped back up, causing a shortage across all industries relying on semiconductors.
Although semiconductor manufacturers are reinvesting and building new factories, a long-term solution to this shortage will take considerable time. The process of constructing a new manufacturing plant takes years and billions of dollars. The US government recognises the expense of building these plants and a $190 billion bill for chip subsidies is being debated in the Senate. Due to the tiny size of semiconductors, even the normal manufacturing process takes months, so building a new plant is a massively complex undertaking that cannot be done on short notice. Even with subsidies, Taiwan Semiconductor Manufacturing Company (TSMC), the world’s biggest manufacturer of semiconductors, is spending $12bn on a factory in Arizona that will not start production until 2024. Due to these factors, this shortage could easily drag into 2022 and beyond. The expense of building a plant is also not to be underestimated, and without subsidies, it seems unlikely that there will be much new development.
This shortage is also a geographical supply chain problem. Chip manufacturers are concentrated in Asia. Therefore, any geopolitical restrictions on trade also severely hamper the ability of companies to secure enough semiconductors to manufacture their products. Although there is some production of semiconductors in the US, manufacturers are still heavily dependent upon foreign supply. This problem seems to be growing, as the historical manufacturing strongholds in the US and Europe are declining in their market share. Taiwan, South Korea, and Mainland China are taking the lead as the following chart (Figure 1) shows.
As we wrote about previously, trade from China slowed due to the Delta variant, so any semiconductors being exported from there are being delayed even more. The current effects of this shortage can be seen in the delayed and reduced manufacturing across products like cars, smartphones, game consoles, and computers. Used-car prices have increased as a symptom of people being unable to get new cars without long waiting periods, especially as newer cars have even more semiconductor chips in order to support features including assisted or autonomous driving. Car manufacturers are forced to idle or even shut down plants due to this inability to get chips. Prices for computer components are at an all-time high for months, and some smartphone manufacturers are having to cut production for phones. Companies with aggressive cost-cutting strategies, such as just-in-time supply, which cuts down on inventory and places orders only as needed, were hit hardest as they did not have any way to mitigate the effects.
Overall, this shortage exemplifies the benefits of taking a longer-term and holistic view of your supply chain. Diversifying suppliers, as well as keeping more inventory as a buffer, can make your supply chain far more robust and increase your ability to deal with unexpected circumstances.
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