In case you haven’t heard, we are in the midst of a global semiconductor shortage.
The first monolithic integrated circuit (IC) chip was invented sixty-two years ago by Robert Noyle at Fairchild Semiconductor. This small electrical “gadget” has since become a critical component for everything from smartphones and computers to vehicles and appliances.
What Is a Chip?
Techopedia defines a “chip” as follows:
In electronics, a chip is comprised of semiconductor material cut from a larger wafer of material that is only a few millimeters on one side. On this chip, a transistor or integrated circuit may be etched but only occupy one-thousandth of an inch of the chip’s surface.
The terms chip, microchip, integrated circuit (IC) and silicon chip are synonymous.¹
A single chip that measures a mere 1/16 square inch (with a thickness of 1/30 square inch) can contain anywhere from a few to thousands of transistors. Larger chips that are about the size of a postage stamp can contain millions of transistors.
How can anything so tiny be causing such a big stir?
The Extent of the Problem
Lead times for chips have been extended significantly. This means that the amount of time between when a chip is ordered and the order is filled has increased. According to Bloomberg, lead times for Broadcom, Inc.—a leading barometer for the semiconductor industry—have skyrocketed from 12.2 weeks in February 2020 to 22.2 weeks in February 2021. The company’s Chief Executive Officer, Hock Tan, released a statement saying his company is sold out for the rest of the year.²
When categorized by functionality, there are four types of chips: standard chip, memory chips, microprocessors, and complex systems-on-a-chip (SoCs). Because of the smartphone and computing power boom over the last ten years, demand for all types of chips has grown steadily. In addition, numerous machines that have been traditionally mechanical have become smarter and use many more chips than ever before. A good example of this is the automotive industry. Deloitte states that in the year 2000, automotive electronics comprised 18 percent of the total cost of car; in 2020 that percentage increased to 40 percent. And they project by 2030 that 45 percent of the cost of a car will be due to its electronics.³
Industry experts report that there is a particular shortage of 200 millimeter wafers which are used to make lower-end chips. This shortage then affects the supply of power management chips and display ICs that are required in the automatic and consumer electronics industries. As an end result, big name vehicles such as the Ford F-150, the Jeep Grand Cherokee, and the Mercedes-Benz C-class production lines have been either slowed down or temporarily paused. And that is why popular devices such as Playstation and Xbox are becoming scarce in stores.
So, Why Don’t They Just Make More Chips?
As semiconductors can be damaged by things like temperature spikes, static electricity, and even specks of dust, they must be built in highly controlled fabrication plants (called “fabs”). Big name U.S. companies like Qualcomm, Nvidia, and Apple design semiconductors but they do not manufacture them.
So, where are they made?
It is estimated that as much as 91 percent of chip manufacturing happens in Asia. In fact, there are only four semiconductor companies that make the vast majority of the world’s electronic chips: Taiwan Semiconductor Manufacturing Company (Taiwan), Samsung Electronics Company (South Korea), Globalfoundries, Inc. (United Arab Emirates), and United Microelectronics Corporation (Taiwan).
It is not as simple as building another semiconductor fab and hiring workers. Chip fabs cost billions of dollars and at least two to five years to construct. It is important to note that the U.S. is trying to gain more chip independence. To this end, Intel Corporation just recently unveiled plans for a new $20 billion fab of its own.
Bottlenecks exist in other parts of the chip supply chain too. Bloomberg states:
The Netherlands-based ASML Holding NV has a virtual monopoly on advanced photolithography equipment required to print patterns of cutting-edge chips onto the wafer. Companies from Japan, such as Shin-Etsu Chemical Co., dominate the market for chemicals used in semiconductor manufacturing. And manufacturing cannot start in the first place without access to electronic design automation software, a segment led by the U.S.’s Cadence Design Systems, Inc. and Synopsys, Inc.⁴’
Here’s How the Pandemic Fits into the Semiconductor Shortage
At the beginning of the pandemic, most economists predicted that consumer spending would drop off because people were losing their jobs. As a result, auto companies showed down production, which means they ordered fewer chips. However, instead of curtailing all non essential spending as predicted, consumers who were stuck at home with a bunch of free time on their hands, poured the money they would have spent on movie tickets, dining out, vacations, etc. into TVs, computers, and video game systems. With this increased demand for their goods, electronics companies purchased extra chips and beefed up their production to meet this increased demand. Then, auto companies realized that in spite of the pandemic, people still wanted to buy cars—but it was too late! The chips were gone and lead time for many were at a year or more.
The Perfect Storm
There are many other factors that have played into this perfect storm of events. According to The Washington Post:
New 5G phones use a lot more computer chips than previous generations of handsets. About a quarter of all phones sold in 2020 were 5G-ready, so the industry suddenly put a massive new strain on chip production, said Matt Bryson, a semiconductor company analyst with Wedbush Securities. President Donald Trump’s trade war with China also had an impact. About 10 percent of the world’s chip production comes from SMIC, a semiconductor company that’s partially owned by the Chinese government. In 2020, the U.S. government restricted American companies from selling to SMIC, citing its ties to the Chinese military. Even the demand for cryptocurrencies such as bitcoin is a factor. Warehouses full of computers used to run the extremely complicated calculations that made cryptocurrencies possible are chewing up more and more computer chips each year.
This chip shortage has made it extremely clear that it is essential to be alert, flexible, and resilient in the face of something as complex and consequential as supply chains.
There is hope. President Biden has signed an executive order calling for the review of supply chains for critical products.
And there is help from Taiwan, too. According to Reuters:
Andrew Hou, Acer’s president for Pan-Asian Pacific Operations, told reporters in Taipei that since the problem first became apparent in the fourth quarter of last year, the supply chain has “jumped into action” as suppliers worked to address the situation.
Hou said he expected better supplies in the second quarter compared with the first quarter of this year, and the situation in the second half will be better than the second quarter.
“That’s what we are seeing at the moment,” he added.⁶
The bottom line is this: Supplies of semiconductor chips will be scarce at least through the end of the year. Our advice to you is to anticipate your needs and order supplies as early as possible to lessen the shortages’ impact on you.
1 Techopedia: Chip
2 Bloomberg; How a Chip Shortage Snarled Everything From Phones to Cars
3 Deloitte: Semiconductors—The Next Wave (April 2019)
4 Bloomberg: How a Chip Shortage Snarled Everything From Phones to Cars
5 The Washington Post: What you need to know about the global chip shortage
6 Reuters: Taiwan’s Acer sees global chip shortage gradually easing