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Global Semiconductor Crisis – A Series
Global Semiconductor Crisis – A Series

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Blog 1 of this series will focus on understanding the semiconductor crisis and the underlying causes of this shortage

The world is currently undergoing a semiconductor crisis. In the past few weeks, we have seen many news articles regarding the shortage of semiconductor chips or integrated circuits (ICs) across the globe. These chips are an essential component in every electronic product. From computers, automotive, mobile phones, gaming consoles, home appliances, agri-tech, ATMs, pharmaceutical devices etc., ICs have their uses in various devices, across various sectors. Atleast 169 industries are expected to be impacted directly by this crisis.

This acute shortage has had severe impact across many industries. Automotive OEMs such as Maruti Suzuki, Ford, Toyota, Nissan, Volkswagen etc., are reducing their production, some by as much as 40%, leading to an increase in prices as well. Mobile phone sales are expected to be affected severely, television and appliance production have been impacted severely as well. This crisis has far-reaching consequences and impacts our daily life as we know it.

 

Why are semiconductor chips or integrated circuits important?

These chips or ICs are electronic circuits which are primarily made of silicon. All modern tech products and components require these ICs and they have revolutionized the world of electronics. With the advancements of technology, these chips have become the mainstay of many industries, which allow electronic devices to process data effectively.

 

How did this shortage start?

The reason for this shortage in supply of ICs has been a combination of factors. There have been many factors including China-US trade wars, increased demand for electronic gadgets such as smartphones and laptops due to remote learning, Taiwan drought etc. However, all these have been amplified due to the Covid-19 pandemic.

 

Semiconductor

 

  1. Covid 19 pandemic – Due to the pandemic, across the world, countries went under lockdowns, leading to shutdown of chip manufacturing facilities. In addition, due to the new normal of working from home, remote learning etc., the demand for laptops, tablets, smartphones, webcams, gaming consoles etc., drastically increased during the lockdown, putting pressure on the demand for these ICs.
  1. Silicon shortage - The silicon used in semiconductor chips is also used to manufacture vials for covid vaccine, leading to an increase in prices of silicon and putting increasing pressure on an already strained supply chain.
  1. China – US trade wars - In 2020, US placed restrictions on Chinese chip manufacturer, Semiconductor Manufacturing International Corporation (SMIC), putting pressure on other chip manufacturing companies, who were already facing increased demand. US also banned foreign companies whose chips use American technology, from selling to Huawei over espionage allegations.
  1. Stockpiling by chip manufacturers – In anticipation of putting on US blacklist, Huawei Tech began stockpiling chips from 2019, which contributed to the already stretched capacity at Huawei’s main foundry supplier TSMC. Further, double booking by customers, who were anxious to secure the inventory, further intensified the strained pipeline, thereby further impacting the supply chain.   
  1. Taiwan drought – Taiwan experienced drought in 2021, which led to acute shortage of pure water needed by chip manufacturers for cleaning factories and wafers.
  1. Storm in Texas and fire in Japanese factory halted production and led to increasing pressure on an already existing shortage.
  1. 5G – Rollout of 5G across various sectors in many countries further increased the demand for radio-frequency semiconductors.
  1. Cloudification - As more companies expand and store their data in cloud, this requires more data centres to be built, leading to use of high quantities of ICs, resulting in further shortage of these chips.
  1. Production lines shut down in Automotive sector – Due to shutdown of production facilities due to decreased demand during Covid lockdowns, many auto OEMs cancelled their orders of ICs, which are used in car electronics, including ADAS systems – driver assistance and navigation systems, anticipating a decrease in demand. However, once the lockdown lifted, the demand bounced back, and OEMs were conducting business as usual, IC manufacturers were unable to meet the increasing demand. In addition, the just-in-time strategy employed by automakers for semiconductor chips also added to the demand pressure.

 

Do these shortages keep recurring?

This is not the first time that IC shortage has happened. The chip industry, and the customers involved, typically work on a just-in-time model and they are routinely affected by disturbances, whether natural or man-made.

Some instances include Fukushima earthquake, which damaged wafer fab operations at Renesas Electronics, a leading supplier of ICs. Another example of such shortage was in 1997 when the Tamagotchi digital pets (a type of keychain made in Japan) became very famous, which used up all the semiconductor chip capacity in Taiwan, whose effects spilled over to other sectors as well.

The effects of this shortage are far-reaching and spread across various sectors, which affect the day-to-day life of an average consumer.

 

Blog 2 of this series will focus on the impact that this crisis is having on various sectors and Blog 3 of the series will share insights on what is the road ahead and how are companies and governments across the world tackling this situation and taking corrective action.


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Vandhna Babu
Principal Analyst - Research

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