28.09.22
WHAT NEXT FOR CHIPAGEDDON?
It started with gamers struggling to buy new graphics cards. Then Apple had to delay the release of its iPhones. If that wasn’t a sure sign of the impending apocalypse, next up, the latest generation of Xbox and PlayStation consoles trickled off the production line at a snail’s pace. Now supply chain disruption has become a top threat across many industries, most notably car production, labour and recruitment and, of course, consumer electronics.
Cars, iPhones, refrigerators, washing machines, house alarms, laptops, dog-grooming machines, you name it: if it does something cool, it most likely contains at least one, if not many, computer chips. And unfortunately, there currently just aren’t enough of them to go around.
You don’t have to be a tech genius to realise that this is very bad news. Chips make the world go round. Last year car manufacturers like BMW and Mini literally had to close their doors (and used car prices skyrocketed in response). Now, all eyes are on the semiconductor industry as it seeks to tackle the crisis. You might be thinking, if computer chips are so important, can’t we just make more of them, and fast? Here’s where we come up against some uncomfortable truths…
WHERE ARE ALL THE CHIPS?
There are several major factors that have played a role in the shortage so far and, as usual, most of them can be traced back to COVID. When the pandemic hit, manufacturers were expecting sales to drop in line with lockdowns and projected job losses - so, to manage their own business needs, they adjusted output accordingly.
According to CNET, semiconductor chip orders were put on hold as manufacturers braced for economic impact, and existing supplies were reallocated. In fact, demand increased sooner than expected. While it’s true that the automotive industry took its foot off the gas for a little while, what we actually saw was a boom in demand for electronics, as people needed more devices than ever to help them cope while working from home. Manufacturers switched their production line, temporarily ignoring cars in favour of other products. When the automotive industry bounced back, its own production lines soon found they were missing one very important piece of the puzzle - chips.
There are other factors at play. According to the BBC:
“There are two main approaches to chip production right now: using 200mm or 300mm wafers. This refers to the diameter of the circular silicon wafer that gets split into lots of tiny chips. The larger wafers are more expensive and are often used for more advanced devices. But there's been a boom in demand for lower cost chips, which are embedded in an ever-wider variety of consumer products, meaning the older, 200mm technology is more sought after than ever.”
Some industry news sites got wind of a potential shortage back in February 2020. As the pandemic unfolded, early signs of fluctuating demand led to stockpiling and advance ordering of chips by some tech firms, which left others struggling to acquire the components.
Add a few poorly-timed acts of God, runaway shipping and air freight costs, and escalating trade tensions between Chinese, US and other markets into the mix, and it’s easy to see why the past few years have proven to be a perfect storm in bringing the electronics industry to its knees.
It’s reported that car manufactures had to cull 3.23 million vehicles from production due to chip shortages this year alone. This comes on top of the 10 millions cars lost from production last year. Recent analysis suggests that the crisis is far from over, and some companies may have to wait until 2024 or later before they start to recover .
The fact is that our need for semiconductor chips is increasing almost daily. With the rollout of 5G and evolution of other technologies only intensifying the impact of the shortage, all of us having a growing stake in ensuring there is a plan to solve the problem in both the short and long term.
HOW CAN WE AVOID IT HAPPENING AGAIN?
Pandemic aside, one of the biggest issues here is the vice-like grip on the market currently held by electronics mega-giants in South Korea and Taiwan. TM Lombard economist Rory Green estimates that the two Asian nations account for 83% of global production of processor chips and 70% of memory chips: "Like Opec was for oil, Taiwan and South Korea are near monopoly producers of chips."
When you consider the proximity of these countries to China, it’s no surprise that the US and others are calling for the production of chips elsewhere. China makes more cars than any nation, posing a potential threat to future supplies if it were to gain control of factories.
A group of 15 senators has written to President Biden urging him to take action to "incentivise the domestic production of semiconductors in the future". This is by no means a quick fix; semiconductor factories cost billions of dollars to build and require a well-trained workforce.
As it stands, existing chip makers are responding to sustained demand by increasing capacity and are likely to continue to dominate in the future.
Other markets need to think seriously about how to respond to this challenge. After all, our appetite for chips shows no sign of abating.
