At the nucleus of advanced civilization, chips, called semiconductors and microchips, are the brains of today's electronics. The rapid acceleration of the "internet of things," and the future before it, has launched these tiny little chips ahead of oil and gas as the world's essential commodity for input and growth. With an already fragile supply chain, the demand for chips skyrocketed as the pandemic shut down the global economy, leading to delays that may linger for a year or more.
An American invention, chips—minute wonders that host billions of transistors within them—bring to life almost everything in modern society, including cars, computers, washing machines, refrigerators, electric toothbrushes, dishwashers, phones, hospital ventilators, and fighter jets. Chips vary in size and sophistication depending on their end-use. Twenty-five years ago, 37 percent of chips were manufactured in the U.S. Today, that number is only 12 percent.
James Lewis, senior vice president, and director of the Strategic Technologies Program at CSIS, pointed out that building a chip factory, which has been consistently shrinking over the years, can cost $10 billion, a prohibitive price to most companies. He added, "These are multibillion-dollar facilities at the cutting edge of science."
What is the Chip Shortage?
There appears to be no end in sight to the issues facing chipmakers. The COVID-19 pandemic forced many factories to halt production, making supplies needed for chip manufacturing unavailable for months. As society moved to remote electronic communication, the pandemic-driven lockdown increased demand for consumer electronics and caused a ripple effect up the supply chain, causing orders to accumulate as manufacturers struggled to keep up with the increased demand. The situation has led Patrick Penfield, a professor of supply chain practice at Syracuse University, to declare:
"Right now, we have a global supply chain in crisis. We've just never seen anything of this magnitude impact us before."
Penfield added that right now, it can take six months for a chip order to be filled. The current need for chips is so great that manufacturers are unable to make enough chips to meet it at this time, suggesting consumers will soon be seeing higher prices for fewer goods. Making matters worse, approximately 90 percent of the world's electronics travel through China's Yantian port. COVID caused the port and other ports in Asia to close, leaving hundreds of container ships waiting to dock. The various parts of the supply chain were not able to handle the bottleneck.
What Led to the Chip Shortage?
As previously mentioned, the unprecedented economic shutdowns resulting from the pandemic were a devastating blow to chipmakers. Before that, in 2018 and 2019, the trade wars between the U.S. – China, and Japan – Korea caused market turbulence for chipmakers. The trade wars added to mounting concern over the consequences geopolitical conflicts had on manufacturing and distribution. Both trade wars created extended lead times, increased pricing, and added to constraints on raw materials. Also contributing was the escalating tension between the U.S. and China and growth in 5G and automotive industries.
In the second half of the pandemic, as consumers avoided public transportation and sought more customized vehicles, the automotive industry experienced a significant increase in demand. Recovery for automakers was delayed as the supply chain encountered shortages in 8-inch wafers and ABF substrates needed for semiconductors manufactured in cars. According to Lewis, in an effort to allow chip companies to shift and make chips for consumer products, automakers like Ford, Volkswagen, and Toyota cut production when the industry was about to rebound. This move led to a shortage of car chips. Estimates indicate the U.S. auto industry will manufacture at least 1.5 to 5 million fewer cars this year. Tesla rewrote its software to support alternative chips to maintain its production levels.
Also adding to the situation was a fire at a plant in Japan which had a significant impact on the supply chain. Additionally, severe winter storms in Texas forced some of America's only chip plants to stop production. Severe drought in Taiwan slowed chip production as well.
China's Role in the Chip Shortage
Although not the leading cause, Taiwan's tense relationship with China plays a role in the current chip shortage. With Taiwan driving the world in chip production, the potential for military conflict between the two nations "puts American access to the chip industry in potential jeopardy, and could be catastrophic for many industries that would be unable to get the chips they rely on." Lewis added:
"China is deeply tempted to just seize Taiwan. The Chinese are desperate to have their own chip industry. It's become a focal point for the competition between the US and China."
Looking Ahead
Meanwhile, the White House reported in April that the Biden administration's $2 trillion infrastructure bill includes $50 billion for semiconductor production and research. The Senate has passed a bill offering tax credits and other incentives for chip producers. American chipmaker, Intel has announced plans to increase their chip production, while Taiwan Semiconductor Manufacturing Co. and Samsung scout locations for the factories they plan to build in the United States. Still, it will take years before these factories can ramp up their chip production.
Presently, opinions vary on when the shortage will end, but most agree it will easily drag well into 2022. According to Lewis, “We’ve probably got about nine, 10 months of this to live through. If you can afford to wait, prices will go down.” Penfield added:
“It’s gonna be a tough holiday season. One thing I would caution consumers on is you probably won’t see the variety that you’re accustomed to. If you can buy before the holiday season really gets going, I think you’re going to be in good shape.”
