A lack of vital semiconductors has disrupted industries around the world throughout 2021, and the global chip shortage shows no signs of coming to an end.
While capacity in the industry has always had its ups and downs, the severity of the 2021 shortage should not be underestimated. Linley Gwennap, principal analyst at tech research company the Linley Group, told Tech Monitor in June that the current situation is “the worst [shortage] I have seen in my three-decade career” covering the sector.
But why are we in this situation, and how and when will it be resolved?
What is the cause of the global chip shortage?
The global chip shortage was prompted by the Covid-19 pandemic and the surge in demand for electronics. Consumers and businesses started buying new laptops and servers to cater for staff working remotely and children being home-schooled. So, whereas worldwide semiconductor sales declined between 2018 and 2019, in 2020 sales grew 6.5%. This rapid growth has continued in 2021, and according to trade organisation the Semiconductor Industry Association, sales for May 2021 were 26% higher than the same time last year.
It is, therefore, no surprise manufacturers are struggling to keep pace, but the pandemic has also exposed pressure points in the global chip supply chain, with the vast majority of manufacturing being carried out by two companies – Taiwan’s TSMC and South Korea’s Samsung. These foundries are particularly dominant when it comes to the leading-edge chips used in mobile devices or for military applications.
Aside from the pandemic, other factors contributing to the shortage include a drought in Taiwan, the worst for 50 years, which has left TSMC and other manufacturers struggling to get hold of sufficient quantities of water, which is crucial in chip manufacturing. “Other events have held back supply, such as fires in factories, power outages and the transportation blockage at the Suez Canal,” said Shane Rau, a semiconductor analyst at IDC.
Which sectors are affected by the global chip shortage?
The automotive industry has been hit particularly hard because it scaled back its orders at the beginning of the pandemic as demand for vehicles dropped, and then found itself at the back of the queue when it wanted to restart production at scale. “The [chip] foundries business model is based on profit margin and volume,” Gaurav Gupta, vice-president for semiconductors and electronics at Gartner, told Tech Monitor earlier this year. “Automotive electronics is a very small fraction [of their business], so now when demand has picked up and the automotive guys need chips they are not seen as a priority.” Joe Biden’s Covid-19 stimulus package, which saw American citizens given up to $2,000 by the government, has also seen demand for new cars in the US market spike. “A lot of people have that money burning a hole in their back pocket, and are putting it down on a car,” said Calum MacRae, head of automotive at GlobalData.
What is being done to solve the global chip shortage?
Semiconductor supply had been expected to rebound by the end of 2021, but the global chip shortage is now set to last into next year and could remain until 2023, experts fear. The current investments in capacity will not make an impact for some time, Malcolm Penn, CEO of industry analyst firm Future Horizons, told Tech Monitor in June. “CapEx is now starting to happen but it takes a year to build out and kick in,” Penn said.
The final quarter of 2021 could prove a key indicator as to how long the chip shortage will continue, according to Penn. Demand typically slows in Q4, which may help suppliers catch up on orders. “That slowdown is unlikely to be severe enough to bring supply and demand back into balance, [but] if we limp through it, shortages will persist through the first half of 2022 until the current CapEx spend starts to impact supply,” Penn said, adding that if demand continues to be stronger than usual, “the shortages could easily persist into the first half of 2023.”
Can we expect another global chip shortage in future?
Even when the current global chip shortage ends it is likely more supply problems are just around the corner as demand for electronics grows further. “The capacity [the chip makers] are putting in place now will be enough for the next few years, and as these things come on stream there’ll be too much capacity,” said Gartner analyst Alan Priestley. “But then, in another five years, we’ll be maxing out capacity again because everyone wants the latest smartphones, and we expect to see demand for things like smart homes and electric vehicles increasing. The industry is very cyclical; that’s just the nature of the beast.”
Join Our Newsletter
Want more on technology leadership?
Sign up for Tech Monitor's weekly newsletter, Changelog, for the latest insight and analysis delivered straight to your inbox.