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Technology / Hardware

Here’s what we know about the global chip shortage

A lack of crucial semiconductors is causing problems for industries and governments far and wide. Why is there a chip shortage, how can it be solved and when will it end?

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?

chip shortage
How and when will the chip shortage be resolved? (Photo by aha Heang 245789/Shutterstock)

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.

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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 shortage has affected a wide range of business sectors, delaying shipments of Sony’s new PS5 games console, as well as restricting the supply of TVs and other OLED displays. The automotive industry has been hit particularly hard, with production lines around the world having to close for weeks at a time due to a lack of components. The shortage for automakers appears to be worsening, with both Ford and General Motors announcing prolonged shutdowns of plants across North America, while it has led to Jaguar Land Rover halving its sales expectations for 2021. According to analysis from GlobalData, the opportunity cost to the automotive industry resulting from lost production due to the global chip shortage stands at $47bn and rising.

Why is there an automotive 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?

With demand for semiconductors likely to continue to increase as more industries undergo digital transformation, chip makers and governments are working to build more capacity into supply chains. TSMC is investing $100m in additional capacity over the next three years, while Samsung and SK Hynix, along with the South Korean government, have pledged to make $451bn of investment in capacity and incentives for chip makers.

But there is a recognition that chip supply chains must be diversified to decrease the reliance on Taiwan and South Korea. “America only makes about 10% of the chips it uses,” said Mike Orme, who covers the semiconductor market for GlobalData. “That’s not music to the ears of the American military or aerospace industry.” US president Joe Biden has pledged to support the semiconductor sector as part of his Build Back Better plan for boosting manufacturing, and a massive bipartisan tech funding bill introduced last month would see $52bn earmarked for US chip production. Intel, now under the leadership of Pat Gelsinger, plans to expand its fab capacity and is spending $20bn on two new factories in Arizona.

The European Union states have also agreed to try and grow chip building capacity across the bloc, but the UK government has yet to reveal any plans to help its domestic semiconductor sector. Indeed, the UK’s biggest chip factory, Newport Wafer Fab, is now in the hands of the Chinese after a take-over by Nexperia.

When will the global chip shortage end?

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.”

Though chip company executives have previously been bullish about the prospects of the shortage coming to an end sooner rather than later, many have sounded more cautionary notes in recent statements. Nvidia CEO Jensen Huang said recently that he expects “at least another year” of demand far exceeding supply. Intel’s Pat Gelsinger, meanwhile, believes the company will continue experiencing problems into 2023, though he told investors on the company’s most recent earnings call that things would get “incrementally better” throughout 2022. “We still have some rough road in front of us,” Gelsinger warned.

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.”

Matthew Gooding

News editor

Matthew Gooding is news editor for Tech Monitor.