The worldwide shortage of semiconductor chips continues to affect industries from consumer electronics to the auto sector, revealing weaknesses in the intricate supply chains that fuel modern technology.
Starting in 2020, this crisis has been fueled by the convergence of numerous factors, including heightened demand, supply chain disturbances, geopolitical tensions, and the structural constraints of the semiconductor industry.
Identifying the reasons for this shortage gives insight into the difficulties of sustaining a strong global technology system.
Surge in Demand for Electronics
Another key cause of the semiconductor shortage is the record-breaking demand for electronic devices. The global COVID-19 pandemic, which started in 2020, accelerated the process of digitalization globally, causing unprecedented demand for electronic devices. Lockdowns and work-from-home policies triggered demand for laptops, tablets, and other equipment to enable remote communication and amusement. According to the Semiconductor Industry Association, global semiconductor sales reached $555.9 billion in 2021, a 26.2% increase from the previous year, reflecting this demand spike. In 2023, this trend persists as hybrid work models and the expansion of 5G networks continue to drive the need for advanced chips in smartphones, IoT devices, and network infrastructure.
The emergence of new technologies has also exacerbated supply. Artificial intelligence, machine learning, and self-driving vehicles need more advanced chips, like GPUs and specialized AI processors. The car industry, especially, has experienced a steep rise in chip demand as cars come equipped with sophisticated driver-assistance systems (ADAS) and infotainment. This sudden demand caught manufacturers by surprise, as they were not expecting the sudden change in consumer behavior.
Supply Chain Disruptions
The semiconductor supply chain is highly complex, involving raw material extraction, wafer fabrication, and chip assembly across multiple countries. The pandemic exposed its fragility. Factory shutdowns in Asia, where most semiconductor production occurs, disrupted manufacturing in 2020 and 2021. For instance, Taiwan, home to TSMC (the world’s largest chip foundry), faced production constraints due to labor shortages and logistical bottlenecks. These disruptions rippled through the supply chain, delaying chip deliveries to industries worldwide.
Natural disasters and environmental issues exacerbated the situation. There was a severe drought in Taiwan in 2021 that restricted water supplies needed for semiconductor production, which needs enormous amounts of ultra-pure water. The outbreak of a fire at a Renesas Electronics factory in Japan, a leading supplier of auto chips, further curtailed production. Although by 2023 there had been a return to recovery, the incidents began to emphasize the susceptibility of concentrated production centers.
Geopolitical tensions and trade restrictions
Geopolitical considerations have been among the key drivers of the shortage. The Trump administration escalated the U.S.-China trade war, which saw America impose limits on Chinese semiconductor companies such as SMIC and Huawei. The limitations denied them access to cutting-edge manufacturing machinery and intellectual property, thereby limiting chip supply worldwide. In 2023, continuing export controls by America and its allies, whose main target is to limit China’s technological progress, still destabilize the global semiconductor supply chain. Though these steps are addressing national security issues, they have cut back Chinese manufacturers’ output of chips, tightening supply even further.
Also, the dependence on a handful of major players, including TSMC and Samsung of South Korea, is a bottleneck. These firms manufacture most of the world’s cutting-edge chips, and any interruption in their activity—either geopolitically or naturally—has disproportionate effects. Moves to diversify production, like the U.S. CHIPS Act of 2022, seek to remedy this, but new plants won’t be up and running until the latter part of the decade.
Structural Constraints in Semiconductor Manufacturing
Structural limitations in semiconductor manufacturing have worsened the shortage. Chip production is laborious and costly, with new fab investments worth billions of dollars and several years to construct. Even with investments by firms such as Intel and TSMC to increase capacity in 2023, the sector cannot keep up with demand. The manufacture of leading nodes (e.g., 5nm and 3nm chips) is most limited, as few foundries have the capability and tools required to manufacture them.
Additionally, the sector experiences labor shortages and key raw materials like neon gas and silicon wafers. Neon used for photolithography in manufacturing chips comes mainly from Ukraine and Russia, areas that experienced conflict in 2022. This disrupted supply chains, resulting in increased costs and slowed production.
Path Forward
The 2023 global shortage of semiconductors is a complex crisis fueled by demand spikes, supply chain bottlenecks, geopolitical rivalries, and structural constraints. Governments and businesses are building new factories and diversifying supply chains, but these responses will take years to pay off. Meanwhile, industries need to adapt by maximizing chip use, finding alternative suppliers, and investing in resilient supply chains. The shortage highlights the pivotal role of semiconductors in the economy of the world and the necessity of concerted efforts to guarantee their future stable supply.
