The reason behind Global SemiConductor Chip Shortage

Computer chips, also known as semiconductor chip shortage, are used in millions of goods today, including vehicles, washing machines, cellphones, and many more.

The tech sector has reached a critical moment. A shortage of them is now preventing the industry from meeting demand. Numerous popular items are thus in limited supply.

The PS5 has become very difficult to obtain. Several major automakers such as Toyota, Ford, and Volvo have been forced to reduce or temporarily stop production at their plants. Apple has warned that the shortfall might hurt iPhone sales.

CSSI international, a US business that produces dog grooming devices, is experiencing the consequences. Several buyers have already identified these issues. For example, used-car sales are on the rise because new vehicles, which are frequently packed with thousands of separate chips, are in high demand.

It’s conceivable that the scarcity could affect even more items in the coming months, especially during the holiday season. As a result of the shortage of chips, current items typically have more than one of them.

Piotr Esden-Tempski is the creator and proprietor of 1bitsquared, an electrical hardware company headquartered in the United States. Several thousand electrical interface boards, which allow students and makers to link numerous appliances to their computers, are in his books.

However, Mr Esden-suppliers Tempski’s claims that some of the semiconductor-containing components he needs will be unavailable for at least a year. “You can’t just put it together and leave one element out; it won’t work,” he adds.

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• This is a scenario that has been building for years, not months.

Semiconductor Chip Shortage

According to Koray Köse, a Gartner analyst, the advent of 5G, which boosted demand, and the US decision to prohibit the sale of semiconductors and other technologies to Huawei were among the challenges confronting the chip sector before the epidemic. The Chinese company immediately swamped chip manufacturers outside the United States with orders.

Less evident manufacturing difficulties have also impeded the availability of some components. Using 200mm or 300mm wafers, for example, is one of the two primary ways to chip manufacturing right today. The diameter of the circular silicon wafer divided into many little chips is referred to as this.

Larger wafers are more costly and are often utilized for more sophisticated electronics.
However, due to a surge in demand for lower-cost chips, which are increasingly integrated with a broader range of consumer items, the older 200mm technology is in higher order than ever.

In February 2020, industry news site Semiconductor Engineering warned of a chip shortfall, partly due to a scarcity of 200mm production equipment. Early signals of changing demand led to the hoarding and advanced purchase of chips by certain IT businesses as the epidemic developed, leaving others scrambling to obtain the components.

Laptops, tablets, and webcams were required for people working from home, and semiconductor companies were forced to close during the lockdown. Consumers have had difficulty purchasing the gadgets they desire at times. However manufacturers have been able to keep up with demand in the past.

The pandemic, however, was not the primary reason for the chip scarcity, according to Mr Köse: “That was probably simply the final drop in the bucket.” Unfortunate events have lately aggravated the situation. A severe winter storm in Texas forced the closure of semiconductor plants, while a fire at a factory in Japan prompted similar delays.

Logistical issues are exacerbating the problem. For many years, according to Oliver Chapman, CEO of OCI, a global supply chain partner, the shipping cost was not a significant problem for many IT companies since their goods are relatively tiny, and suppliers could put several of them into a single 40ft container.

However, due to unexpected swings in demand during the epidemic, the cost of transporting cargo containers worldwide has risen dramatically. It is accompanied by an increase in air freight rates and a scarcity of lorry drivers in Europe.

According to George Griffiths, editor of global container markets at S&P Global Platts, sending a single 40ft container from Asia to Europe costs $17,000 (£12,480). Compared to a year ago, when it cost about $1,500 (£1,101), the price has increased by more than tenfold.

Chip producers are boosting capacity in response to persistent demand, but this will take time, according to Mr Köse, not least because semiconductor facilities cost billions of dollars to construct. “That isn’t going to be addressed by Christmas, and I have my doubts that it will be solved by Black Friday [November 2022],” he continues.

The CEOs of the tech behemoths appear to be well aware of this. Intel and IBM’s CEOs have lately stated that the chip scarcity may continue for two years.

“It will take many years to achieve… a better equilibrium,” says Seda Memik, a Northwestern University professor of electrical and computer engineering and computer science. She further claims that chip demand has been increasing rapidly that scarcity was “inevitable” at some time.

“It’s highly expensive and demands a well-trained crew,” she says of establishing new chip plants fast. It’s a possible stumbling block for proponents of “reshoring,” or moving chip production to a broader range of nations, including those in the West, to relieve strain on global supply chains.

Mr Chapman isn’t persuaded the market is up for business. He claims that chip producers in Asia, such as those in Taiwan, China, and South Korea, are already competing to satisfy demand and will continue to do so in the future.

Consumers are unlikely to notice price increases or significant shortages of digital items this Christmas, according to Mr Köse. Certain in-demand products, such as gaming consoles, may become difficult to obtain, requiring buyers to wait many months for the item they desire. He does not, however, anticipate interminable delays.

The basic conclusion is that the pandemic has exacerbated an already precarious position for chip producers – we’re in the midst of a technological revolution, and supply can’t keep up – and it won’t be resolved quickly.

Main Reason behind Semiconductor Outage

1) COVID-19 pandemic

The primary reason for the worldwide chip shortage is the COVID-19 epidemic. Chip production facilities shut down due to global lockdowns, causing the stock to deplete. Because of the COVID-19 epidemic, more individuals were forced to stay at home and improve their electrical equipment, such as cameras, monitors, and computers, to keep them connected and engaged. Traditional computer sales increased by 26.1 per cent year over year in the fourth quarter of 2020.

2) China–United States trade war

The US government imposed limitations on Semiconductor Manufacturing International Corporation (SMIC), China’s largest chip maker, in 2020, making it more difficult for them to sell to American firms. Due to the limitations, businesses such as Taiwan Semiconductor Production Company Limited (TSMC) and Samsung were compelled to utilize other manufacturing facilities. On the other hand, these businesses were already operating at total capacity.

3) Taiwan Drought

Taiwan’s most significant drought in more than a half-century struck in 2021, causing issues for semiconductor makers that rely on enormous volumes of ultra-pure water to clean their facilities and wafers. TSMC’s facilities utilise more than 63,000 tonnes of water per day, accounting for more than 10% of the supply of two nearby reservoirs.

Companies Affected due to Semiconductor Chip Outage.

The chip shortage has significantly impacted firms such as Apple, LG, and other Chinese electrical and smartphone manufacturers.

However, the issue is far more prevalent than it looks. While automakers and consumer electronic goods industries have been hit the hardest, semiconductors are used in almost every modern technology.

Because of the global supply chain disruption, prices of daily appliances and electronic products — from televisions to smartphones — have skyrocketed.

Mecarmakerscarmakers have been compelled to raise vehicle costs due to a scarcity of semiconductor chips. Maruti Suzuki has increased car pricing in India owing to rising production costs. The increased input costs might be due to global semiconductor scarcity. Given the lack of chips, it wouldn’t be unexpected carmakersar-makers raised their pricing as well.

According to Goldman Sachs, the global chip crisis is far from finished, and prices of numerous electronic goods and components might rise by 1% to 3% shortly.

Which stocks benefit from chip shortage?

Stock market investing can be challenging at times. Semiconductor stocks have resurfaced as a result of the tech sector’s recovery. After all, semiconductors are considered by some to be one of the most significant technological sectors in the world today.

The Semiconductor Industry Association (SIA) reported that worldwide semiconductor sales in May 2021 were $43.6 billion worldwide. To put that in perspective, this represents a 26.2 per cent rise from the previous year. In May, the industry delivered more units than any prior month in its history on a three-month moving basis. Naturally, investors would place their trust in some of the industry’s biggest names.

NVIDIA Corporation’s (NASDAQ: NVDA) stock, for example, has doubled in value in the last year. Meanwhile, in the microprocessor business, Advanced Micro Devices, Inc (NASDAQ: AMD) is posing a serious challenge to Intel.