When the Chips are Down – Lessons from the Semiconductor Shortage

The global shortage in semiconductor chips has caused major headaches for all sorts of manufacturers, tech companies and consumers throughout 2021 and the predicament is not expected to subside any time soon. The causes and consequences of the chip drought are well known by now and have taught a valuable lesson to stakeholders in the importance of diversifying supply chains and establishing systems of supply in closer proximity to end-users. In this article we investigate the lessons from the semiconductor shortage.   

What is a Semiconductor?

Semiconductors are an essential component of the microchips that power virtually every modern electronic device. Whether it be a simple remote control unit for changing channels on the television, or a supercomputer used to simulate weather patterns. Semiconductor chips are typically comprised of silicon, which conducts electricity more than an insulator, such as glass, but less than a pure conductor, such as copper or aluminium. Their conductivity and other properties can be altered with the introduction of impurities, called doping, to meet the specific needs of the electronic component in which it resides.

What caused the shortage?

Looking back, it’s impossible to point to one or two reasons for the chip shortage, as it was a whirlwind of problems coming together at the wrong time. While chips themselves are resilient, made to handle extreme temperatures, vibrations and other external shocks, the global semiconductor supply chain is relatively fragile, prone to disruptions from natural and man-made shocks.

The COVID-19 pandemic has had a detrimental effect on global value chains, as is well known by now, but is only one factor in this multifaceted drama. Prior to the virus wreaking havoc, the US-China trade war was generating supply issues. For instance major Chinese electronic goods companies such as Huawei were facing US trade ‘blacklisting’, leading them to begin stockpiling chips by making larger than usual orders with their suppliers, creating tight-capacity at their foundry suppliers.

Understanding the pitfalls on the supply side of the equation is key to explaining why a sudden global disruption like a worldwide pandemic spelt peril for the semiconductor chip industry. As much as 70% of the world’s semiconductors are manufactured by just two companies, Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung. Taiwan, China, and South Korea combine for roughly 87% of the global foundry market. Whilst this concentrated system of chip production had its benefits to major automakers and electronic goods manufacturers, pandemic-induced shutdowns exposed an over-reliance on these Asian-based foundries.

With regards to demand, the global lockdowns caused an unprecedented surge in the market for products that required semiconductor chips. Millions of people were now stuck at home, working or not, demand for consumer electronics went through the roof. Consumers were needing new PC’s for their home offices or spending big on at-home entertainment to cure their boredom. Big screen TV sales saw growth of upwards of 30% and PC sales rose by a massive 50% year on year in 2021. 

In the wake of the shutdowns and job losses, global automakers incorrectly predicted a large collapse in demand for new cars leading them to scale back orders for semiconductor chips that are now used widely in modern vehicles. In reality, stimulus checks and disposal incomes saw vehicle sales strengthen. The chip manufacturing capacity usually reserved for the automakers had been allocated towards the booming consumer electronics market, leaving a significant gap in supply for vehicle chips. The unavailability of chips would impact the production of 1.3 million cars and vans globally in the first quarter of 2021.

The Response to the Semiconductor Shortage

The chip makers have responded to the trailing supply in a variety of ways. TSMC, who supplies chips to the likes of Apple, Intel and Nvidia, and is responsible for producing about 80 per cent of microcontroller chips used in cars, said it would invest US$2.87 billion to expand mature capacity at its fab in Nanjing, China. In November 2021, Samsung Electronics announced it would build a new semiconductor manufacturing facility in Texas. This $17 billion investment will be the largest-ever by the company in the US with the aim to improve supply chain resilience. Similarly, Intel has started building two new facilities in Arizona, at a cost of $20 billion. But they won’t begin mass manufacturing until the second half of 2024. Down the line, Original Equipment Manufacturers (OEMs) have been encouraged to reimagine their supply chains. The focus of OEMs, particularly automakers, has shifted to rebuilding supply networks around the core principles of efficiency and resilience.

At the national level, The United States, the European Union, and China have all committed to growing their country or region’s semiconductor fabrication capacity, a process called localisation. Localisation is not just about avoiding shortages, but also about enhancing national security: For example the proposed US$52 billion CHIPS for America Act was a part of the National Defense Authorization.

Lessons Learned from the Semiconductor Shortage

The experience with the semiconductor market over the past couple of years has provided pertinent lessons for supply chain management as a whole. It has displayed on a global scale how a supply chain is only as strong as its weakest link. Seemingly small disruptions to supply and demand can snowball into significant economic loss. 

Therefore it’s argued that firms and the global economy as a whole would benefit from diversification of supply chains, in order to reduce the risks of over-dependence on a specific region. Interruptions like COVID-19 or natural disasters are near impossible to predict so having contingency plans and backup means of production can allow companies to minimise the impact of further unexpected disruptions.

Localising production is also a valid approach to take. Whilst the process would be expensive and time consuming for semiconductor manufacturing, it’s viable for other types of manufacturing. Given the volatility of today’s freight times and costs, sending manufacturing to the countries with the lowest labour costs no longer consistently results in the lowest cost landed products. Localised sources of supply allow for greater transparency and control over the value chain and strengthen ability to weather unexpected disruptions. There will always be a need for certain commodities to be transported globally, but overall, more localised supply chains provide security for governments and companies, environmental benefits, improved product quality and increase resilience in times of global uncertainty.  There are the lessons the semiconductor shortage have provided to businesses, governments and stakeholders the world over.       

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