Explained: The Global Semiconductor Crisis

Imagine yourself living in this world devoid of cars, smartphones, and video game consoles. Pathetic, isn’t it? What if that becomes a reality soon? Yes, with demand for microchips exceeding their supply, more than 169 industries have been severely affected which has resulted in acute shortage and long queues amongst consumers for graphics cards, video game consoles, cars, and other products that require semiconductors. Who would have ever even thought how significant these minute chips can be in today’s modern world!

Introduction

Technically, Semiconductors, sometimes referred to as integrated circuits (ICs) or microchips, are made from pure elements, typically silicon or germanium, or compounds such as gallium arsenide. These tiny objects perform a lot of functions such as powering displays and transferring data. These are the backbone of many established & growing industries like Digital Devices, Automobiles, Communication, Banking, Defense, E-commerce, AI, and whatnot.

REASONS THAT GAVE BIRTH TO THE GLOBAL SCARCITY

1. Covid-19 Pandemic

Can you cite any issue in recent times where our unwelcome companion was not a reason for causing it? No, right? Coronavirus has been degrading human health as well as hitting numerous industries, some of which are bleeding funds to remain alive. The industries were shut down and consequently, the production was hit, resulting in depletion in the stock of the semiconductors. What actually happened is, the pandemic disturbed the equation of Demand and Supply in the world.

After imposing nationwide lockdowns in many countries, the demand of many products, manufacturing of which have direct involvement of the electronic industry or have its indirect participation, dwindled whereas demand for electronic devices like smartphones, laptops, etc. was booming because of work from home and leisure activities. Owing to this, the supply of microchips was routed towards the production of these devices. Now since the economy is reviving and all of sudden every industry is demanding semiconductors, the equation hasn’t adopted the new normal yet.

2. US-China Trade War

The world witnessed the tussle between Donald Trump and Xi Jinping last year and the restrictions imposed by the US (leading chip manufacturing) over Chinese semiconductor manufacturers, for instance, the biggest Chinese microchips manufacturer, Semiconductors Manufacturing Company Limited, affected the global supply chains.

3. Dependence on Taiwan

Taiwan Semiconductor Manufacturing Corporation (TSMC) is the world’s largest chipmaker having around 56% share and customers ranging from Qualcomm to Apple. According to a Bloomberg report, making chips is a complex process that typically takes more than three months and requires large factories, dust-free rooms, very expensive machines, molten tin, and lasers as prerequisites. However, in 2021, Taiwan faced its worst drought in the last 50 years, which caused problems among chip manufacturers that use large amounts of ultra-pure water to clean their factories. For example, TSMC’s facilities used more than 63,000 tons of water a day.

INDUSTRIES IMPACTED DUE TO THE SHORTAGE

The crisis came at a time when chip inventories were already running low across most sectors around the globe. Input shortages and low inventories will likely lead to production cuts and delayed shipments in the September 2021 quarter and even later. These shortages are expected to persist in Q2-Q3 of FY22 and supplies are expected to improve in a staggered manner and eventually may come down to normal by FY23-end, according to Raghunandhan N L of Emkay Global.

This semiconductor shortage impacts a whopping 169 industries in some way – from steel products and concrete manufacturing to industries that manufacture ACs and refrigerators to breweries. Even soap manufacturing is adversely affected by the chip crisis. Some major industries that are likely to be the worst hit are:

Graphics cards and gaming PCs

The chip crisis made it extremely difficult to acquire a new graphics card, and a simultaneous increase in cryptocurrency mining in 2021 further aggravated the situation. Finding gaming PC parts became more difficult and even more expensive. Moreover, such PCs rely on either AMD or Nvidia to make their dedicated graphics, both of those companies upgraded to popular new models that are now almost impossible to find.

Video game consoles What did you do while locked in your home? Play games and chill? Well, you are also responsible for the crisis. As the release of the ninth generation of video game consoles coincided with the pandemic, demand skyrocketed. On the other hand, both major gaming giants, Sony and Microsoft warned that the short supply of the PlayStation 5 and Xbox Series X and S respectively will continue till 2022. As if that wasn’t enough, then came another stroke for the stricken – both Sony and Microsoft use AMD chips manufactured by TSMC in their ninth-generation consoles, which puts extra strain on the supply chain. Now the scenario is, people are reselling the consoles on websites like eBay for 50% to 100% more than their retail price.

Cars and Automobiles

An average modern car needs between 1,400 and 1,500 chips, some even up to 3,000. Cars account for 15% of global chip production. At the start of the pandemic, car manufacturers wrongly predicted that sales would plummet and thus, canceled chip orders. To cut short, they were unprepared to meet demand. Whereas, chip manufacturers had more prior commitments from the tech sector, which further decreased capacity for car chips.

After all, what could have possibly gone wrong other than the pandemic? Well, Ford parked thousands of unfinished vehicles at Kentucky Speedway as the company waited for chips to finish assembling those cars. Toyota planned to cut vehicle production worldwide by 40 percent in September 2021, while General Motors announced it would stop production of almost all cars at its North American plants for a couple of weeks. The consequence – demand outpaced its supply!

THE INDIAN CONTEXT

Talking about India, demand for semiconductors stands at around $24 billion and is expected to reach $100 billion by 2025. The economy is reviving and demand for electronic durables is going up. The need for Semiconductors is soaring in India as the electronic industry is expanding its roots in India. Also, many smartphone brands including Apple, Samsung, etc. started or expanded their manufacturing and assembling units in the country in past years which adds to the numbers of semiconductors required.

Due to the shortage in supply, automobile manufacturers are the ones who are the most impacted for the time being. Maruti Suzuki, the country’s largest car manufacturer, has guided to cut production by around 60% at Haryana and Gujrat-based plants.

India can build upon this opportunity but the demand cannot be fulfilled in the short term. So, the government needs to create a long-term blueprint to grow the industry and strengthen the whole domestic electronic industry to substitute the import dependence and prevent the disturbance in global supply chains due to the geopolitical tussles.

Government Aid

India lags in the establishment of semiconductor wafer fabrication (FAB) units – due to a weak ecosystem and shortage of resources as compared to more competitive bases like China and Vietnam. Still, India is specializing itself in Chip Designing. Major Semiconductors companies have their fabless Intellectual Property (IP) and System-on-Chip (SoC) design houses in India. The government has to take effective initiatives to create a robust infrastructure for chip designing and manufacturing in India. Back in March-April 2021, the govt. gave hints of providing $1 billion incentives for every company who would start semiconductor manufacturing in India.

Countering China and Multilateral Agreements India can exploit the negative sentiments against China and attract the companies leaving towards South Asian Nations. The government is trying to attract the companies by providing attractive deals under the Production Linked Incentive Scheme and has been successful to some extent. Also, India can make agreements with different nations and put forward this opportunity to create global supply chains with its allies. India is a part of the Quad group. There have been talks about D-10. These nations can bring a robust mechanism to work on the efficient supply of semiconductors across the globe.

CONCLUSION

It would be no exaggeration to hold Covid, climate change and Trump liable for the global chip shortage. The ongoing crisis is unprecedented and there seems to be no clear way out in the short term. The only thing that is crystal clear for now is, with data being the new oil, this digitalized world will be jammed without semiconductors. To overcome this shortage, rampant measures need to be taken at a global level or else you have probably already imagined what it will look like!

Credits- Content- Aryan and Rajat Infographics- Anmol and Punit