Article / April 27, 2021

Why The World Can’t Make Enough Semiconductors

As the supply chain disruptions of 2020 continue to manifest themselves unexpectedly, the world is now facing a global chip shortage. 

Don’t worry, your favorite fried potato snacks are fine — this chip deficit has to do with computers. 

Semiconductors, referred to in the industry as “chips,” are essential components for computer manufacturing. Present in everything from smartphones and laptops to common kitchen scales, these pieces of hardware have fallen prey to several confluences that have resulted in an epic supply crunch. 

But why suddenly, with the brunt of the Covid-19 pandemic seemingly behind us, has this ubiquitous computer part become scarce in the global marketplace?

Exploding consumer demand for electronic goods, a series of unfortunate natural disasters, the global pandemic, and the US-China trade war all play a factor in the sudden supply crunch for this crucial electronic. 

Tech wants to grow, and the industry can’t keep up.

With major global trends and shifts occurring in tandem, lead times for semiconductors now stand at their highest levels in years, eclipsing the 2018 supply crunch. 

Wait times for new chips jumped two weeks in only one month, foreshadowing an increasingly epic shortage.

The most immediately apparent driving force behind the global chip shortage is the average consumer’s increasingly voracious appetite for the component. 

With Covid-19 lockdowns pushing an unprecedented number of people to home offices and remote learning, the demand for computer equipment soared. 

If you’re going to spend weeks on end cooped up inside your house, you may as well upgrade your workspace. 

Computer sales increased a whopping 13% in 2020, the largest increase since 2014.

With more time at home, consumer demand for chips now extends well beyond in-home offices. For example, interest in new gaming consoles is at record highs.

The latest smart devices and gaming systems have further strained the global semiconductor industry. You can hardly find a Playstation 5 or Xbox Series X at a local retailer. 

Companies like Nvidia and AMD will likely have a strain on inventories through the remainder of 2021.

TSMC is warning that the chip shortage may extend into next year and that prices will rise for the foreseeable future.

Samsung has entertained canceling this year’s Galaxy Note release. Simultaneously, the Google Pixel announced manufacturing delays in the face of the global chip shortage.

Consumer demand for electronic equipment isn’t slowing down any time soon, but producers simply have nothing left to sell! 

Unfortunately, nature has had insidious plans for the supply side of semiconductors. 

Three major chipmakers located in Texas endured rolling blackouts from a severe winter storm earlier this year. 

Samsung, Infineon, and NXP all suffered temporary shutdowns as the Texan grid slowly came back online. Meanwhile, Renesas Electronics suffered an intense fire at their Naka Factory in Japan, halting operations. 

Consumers can’t get enough while manufacturers can’t seem to catch a break. 

Tech and auto industry executives recently met with the White House to discuss how they’ll come out on top of the worldwide chip shortage. 

Senator Mark Warner believes the U.S. needs legislation that will position the country ahead of China’s increasing influence in the sector. Chips feed everything from the military to the medical industry, so meetings like these are increasingly common. 

President Biden has also addressed the chip shortage on several occasions. We’ll likely see a significant slice of the $2 trillion infrastructure bill going towards building up the U.S. chipmaking industry.

As 2021 progresses, we’ll continue to hear a narrative around semiconductor manufacturing and national security. 

A product of globalization requires, well, global cooperation.

The global geopolitical environment began to impact the semiconductor industry well before the Covid-19 pandemic blindsided global markets. 

US-China relations continue to sour as the world’s largest manufacturing nation finds itself in a unique position. 

For now, Chinese chip manufacturers like Huawei have plenty of chips ready to hit the market. Still, a lack of market access and available inputs threaten future operations.

Tariffs and strained relations with Western markets leave the long-term continuity of Chinese chip manufacturers in uncertainty. With Google cutting ties with the company and the pressure of US sanctions mounting, Huawei only has an estimated single year of supplies. 

With global demand as it is, Huawei’s growing stockpile of finished chips will find a new home in little time, and that will not include the United States. 

The company’s uncertain future led to Eric Xu, Huawei’s rotating chairman, pointing fingers at the US for the current semiconductor market chaos.

Conversely, the US has ramped up its presence in the semiconductor manufacturing industry since kicking off the trade war with China. 

In a recent virtual meeting, President Biden stated that “there is no reason why Americans should wait” to take advantage of the global manufacturing shortage. One significant factor behind this intense support for the growing US chip industry is the shortage’s impact on auto manufacturing.

Ford has begun to cut shifts in some locations while General Motors speculates a $2 billion hit to profits. As an essential US industry, the US stands to benefit from increasing domestic manufacturing sooner rather than later. 

With bountiful latent deposits of rare earth, a category of minerals essential for semiconductor manufacturing, there is a significant possibility that the US evolves into a major semiconductor manufacturer. 

However, that growth will take time and does little to offset the enormous supply crunch facing the chip market.

In the interim, component-making giants like Taiwan Semiconductor Manufacturing Co. (TSMC) have announced plans to invest significantly in expanding capacity to keep pace with rising demand. Intel is on track to spend $20 billion on the expansion of fabs in Arizona.

Investments in infrastructure are climbing right behind the rising demand and prices for components. TSMC is raking in the dough, thanks to the trend.

The global semiconductor shortage will likely worsen before it gets better and highlights the growing inconsistencies within our increasingly fragile global supply chain. 

Stable supply chains require more distributed points of failure

Not even essential goods are immune to the rapidly evolving global supply chain. 

Returning to a “business as usual” scenario, a hope held by many throughout the pandemic appears increasingly unlikely.

While the global chip industry will eventually stabilize, changes will take time and commitment from multiple decision-makers.