The Global Semiconductor Crunch

A supply chain is only as strong as its weakest link

The global shortage of semiconductors that has been plaguing the automotive market since 2020 is now being felt by makers of consumer electronics products including smartphones, meaning it could hinder an industry looking for a comeback year.

Microprocessor chips, the brains behind computing in modern electronics, are produced in high-technology facilities called semiconductor fabrication units, often referred to as “fabs”. Silicon chips have become critical ingredients for more than computing devices: everything from household appliances and Internet-connected devices to jumbo jets are dependent on them.

Semiconductors are currently in short supply because of the initial jolt in demand caused by the pandemic. As the pandemic wore on in 2020 and people accepted the new reality, silicon-packed consumer gadgets became a hot ticket.

This unanticipated surge in demand became a bright spot in the global pandemic economy, but caught chip suppliers and silicon fabricators off guard as demand for chip production outstripped supply. In fact, devices such as Chromebooks and next-generation gaming consoles like the Xbox Series X and PlayStation 5 have been in such hot demand that they’re often sold out or subject to lengthy waiting times.

This is a classic supply-and-demand problem, with demand limiting the supply to some industries. For example, the automotive industry was adversely affected beginning in 2020. The average car now uses semiconductors for various functions, from power-steering and brake sensors, to entertainment systems and parking cameras. And the smarter cars get, the more chips they use. Electronics account for roughly 40% of a vehicle’s bill of materials. Without semiconductors, production lines stall.

Last week, General Motors announced that it is shutting three plants and slowing production at a fourth because of the shortage of semiconductors. Several other car-makers have also put production on hold: Honda UK’s main plant in Swindon was shut down for several days in January 2020, and Ford and Volkswagen have also been forced to close plants or cut production while they wait for chip supplies to rebound.

When the Covid-19 pandemic first struck in early 2020, chip orders initially collapsed. But remote work and online education spurred demand for computers, tablets and hot spot devices. Demand for cars also increased as people avoided public transportation. That, in turn, caused manufacturers of vehicles and electronics to re-up their chip purchases. Orders for chips that run computers, cars and many other Internet-connected devices are swamping the industry, which relies on just a handful of factories in Asia.

The shortage is a setback for some of the largest and most influential makers of consumer electronics products. Apple said recently that production of some of its high-end iPhones was affected, and Sony admitted it was struggling to build enough PlayStation 5 consoles as a result of the shortage of semiconductors.

Unfortunately, there’s no quick fix because of the investment and time needed to build new fabs. The chip industry has been moving toward a fabless model for years now, and with majority of the chip manufacturing centred on a handful of outsourced fabs, this demand and capacity crunch was predictable. It comes as smartphone-makers, infrastructure equipment suppliers and wireless operators are looking to 5G services to fuel a rise in sales and use of connectivity services. Telecom companies need to plan and procure like never before.

Until the balance between supply and demand is restored, the industry will continue to suffer delays, shortages and price rises, which everyone in the supply chain will have to endure as they navigate through this pandemic economy.