As you’ve probably heard by now, there is a global shortage of computer chips affecting the supply of almost every electronic device you can think of. If you’ve tried to buy a car, games console, or laptop recently, you will know exactly what we’re talking about. Before 2020 most of us probably didn’t realize how much we rely on computers during our everyday lives, or even if we did, we certainly didn’t think about where all these chips come from or how they’re made.
With so many devices relying on them, and so much money to be made from selling them to you and me, you would think the problems would be solved as fast as possible. Although thanks to increasing demand combined with the pandemic, the shortage isn’t likely to disappear anytime soon.
What Caused the Chip Shortage?
Unfortunately, there isn’t just one problem that caused the shortage; a whole series of badly timed events caused chaos for the chip industry. Here are the main issues that contributed to the global supply not being enough to meet demand:
The world has been rapidly increasing the number of computer chips it uses for years, but the amount of companies making them hasn’t increased at the same rate. As a result, more and more devices are becoming ‘smart’ with everything from speakers and laptops to cars and airplanes now relying on chips to function correctly. And this situation was only made worse by the pandemic.
When we all started working, teaching, and learning from home in 2020, sales of electronics sharply increased and put a lot of pressure on supply chains. As a result, semiconductor sales rose 6.5% in 2020 and grew even faster in 2021. According to the Semiconductor Industry Association, chip sales in May 2021 were 26% higher than the same period in 2020.
Along with the increasing demand, chipmakers also had to deal with a huge list of other pandemic-related issues. Chief amongst these was a shortage of workers as well as facilities shutting down due to outbreaks of Covid-19.
Even when the factories were up and running, there was still the challenge of getting the chips transported around the world during all of the lockdown restrictions.
These weren’t the only problems, though. There was also a series of badly timed weather events that caused chaos for the industry. A severe drought in Taiwan caused delays to the water-intensive manufacturing process, and a number of plants in Texas were forced to close due to power disruptions caused by winter storms. And if that wasn’t enough, a fire broke out at a facility in Japan that supplies chips to the likes of Toyota, Nissan, and Honda.
Why Was the Auto Industry so Badly Affected?
When Covid hit, most companies assumed the worst, but none got it more wrong than the auto industry. They figured that because people wouldn’t be driving to work or going on vacation, they wouldn’t want, need, or be able to invest in a new car. So most car manufacturers cut or canceled their orders for parts, including microchips.
This turned out to be completely wrong, and people needed their cars more than ever. No one wanted to travel on public transport for fear of catching the virus, and increased use of online shopping meant shipping companies also needed vehicles to deliver all the packages. A modern car can have as many as 3,000 computer chips, and it only takes one to be in short supply to make production lines grind to a halt.
Combine this with everyone wanting a new laptop to work from home, and the factories simply couldn’t make chips fast enough.
All of these factors were the perfect storm for an industry that was only just managing to meet demand even before the pandemic hit.
What is Being Done to Solve the Shortage?
First of all, we need to get an idea of where these chips come from. When you buy a new phone or computer, chances are the chip inside it wasn’t made by the company that sold you the device. Only a handful of companies produce the bulk of the world’s supply of computer chips. Three of the biggest manufacturers are Intel, TSMC, and Samsung, all of whom are investing millions of dollars to increase production. One of the quickest ways to do this is by improving yields, which is the number of usable chips that can be made from a single silicon wafer. Unfortunately, these will only improve by a couple of percentage points at best, which is nowhere near enough to catch up with demand.
So, in the short term, there aren’t a lot of options to meet the growing demand for chips. Consumers and businesses alike will likely see shortages last well into 2023.
So What Will Prevent this from Happening Again in the Future?
The scarcity of chips over the last couple of years has been a real pain for everyone. Whether your business depends on them or you simply want to buy the latest tech. The good news is that a lot has been learned, and companies are making changes to prevent this situation from happening again.
All of the big chip makers are investing heavily to increase production and build new factories. Still, tens of billions of dollars will be needed to make a noticeable difference to supplies. Thankfully governments are also taking action to create a more robust supply chain.
Most cutting-edge chips are currently made in Asia, mostly Taiwan and South Korea, but this wasn’t always the case. Back in 1990, the US made 37% of all semiconductors, but by 2020, that had declined to just 12%. To help reverse this trend, the US Senate passed a bill to provide $52 billion of funding to increase production and research cutting-edge technology.
Intel and TSMC have both also announced plans to build new facilities in Arizona that will greatly increase their production capacity. Intel’s investment is part of its new Foundry Services division that will produce chips for other companies as well as ones to be sold under its own brand. This is part of Intel’s $20 billion investment plan and will be their first new factory location in 40 years, although the first products won’t roll off the line until 2025.
So the private sector and governments are both taking steps to create a robust supply chain that is spread more evenly around the globe, but it will be a few more years until these investments make a real difference.
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