A shortage in the supply of semiconductors first hit the world during the COVID-19 pandemic and has had a cascading effect, causing disruptions across the globe.
In this article:
- Recent shifts in market dynamics
- When will the shortage end?
- Complex process
- China-Taiwan angle
- Mismatch between demand and supply
On the supply side, factories were shut down for indefinite periods, especially during the start of the pandemic.
On the demand side, as work-from-home and online learning became the norm, demand for laptops and other electronic devices surged.
Demand is also being driven by technologies like cloud computing, AI and 5G, along with the growing use of semiconductor chips in all manner of products, from cars to vacuum cleaners.
The automotive sector, a major consumer of semiconductors, used fewer chips as consumer demand for cars declined during COVID-19 lockdowns.
This forced chip manufacturers to shift their focus to computer equipment and mobile devices.
However, once lockdowns were eased and car sales picked up, it led to greater demand for chips.
Recent shift in market dynamics
The shortage in the supply of semiconductors is a recent phenomenon.
Worldwide sales of semiconductors increased 6.5% in 2020 after declining between 2018 and 2019, according to the Semiconductor Industry Association (SAI).
The growth momentum continued into 2021, and sales in the third quarter of 2021 were 27% higher than the same period in 2020.
The SIA noted that more semiconductor units were shipped during the third quarter of 2021 than during any other quarter in the market's history.
Chipmakers didn’t realise the extent of the sustained demand until recently.
But now they can’t increase production quickly as new chip-making factories cost billions of dollars and take years to build.
It is also a regionally concentrated industry as Taiwan and South Korea produce 83% of the global output of processor chips and 70% of memory chips.
With 54% of total global semiconductor foundry revenues in 2020, Taiwan dominates the foundry market, led by Taiwan Semiconductor Manufacturing Co. (TSMC).
When will the shortage end?
Tech research firm Gartner has warned that the semiconductor shortage will extend well into 2022.
Research and advisory company Forrester expects chip shortage to continue through 2022 and into 2023.
The IEEE’s (Institute of Electrical and Electronics Engineers) prediction is more positive as it expects more than 40 companies to increase capacity by more than 750,000 wafers per month by the end of 2022.
Chipmakers across the world are ramping up production with Intel planning to spend US$20 billion to build two new fabrication plants in Arizona, and TSMC will invest US$28 billion to increase capacity.
Texas Instruments (TI) has revealed a plan in November 2021 to build four new semiconductor plants in Texas at an estimated US$30 billion.
TI will start construction on the first two fabrication plants in 2022 and will have the option to build out two additional plants at the site in the future.
Complex process
Making a chip on 12-inch circles of pure, crystalline silicon known as ‘wafers’ requires lasers so precise they can create features on microchips just five nanometers, or billionths of a metre, according to a WSJ report.
Those chips may require more than 1,000 passes through different machines inside a chip-making factory, the report added.
This level of complexity means that even if a startup or less-experienced chip manufacturer can obtain chip-making equipment, it may not be able to make chips well enough to make a profit.
The worst part is that even the companies that make chips are themselves affected by the chip shortage.
For example, German semiconductor manufacturer Infineon has adequate capacity for making its own power-handling chips but can’t get enough of the older-style microcontroller chips that its systems also require.
China-Taiwan angle
Taiwan’s role in the world economy was largely unnoticed until it came to prominence in 2021 as the world suffered shortfalls in chips used for everything from cars to mobile phones.
As carmakers around the globe including Volkswagen, Ford, Toyota and Nissan were forced to halt production and idle plants, Taiwan’s importance suddenly became too big to ignore.
These difficulties illustrate how TSMC’s prominence in chip-making has handed Taiwan political and economic leverage in today’s world.
Taiwan’s grip on the chipmaking business, despite being under constant threat of invasion by Beijing, represents a potential risk in the global supply chain that’s forcing other countries to increase their self-reliance.
The biggest worry is the potential risks to Taiwan’s chip factories if China acts on its threats to invade Taiwan.
Mismatch between demand and supply
Global chip manufacturers are on track to invest US$146 billion into capital expenditures in 2021, a 50% increase compared to 2019, according to Gartner Inc.
However, less than US$1 of every US$6 is earmarked for the so-called legacy chips facing the longest backlogs right now, the tech-market researcher estimates.
The small investment reflects how the legacy chips, which sells for just a few dollars each, get made with older technology and equipment that requires less money to procure.
But it also shows that many chip manufacturers are reluctant to invest in the much-needed chips given the slim profits and risk of a future decline in demand.
This mismatch between demand and supply reflects the imbalance in the global chip market which is a predicament to be fixed.