CHIP CRISIS Is the global chip shortage over? That depends on who you ask

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It might seem that the chip shortage is ending, but things aren’t quite so simple. The non-homogeneous nature of chips means that just because one firm has gotten over supply challenges, not everyone else has.

The past couple of years have been dominated by significant global supply chain disruptions, and chief among these has been an ongoing shortage of critical semiconductors. It all started when supply soared during the pandemic, and the industry still hasn’t fully recovered. Or, has it? That depends on who you ask.

The question of whether the chip shortage as we have come to know it is over is not as simple as you might imagine. That’s because not every business that relies on semiconductors has felt the impact of the chip shortage in the same way. For some electronics manufacturers, it’s business as usual whereas, for many automotive manufacturers, the struggle is still ongoing. This is also evident in our monthly chip shortage summary. For example, Hyundai said as recently as March 2023 that the chip shortage is no longer the biggest challenge to producing vehicles. At the same time, a spokesperson for Maruti Suzuki reported that the chip crisis still persists and poses a problem for the production of some models.

What caused the shortage?

It helps to understand what caused the shortage in the first place before getting into a discussion about its current status.
With the advent of coronavirus lockdowns in early 2020, many consumers bought products like laptops, monitors, and game consoles. This caused demand to skyrocket. At the time, demand for semiconductors was already rising steadily due to the increased digitization of automobiles, smart appliances, quantum computing, and cryptocurrency mining. These have all contributed to the rising demand for chips in recent years.

Chip production facilities meanwhile were shut down due to lockdowns, leading to the depletion of chip inventories which suppliers have struggled to resolve ever since. Add in disruptions like the war in Ukraine and strict, ongoing lockdowns in China, and a few other blips such as droughts in Asia and you’ve got the perfect recipe for constrained supply.
With demand far outpacing supply, severe shortages have resulted, causing major troubles across industries that rely heavily upon chips. For example, the automotive industry suffered billions of dollars in lost revenue as automakers were (and often, still are) forced to knock production offline and fewer vehicles because they don’t have access to the chips they need.

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The current situation

After almost three years of shortages, things appear to be getting better. This is largely because demand has decreased alongside persistently high global inflation for consumer goods such as food and energy. Consumer behavior is also thought to be changing, and Q3 2022 saw a 6.3 % decline in global semiconductor sales compared to Q2. Big-name chip manufacturers are working hard to build new production facilities (though it will be several years before any chips roll off these new production lines), and new legislation has been introduced in the United States and Europe to safeguard chip markets and prevent future shortages.

In some sectors, such as consumer electronics, the shortage has in large part eased because of falling demand. “The semiconductor market is entering into a major correction cycle as demand for PCs, smartphones, tablets, and consumer electronics has significantly declined,’’ said Gaurav Gupta, vice president analyst at Gartner, in a recent publication.

It’s mostly the automotive sector where the shortage is being felt most severely. While some automotive leaders have said that the chip shortage is easing for them, including key individuals at General Motors and Ford many, such as Honda, Suzuki, and Skoda continue to battle shortages that have led to the suspension of production within the last few weeks alone. “Automakers in particular are still facing serious challenges getting the chips they need, which is forcing some to continue to cut back production or rewrite software to use different or fewer chips,” said Tom Stringer, a national site selection and incentives service leader at tax and accounting advisory BDO USA.

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So, is the chip shortage over?

“No”, is the simple answer. Chips are not a homogenous commodity; they cannot be readily substituted. There are many different types that perform different functions, and different industries have their own needs. Whether shortages are easing or persisting depends on the type of chip in question, as we’ve seen in consumer electronics vs automotive. While chip inventories have stabilized for electronics manufacturers, most automakers continue to struggle with a persistent lack of critical chips.
As for what the future holds for the chip shortage and broader supply chain, only time will tell. Significant efforts are underway to bolster chip production capacity and safeguard against the potential for future shortages, but it will be some time before these efforts come to fruition.

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