SEMICONDUCTOR SHORTAGE The global chip shortage: Causes and state of play in 2022
It’s safe to say that a lot has gone on between the start of the chip shortage and the present day. But why is there a chip shortage in the first place? This article explains the causes of the chip shortage and shows the most important developments to date. This is followed by a short outlook.
More than two years since the emergence of the global chip shortage, it’s still very difficult for consumers to get their hands on a wide range of products. These include GPUs, microprocessors, and even vehicles, with many automakers unable to meet the demand for their vehicles and settle order backlogs. In some cases, vehicles are sat in warehouses awaiting one or two crucial microchips until they can be officially completed and shipped. In others, vehicles are being shipped with certain non-critical features missing.
What is the chip shortage?
A chip shortage is a fairly rare occurrence in the semiconductor and integrated circuit industry that occurs when industry demand is higher than supply, and there’s currently a substantial one that has been in focus since January 2021. But in fact, the chip shortage history has started already in 2018.
After 2021’s supply chain challenges, some are still hopeful that events this year will be a major steppingstone to getting over the worst of the semiconductor shortage. But solving it is an overwhelmingly complicated problem that cannot be solved quickly or easily. After all, the answer to the problem isn’t simply to make more chips—this is easier said than done. It takes several years and several billions of dollars to build semiconductor fabrication plants and get them online, all the while semiconductor technologies continue to become more advanced at an increasingly rapid pace. Furthermore, current labor market challenges and shortages mean that skilled workers are in short supply, and this is placing additional pressure on semiconductor manufacturers who are scrambling to find new ways to navigate the ongoing shortage.
What is causing the chip shortage?
To have the background of the global chip shortage explained, we need to look all the way back to 2018 and 2019, when trade wars began to cause supply chain uncertainty, and, predictably, 2020, when the COVID-10 pandemic emerged and decimated chipmakers.
2018 and 2019: Trade wars create supply chain uncertainty
A trade war has existed between the U.S. and China due to the actions of the Trump Administration in 2018. “The trade war took direct aim at Beijing’s ambitions to become a leader in advanced manufacturing technologies such as semiconductors and electric vehicles," wrote Josh Zumbrun in the Wall Street Journal in May 2021.
The first round of U.S. trade tariffs hit Chinese imports in 2018 and focused on raw materials such as silicon. Over time, the U.S.-China trade tensions led to the hoarding of wafer supplies when the U.S. blacklisted China’s SMIC in 2020. With so many key parts of the chip supply chain hindered, U.S. industries reliant on semiconductors—which is virtually any that produces anything electrical—were concerned that restrictions on Chinese imports would force China’s hand and lead to the development of their own semiconductor manufacturing ecosystem. And that’s exactly what happened.
Then along came the COVID-19 pandemic. This added a whole new dimension of problems for the chip market.
2020: COVID-19 decimates chipmakers
The pandemic played a huge role in the global semiconductor shortage. According to several analysts, including Glenn O’Donnell, the vice president research director at Forrester, this was largely due to skyrocketing demand for cloud computing services from providers like Microsoft Azure and Amazon Web Services. “They [the service providers] buy a lot of chips,” he said in a blog post.
Owing to this demand surge, industries had to scramble to meet supply and demand in a highly uncertain and volatile economic climate. For chipmakers, production was halted for almost half of 2020 due to government shutdowns and COVID-19 restrictions. This piled onto the shortage to such an extent that by the time production resumed, semiconductor companies were well behind and had to adjust to severe demand pressure from various sectors.
The automotive sector was the prime example of this. It was a huge demand surge as consumer purchasing behavior shifted in the second half of 2020. As economies began to re-open, consumers dodged public transport due to the pandemic and started purchasing their own vehicles. This shifted the focus from consumer electronics to automobiles, causing shortages in 8-inch wafers and ABF substrates necessary for automotive semiconductors. This was made worse by a fire at Japanese manufacturer Nittobo’s plant in July 2020. In response, Volkswagen, Ford, and Toyota, among others, cut, and in some cases completely halted their production in some factories, at a time when the automotive sector was booming.
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2021: The chip shortage worsened
The chip shortage continued to worsen throughout 2021, with the snowball effect of the COVID-19 impact being one of the biggest driving forces. But besides the continuing trade war between China and the U.S., there were other factors: For example, storm Uri caused widespread power outages in Texas, which led to rolling blackouts. Manufacturers like Samsung, Infineon, and NXP Semiconductor were all forced to suspend their plant operations. To add to all the chaos, a drought in Taiwan, the country’s worst dry spell in half a century further threw chip production into disarray. This is because wafer fabrication requires large quantities of water for the production process.
In addition, automotive companies across the world anticipated a decline in demand at the beginning of the pandemic. As a result, they chose to order fewer semiconductors to reduce potential inventory costs during shutdown periods. Meanwhile, consumers began upgrading their computers, phones, and other electronics amid lockdowns. Sony also released the brand-new console, the PlayStation 5, to the reception of millions who had pre-ordered it. So, while demand fell in the automotive industry, it grew in all others.
This led to a crunch situation when automotive manufacturers found that they couldn’t resume normal manufacturing due to the shortage of chips and the shift in consumer demand. The consequence were lots of canceled orders while chip manufacturers focused on consumer products in an attempt to meet growing demand. After retooling their operations to produce chips for consumer items rather than automobiles, an even worse shortage of automobile chips ensued and throughout the year, a huge number of auto manufacturers were forced to pause some of their operations. Some of the larger automakers such as Volkswagen and General Motors were forced to stop and start operations in key locations several times. The tip of the iceberg was a fire breakout at the Renesas Naka factory in March. This impacted a building where two-thirds of the company’s wafers for automobiles were produced, causing yet more problems for automakers.
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The global semiconductor sales are expected to rise. sales increased by 20 % in 2021 and, according to the Semiconductor Industry Association, are predicted to rise by a further 9 % to USD574 billion in 2022. The 300mm silicon wafer market is expected to reach USD10.570 billion by the end of 2027, growing at a compound annual growth rate of 5.1 % over the next five years.
The shortage of computer chips is also driving fresh investment into the industry as demand grows. Several chipmakers like Intel or TSMC have already announced their plans to build multi-billion-dollar chip fabs, and Deloitte expects that venture capital firms globally will collectively invest US$6 billion in semiconductors in 2022. This is three times more than every year between 2000 and 2016.
Stay up to date and follow the most important chip shortage updates in 2022 here:
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When will the chip shortage end?
Considering the already long duration of the global shortage of semiconductors and the severe consequences on the affected industries, many may ask themselves the following question: Will the chip shortage ever end? A report released by the U.S. Department of Commerce in January 2022 revealed an alarming shortage of chips; demand for them was 17 % higher in 2021 than two years prior. According to the U.S. government, median inventory had fallen from 40 days to fewer than five days. Accordingly, the end of the chip shortage in 2022 is not yet in sight. Recently, Deloitte has said that it expects the semiconductor shortage to last until early 2023, with some customers waiting several months for their chip orders.
After past forecasts have not always come true in recent years, it is now to be hoped that the chip shortage end will not be dragged out even further.
Chip shortage news summary
- Global chip shortage 2022 – updates in October - click here for reading!
- Global chip shortage 2022 - updates in September - click here for reading!
- Global chip shortage 2022 - updates in August - click here for reading!
- Global chip shortage 2022 - updates in July - click here for reading!
- Global chip shortage 2022 – updates in June - click here for reading!
- Global chip shortage 2022 – updates in May - click here for reading!
- Global chip shortage 2022 – updates in April - click here for reading!
- Global chip shortage 2022 – updates in March - click here for reading!
- Global chip shortage 2022 – updates in February - click here for reading!
- Global chip shortage 2022 – updates in January - click here for reading!
- Intel ramps up investments in EU chipmaking operations - click here for reading!
- Earthquake in Japan: How big is the effect on chip production? - click here for reading!
- Global chip shortage - outlook for 2022 - click here for reading!
- Update: These are the latest developments on the chip shortage in 2021 - click here for reading!
- Fire at Renesas: chip production to be resumed - click here for reading!
- Global chip shortage threatens auto industry supply chains - click here for reading!