CHIP SHORTAGE The global chip shortage explained

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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.

Over the past few months, you’ve probably heard a whole lot of noise about a so-called “chip shortage” or “chip crisis”, but what exactly is this and why is it happening? In short, an ongoing shortage in the global supply of semiconductors is causing global disruption. It first hit the automotive industry, causing several carmakers to temporarily shut down and suspend production, but it has since spread to other areas including consumer electronics as manufacturers battle to keep up with a sudden demand surge.

What’s the cause?

This can all be traced back to the emergence of the still ongoing COVID-19 pandemic. This disrupted chip production in the first half of 2020 by impacting manufacturing investment and caused wild industry fluctuations in supply. At the same time, overall consumer demand for automobiles dropped due to everybody staying at home, forcing chip manufacturers to shift their focus to non-automotive applications—such as computer equipment, communications, data centers—which saw an increase in demand as more people began working from home.

As 2020 progressed, however, the automotive industry quickly recovered (far faster than anyone anticipated), with sharp recoveries in car sales seen worldwide. This caused a supply bottleneck on a global scale that started to cause serious problems at the start of 2021 and has been growing ever more dire with each passing day.

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What’s the impact on the automotive industry?

While the automotive industry recovered in terms of sales, the supply of semiconductors wasn’t able to ramp up quickly enough, resulting in an industry-wide problem that affected all major original equipment manufacturers (OEMs).

Speaking at the time, Toyota spokesman Scott Vazin said that it was “absolutely an industry issue”. Toyota was one of the first automotive manufacturers to halt production on January 11. A few days later, Honda stopped production at its Swindon plant and reports emerged claiming that the supply issues were also affecting the Suzuka plant and Honda’s Fit and Jazz vehicle ranges.

LAST STATUS: December 15, 2021

Update: These are the latest developments on the chip shortage in 2021

Nissan, GM, and VW Group were all forced to review their production efforts at their respective plants to manage the supply bottleneck, as was Ford. We’re now into the second quarter of 2021 and these supply issues are still forcing automakers to cyclically stop and start production. Most recently, Ford has scheduled further downtime at some of its U.S. factories.

It’s not just an automotive problem, though. The chip shortage is also impacting consumer product supply chains and is causing delays in everything from cars and televisions to the latest Samsung smartphone rollout.

What’s being done to solve the shortage?

Facing what is arguably the worst chip shortage ever seen, significant pressure has been placed on national governments and regulatory bodies by automakers and chipmakers to step in and do something about it. Unfortunately, it’s not possible to quickly ramp up chip production in response to short-term problems, no matter how bad they are. This means that we’ll simply have to wait out the chip crisis by letting supply slowly but surely catch up with demand.

This doesn’t mean that we can’t prepare for the future and try to prevent new crises from taking hold. In response to mounting pressure, President Biden signed an executive order (EO14017: America’s Supply Chains) on February 24 which seeks to address the chip shortage and related concerns. The order compels the U.S. federal government to conduct a 100-day review into the supply chains of four sets of products, including computer chips.

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Meanwhile, in Europe, the European Commission has set an ambitious target to double last year’s production of computer chips (10 %) by 2030. It is our proposed level of ambition that by 2030 the production of cutting-edge and sustainable semiconductors in Europe including processors is at least 20 % of world production in value,” says an EC document cited by Reuters.

In 2020, only 10 % of the world’s computer chips were manufactured in the EU. By doubling this figure to 20 %, the EU hopes that it’ll strengthen its digital sovereignty and become less reliant on technologies that have long since been manufactured outside of the trading bloc.

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