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Global Chip Shortage Conundrum

In the modern world, today millions of products- cars, washing machines, smartphones, and most electronic devices heavily depend upon computer chips also known as semiconductors. Right now there just aren’t enough to meet the industry demand and it will extend into 2022 or potentially beyond. It has almost become impossible to buy a PS5 at a regular price and car manufacturers either had to slow or temporarily halt their production. Smartphone makers are also facing the music and are cutting their businesses.

Chips are small flat pieces of silicon with electronic circuits on them and they are used everywhere. There are more than 100 billion chips in daily use around the world. Even before the pandemic struck, demand exceeded the supply of semiconductors. It is becoming clear that the semiconductor supply chain disruption is weighing on economic growth.

Why the crisis?

The world shut down because of the COVID-19 pandemic and many factories closed with it, making supplies needed for chip manufacturing unavailable for months. Increased demand for consumer electronics also caused a shockwave to the demand and shifts rippled up the supply chain. As everything is starting to get normal orders are beginning to pile up and manufacturers are struggling to create enough chips to meet the new levels of demand. A never-ending backlog began to grow.

Increased demand and bad decisions put those together and you got a shortage. The pandemic caused an explosion in demand for devices and the need for chips skyrocketed beyond what manufacturers could provide. The auto industry made the shortage worse by canceling chip orders because they assumed the economy was about to take a lengthy hit. This decision led chip providers to root their plants to make chips for consumer goods instead of cars and a shortage of car chips ensued.

There are only a handful of chip manufacturing plants in the world and the few that were running in the pandemic were subject to a series of unlucky weather events that delayed the process. Japan’s Renesas pants, which create almost one-third of the chips used in the cars, were severely damaged by fire and America’s only chip pants were forced to halt production as winter storms hit Texas. Taiwan suffered a heavy drought as the production of chips required heavy water.

Alarming nature of the problem

Global chip shortage is making industries sweat as considering the internet-connected world is completely dependent on the production of semiconductors. Shortages of semiconductors fueled by pandemic disruption and production trouble at the multibillion-dollar chip factories have sent shock waves through the economy. As of today, every single end market for semiconductors is up simultaneously never before seen in the industry. This is going to be a very painful period including in 2022 for the duration of the year.

While chip manufacturers have plans to expand factory capacity it is not going to kick in until 2023 and 2024. When chips are found, price markup can be stark of up to 20% increase in price hikes. That will ripple across every industry from cars and phones to washing machines and electronics. AMD rival Intel is one of the companies that is going to invest $20 billion in two new chip factories in Arizona. TSMC, the biggest manufacturer of semiconductors that makes chips for companies like Apple and Marvell is also building a $12 billion factory in Arizona. It has also planned to invest $100 billion over the next three years to increase factory capacity.

There is no way that every segment of the electronics industry stays up to the right demand for 12 months. Slowing demands could come from areas such as the personal computer market. There was a panic for masks and hand sanitizers and some analysts believe that there’s a panic to buy on semiconductors right now. Besides the direct effect on hardware makers, chip shortages can reduce shipment and may raise the cost of every electronic device.

Smartphone sales down

Global smartphone sales are off 6% this quarter and it’s not because of lack of demand, it’s due to the global chip shortages. Manufacturers have to be concerned by this turn of events. Apple, the world’s most valuable company, has finally joined the list of companies that are forced to cut back on business because of a global shortage of semiconductors.

Apple slashed its projected iPhone 13 production target for 2021 as many as 10 million units reported by Bloomberg News. The U.S. stock market says it just left $6 billion in potential sales on the table as a result of limited chip supply. For months while electronic, automaking, and even commodities industries were shocked and rocked by the supply chain nightmare Apple remained that one company that could secure the chips. But the recent setback has shown that any hopes that the supply chain crisis was easing are still far from over.

Samsung was leading the market with a 23% market share while Apple was in the second position with a 15% share. Xiaomi took a 14% share for third place. China’s Vivo and Oppo are also in the top five positions. Smartphone manufacturers benefited from the extra left behind chips from other industries. But others were catching up and there came fierce competition.

Demand for smartphones is rising and smaller manufacturers like China’s Lenovo and TCL and Finland’s HMD Global are likely to struggle with chip supply. Semiconductor shortage could prove challenging for smaller device makers. This might lead to a certain imbalance across the market.

Auto industry still being hit hard

The auto industry is perhaps the hardest hit industry by the lack of semiconductors. General Motors said that the U.S. vehicle sales during the third quarter fell by more than 30% as the chip shortage disrupted production and reduced available inventory at dealerships. The automaker shut down production at most of its North American plants to deal with the lack of semiconductor chips.

Toyota said that it would cut November production targets in their global market by as much as 15% as the pandemic and chip shortages have made it difficult for the automaker. Continuous difficulties obtaining supplies have forced it to change the production target. The company is considering strategies to deal with its supply chain difficulties.

Ford the US automaker said its sales of new vehicles fell about 27% in the US and the drop was in line with the rest of the auto industry. Ford was forced to idle many of its plants as it did not have enough electronics parts that use computer chips to control electronic components. Ford is confident that the supply of parts is improving.

On another note, Tesla is growing while other automakers are struggling to build cars as there is a shortage of chips. Tesla the EV maker is weathering the global chip shortage by rewriting its vehicle software to support alternative chips. This approach has helped Tesla maintain high levels of production and deliver more vehicles to customers over the course of the last three months.

Supply chain risks

Policy advisors and executives across industries are worried that long-term supply shocks may be far worse than what has been a short-term crisis for the business sector. The current commercial issues causing the supply chain shortages will end but the politics between Washington and Beijing is concerning. The industry is still unprepared for what is coming. If not handled properly there will be a train wreck coming even when companies go beyond some of the short-term stuff.

When will it end?

The recent rumbling of chip shortages suggests that the problems are expected to persist. The supply chain nightmare stems mainly from years of under-investment coupled with a failure to gauge the explosion in demand for all electronics devices. Even experts and industry insiders were caught by surprise. It seems everyone underestimated the growth of the semiconductor industry over the past 15 years.

It is taking almost a record nine straight months for the amount of time that companies need to wait for chip orders to get filled. Semiconductor shortages will continue to plague businesses well into 2022 and likely beyond. The global automotive industry will cost about $210 billion in sales for 2021 alone.

One potential hiccup is that some of the skyrocketing demand appears to be from customers that are double-ordering to bulk up on inventory and this could delay the ending the shortage. No one can really say when the chip shortage will end and this shortage highlighted the underlying politics in the semiconductor industry.

-Written By Maksudur Rahman

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