A semiconductor chip shortage has made industry execs nervous about production and sales. Here’s why a supply crunch of these tiny wafers is becoming a crisis at a global scale.
The semiconductor chip shortage is quickly becoming a global problem of substantial scale.
Semiconductor chips are incredibly relevant to the global tech economy. China, for instance, has been pushing to manufacture chips locally. As the world’s largest consumer of semiconductor chips, the Chinese government has recognized that relying on imports could stall its attempts at becoming a global tech superpower. The EU has also set a goal to produce 20% of the world’s semiconductors by 2030.
These tiny wafer-like components are at the heart of the electronics industry, and right now, they are short in supply. Here’s everything you need to know about the semiconductor chip shortage.
Firstly, what are semiconductors?
A semiconductor is a conductive material, mostly made of silicon. It is used heavily in the electronics industry for a simple but core function — controlling the flow of electricity. Semiconductors are essential to the circuit infrastructure needed to power electronic devices and appliances.
From automobiles and home appliances, to gaming consoles and smartphones, electronics across the board use components made of semiconductors (such as processors and memory chips).
The semiconductor chip industry is incredibly competitive. Players are constantly trying to make chips that are smaller, faster, and cheaper, and ploughing massive investments into R&D.
In 2020, for instance, Intel made US$73.89 billion in gross revenues. In the same year, they spent $13.56 billion on R&D – 18% of what they grossed, and the highest they’d ever spent in nearly two decades.
Manufacturing also costs much, in terms of both money and time. Setting up a single fabrication facility, or fab, can cost upwards of $1 billion, and is likely to be obsolete in just five years. Equipment is expensive and maintenance is high — one speck of dust can cause losses worth millions.
The most important parts of the manufacturing pipeline, engineering expert Tom O’Brien says, is line width, or the width of the laser that creates circuits to be fitted onto a chip, and yield, or how many of the manufactured chips are fit for use. O’Brien has 15 years of experience in the semiconductor manufacturing space.
“A company I worked with previously had lost significant market share to its main competitor, because it could no longer guarantee the line width down to past maybe six to seven nanometers,” engineering expert Tom O’Brien says. The lower the line width, the more circuits can be packed onto a silicon chip to make more powerful devices.
Meanwhile, manufacturing the chips can take up to three months, O’Brien says. Companies have to keep a close eye on how many chips end up becoming redundant.
“Yield losses typically result from dust particles on a processor, and that makes it redundant. So you need to, as much as possible, keep the redundancy as low as possible. And you’ll never get to zero because there’s always going to be some contamination, but you just have to keep everything near processes as clean as possible to maximize your yield,” O’Brien says.
Needless to say, a semiconductor chip shortage can make it challenging for manufacturers to bump up supply in time. And that’s exactly what is happening right now.
Why is there a semiconductor chip shortage?
One reason for the semiconductor chip shortage is a surge in demand. Amidst COVID-19, not only has consumer demand for home appliances and home-based entertainment boomed, consumers also have the cash to spare for purchasing these items.
Consumer demand for electronics that use these chips — from microwaves to smart TVs – has overtaken the supply of chips, ZDNet reports. Sony, for instance, is facing outpouring demand for its PS5. The company noted that it may have to deal with the strained supply of chips at least for the rest of the year. Sony is not alone in its predicament, the report notes. Apple, Samsung and Xiaomi are all contending with the shortage.
The economics of running a chip manufacturing plant also make it more difficult for new entrants to break in. The market is dominated by three semiconductor manufacturers. Intel, Samsung, and TSMC have long been the top three market leaders.
These companies have the advantage of advanced, multi-billion dollar fabs, years of market dominance, and a higher yield of chips (which companies can only achieve over time), Bloomberg reports.
It’s not just a supply crunch, however — other factors are also coming into play. Another Bloomberg report points out that Huawei has been hoarding components in the wake of the U.S.-China trade war. TSMC also noted that their enterprise customers have been stockpiling more than usual due to volatility.
Moreover, chip producers have been underinvesting in older chips — and understandably so. Newer chips that pack much more power bring in more money, and are in demand at high-tech companies. But that does not mean that the older chips are out of fashion, and that creates a problem.
“There’s still a lot of old technology in cars and in industry that doesn’t need your latest and greatest superfast microprocessor,” O’Brien explains.
This can exacerbate the supply crunch for electronics that use these older chips. Your car’s touch screen dashboard, for instance, won’t need the same power as the latest high-tech smartphone. On this account, the semiconductor chip shortage has forced production cuts in the automobile industry.
Going forward, the tide is likely to turn, since the semiconductor chip industry is fairly cyclical, shaped by demand and supply. One expert estimates that product supply chain will be stressed at least for the next two years.
In the interim, however, the shortage in supply is likely to continue causing disruption across industries. And tech companies dealing in smartphones, gaming, and automobiles, will just have to put up with what’s turning out to be a really long waiting line.
Header image courtesy of xb100 on Freepik