Understanding the Global Semiconductor Shortage: Causes, Impact, and Solutions
Author: Amaan Ahmad Ansari
Why There Is A Chip Shortage?
The semiconductor shortage has been caused by several issues, both long-standing and pandemic-related. The pandemic led to a sudden increase in demand for work-from-home technology, such as PCs, and a decrease in demand for cars, causing automakers to cut their chip orders. However, when demand for cars recovered faster than expected, the semiconductor industry had already shifted production to meet the demand for other industries like smartphones, PCs, and other electronics, resulting in a lack of supply for automotive. The chips that are used in automotive are different from chips of mobile & laptops, car makers use 28- 40nm chips where as mobiles and Pcs use more advanced chips that lie between 14-5nm. Furthermore, the COVID-19 Delta variant affected downstream operations in South Asia, causing further supply chain bottlenecks.
Structural factors, such as the shift towards automation and electric vehicles in the auto industry, also contribute to the chip shortage, as these technologies require more chips. This exacerbates the already stretched semiconductor industry. Ultimately, the current situation is the result of strong demand and limited supply, caused by a confluence of factors including the pandemic and changing industry dynamics.
Besides Covid-19 and Structural factors, there are other factors too that contributed to the problem of chip shortage such as:
Renesas fab in Japan caught fire in March 2021, taking microcontroller production offline for 3 months. Most of these devices supported the automotive industry.
A cargo ship got stuck in the Suez Canal in March 2021, blocking passage for over a week and impacting the delivery of chips in transit.
Slow Down in Electronics Demand:
During the pandemic, manufacturers of phones and PCs stocked up on chips to meet high demand. But now that demand has dropped due to people returning to offices and economic uncertainties, manufacturers are sitting on huge piles of unused chips. They're not buying more, which is bad news for chip companies, causing hiring freezes and even layoffs. This has led to a surplus of chips, with South Korean chipmakers reporting inventory levels at a 26-year high. However, certain other pockets in the chip industry are still very strong like the automotive sector, therefore, still facing chip shortages and experts predict the problem may continue until early 2024.
What has been done so far to SOLVE the problem?
Governments around the world are recognizing the importance of increasing the production of semiconductors, which are crucial components in everything from cars to smartphones. The United States, for example, In July 2022, the United States Senate and House of Representatives passed the CHIPS Act, which includes about $52 billion in government subsidies for the research and production of semiconductors in the U.S. The bill also provides chip plants with tax credits worth about $24 billion, with the goal of spurring U.S. chip manufacturing to alleviate some of the supply chain issues hampering the country's automotive and consumer electronics industries, among others.
Similarly, the European Union is also planning its own "Chips Act" to increase semiconductor production within Europe. South Korea has pledged a whopping $450 billion to its own industry, while Japan is partnering with leading chip manufacturers to build a new factory by the end of 2024.
Where India stands at the Semiconductor Game?
India wants to bring semiconductor manufacturing to the country and is offering a financial incentive scheme of Rs 76,000 crore. Intel, a company that makes semiconductors, has tried to set up in India before but didn't succeed because of government policies and slow response. Intel's CEO visited India in April 2022 and praised the government's efforts but didn't commit to investing yet. India has a chance to enter the semiconductor industry because other countries face political problems such as Taiwan and China. India's values make it a potential partner, not a threat. The government needs to support semiconductor projects by giving subsidies and providing reliable power, water, and land because semiconductor is very capital intensive as a fab needs a $10 billion investment with 2 years to set up. The Indian government has created a policy to support these projects. Vedanta-Foxconn and Tata are among the companies that might invest in semiconductor manufacturing. Building a semiconductor factory can lead to a lot of other companies setting up in the area and help India's economy. The semiconductor industry is expected to cross the $1 trillion mark by 2030, and India can benefit from this.
