Why is there a chip shortage?From trade wars to consumer demand increases
If you’ve been following the news, trying to buy a new car, or looking to replace an old laptop, you may have run into reports of a chip shortage. These tiny pieces of technology are found in nearly every electronic device these days and are unfortunately in short supply right now. This is causing problems for the tech industry, but is also impacting the automotive industry which is actually quite reliant on these small silicon wafers.
Prior to the 2020 pandemic semiconductor chips were in short supply, but the post-pandemic disruptions of the global supply chain has thrown everything into chaos. We’ll dive into why there is a chip shortage and what that means for you.
What’s causing the global chip shortage?
The global chip shortage has its origins dating back a few years – with the earliest signs of trouble appearing in 2018. In 2018 a pair of trade wars arose – one between the US and China as well as one between Japan and Korea. As a result of these trade wars the raw materials necessary to produce chips became more expensive, increasing chip manufacturer’s lead time and reducing chip supply.
The trade wars continued to escalate, eventually culminating in the US blacklisting the major Chinese chip manufacturer SMIC. The trade war between Japan and Korea led to Japan withholding shipments of vital chipmaking components, putting a squeeze on South Korean chip production capacity.
Further complicating matters is these economic squabbles rest atop geopolitical conflict – in the case of the US/China trade war the conflict revolves around Taiwan. China asserts that Taiwan is a part of China, while Taiwan is adamant about its sovereignty. While chip manufacturing isn’t at the center of this issue, it is embroiled within it as Taiwan produces about 60% of the world’s microchips. Taiwan’s largest chip foundry, TSMC, makes chips for clients including Apple, Nvidia, and Qualcomm.
Beyond global economic and political struggles, three separate and unrelated fires in chip factories have compounded the problem by reducing manufacturing capacity for several key chip components.
On top of these troubles, demand for consumer electronics has surged – driven in large part by people buying consumer electronics to stave off boredom and to work from home during the post-pandemic lockdowns. The pandemic also pushed consumer demand for automobiles as people eschewed public transportation. Modern cars are heavily chip-reliant and this further stressed the struggling chip supply.
The Semiconductor Industry Association has said that global chip sales are expected to grow by 8.4% in 2021 compared to 2021. This represents an impressive bump in demand, particularly given that both 2020 saw the global chip market grow by 5%.
Finally, the pandemic has led to massive and unprecedented shipping delays. This means both that chip makers are unable to get the raw materials they need and that companies purchasing those chips are unable to get the chips themselves. This last factor is hard to overstate – particularly given that most semiconductor companies are based overseas.
What industries are impacted by the chip shortage?
Many industries have been hit by the chip shortage, although hardest hit are the auto industry and the tech industry.
Automotive companies have been left high and dry, running out of chips that are essential for their vehicles to function. Toyota has had to cut its October production by 40% while General Motors has seen sales fall 30% as it struggles to keep its plants open. GM has taken to nearly finishing construction of its best selling trucks, and then installing the chips as they arrive.
Ford’s Q3 numbers slipped by 28% compared to last year, although it reported small but meaningful improvements in September. This improvement may come from Ford shifting its focus from selling dealer stock to encouraging customers to place orders for build-to-order cars.
Not all carmakers were hit so hard, with Elon Musk’s Tesla managing to increase sales despite the global shortage. While Tesla is similarly experiencing delays and shortages, they have managed to dodge the worst of the shortage’s damage by using substitute chips and rewriting some of its firmware.
The new car shortages in combination with increased demand for private cars has driven used car prices through the roof. Some used cars are even managing to sell for 20% more than their original MSRPs. The cumulative effect is that dealerships are sitting with limited inventory and anyone looking to buy a car (new or used) can expect to pay quite a premium.
Outside of automakers, chip dependent tech companies that manufacture smartphones, computers, laptops, and game consoles are all feeling the pain of this bottleneck. One major indicator of how severe a shortage the world faces is that Apple has announced they are cutting back production of the new iPhone 13. As a titan of the industry that sells its products with high profit margins, Apple has the resources to pay more for chips. The fact that they’re scaling back production means the chips simply aren’t available to be had.
Apple’s biggest competitor, Samsung, has seemed to weather the shortage relatively well – although they did see weaker than expected 3rd quarter sales. As a chip manufacturer themselves, they may have been buffered from the effects of the shortage by increased chip prices.
On the computer front the chip shortage has had mixed effects. Intel reports that they are missing key components to finish many laptops, resulting in weaker sales, but desktop sales are up. Apple’s newest MacBook Pro is suffering from delays, although not so bad as some analysts had originally feared. These units are currently predicted to be available by the end of November or the first week of December depending upon the model.
Finally, next generation game consoles like the Sony PlayStation 5 and the Xbox Series X/S are going to prove difficult to find this holiday season. Sony at least isn’t taking the problem lying down and has entered into a multibillion dollar partnership with TSMC to manufacture chips in Japan. Unfortunately the plant won’t be operational until 2024 so this is a long-term solution rather than one which will pay dividends this holiday season.
When will the microchip shortage go away?
Due to the multifactored nature of the microchip shortage, it’s difficult to say when the shortage will be resolved but it certainly won’t be in the very near future.
The trade wars that precipitated the current shortage don’t show any signs of lifting, with Biden holding to Trump-era tariffs. However, the blacklist that impacted Chinese companies like SMIC and Huawei has proven to be of less significance than initially predicted. It turns out that the law was written in such a way that permits these companies to apply for export exemptions and 61 billion dollars of these exemptions were issued between November 2020 and May 2021 to Huawei alone.
And, while the chip manufacturing is set to increase, most of the new capacity is still a ways off. TSMC has stated that they expect the chip shortage to persist until 2022, while Intel’s CEO, Pat Gelsinger, has voiced his opinion that the shortage will continue into 2023. AMD’s CEO, Lisa Su, is more optimistic than her competitor and has stated that she believes the shortage will begin to lift during the second half of 2022.
Further complicating any predictions about when the shortage will end is the ongoing supply chain disruptions. As long as the chip industry is based in Asia the US will remain dependent upon the fragile global shipping networks. For now, it seems that shipping issues will persist until the end of 2022. This highlights the need for the United States to boost American microchip production in order to protect its industry from future chip shortages.
One thing is clear, microchip demand is not going to go away with consumer preferences for electric cars and more people working from home.
Modern combustion engine cars, like the Ford Focus, use an already impressive 300 chips – but electric cars increase this number by a factor of 10. The all-electric Ford Mach E requires 3000 computer chips, controlling everything from brake regeneration modules to window switches.
With more people than ever working from home and the specter of COVID looming, laptops and console gaming systems are going to continue enjoying a boost in sales. It is easy to see that reduced demand is not a realistic solution to the current chip shortage!
What can I do to avoid the frustration of the chip shortage?
The chip shortage will come to an end – perhaps as soon as the middle of next year. In the meantime there are a few ways you can avoid the frustration of limited supply and elevated costs of the current shortage.
If you’re in the market to buy a new car, you’re probably best off waiting. One thing to consider, however, is if you have a car you are going to be trading in, or have a car you aren’t using, the market for used cars is currently in your favor.
When it comes to laptops and personal computers, repairs are going to be more cost and time efficient than ever.
Finally, while it may be nice to upgrade your cellphone every year or two, this year it is probably best to hold onto your current phone a bit longer than normal.
Ultimately we’ve all got to be patient while semiconductor manufacturing comes back online and the global supply chain issues are resolved.
Whether you’re buying a car or replacing your laptop, the current chip shortage is going to make that take longer and cost more. If you are in a position to wait to replace either of these, that is going to save you some money – consider hanging onto what you’ve got until this shortage lifts. However, keep in mind that the chip shortage is not going to be solved overnight; expect it to linger well into 2022, and possibly even into 2023.