Semiconductors help power everything from your phone to your car. Here’s what to know about the major supply chain problem.
There are chips in nearly everything electric you own, from your phone to your computer to your car. There are even chips in items you wouldn’t expect, such as your washing machine, electric toothbrush, and refrigerator. But these tiny parts that power so much of our lives are now in critically short supply.
“Right now we have a global supply chain in crisis,” says Patrick Penfield, a professor of supply chain practice at Syracuse University. “We’ve just never ever seen anything of this magnitude impact us before.”
What are these chips?
These chips are the lifeblood of modern society, but even before the pandemic, demand for them exceeded supply. This year, economist Rory Green called semiconductors “the new oil,” pointing out that Taiwan and Korea control the lion’s share of chip production today.
But while these chips were an American invention, the number of US manufacturers currently creating them has declined severely. In 1990, 37% of chips were made in America, says James Lewis, senior vice president and director of CSIS’s Strategic Technologies Program. By 2020, that number was only 12%.
What is the chip shortage?
As the world shut down because of the COVID-19 pandemic, many factories closed at the same time, making the supplies needed for chip manufacturing unavailable for months. Increased demand for consumer electronics caused shifts that rippled up the supply chain.
Orders began to pile up as manufacturers struggled to create enough chips to meet the new levels of demand. A backlog began to grow and grow and grow.
Car companies, like Ford, have to predict the amount of chips they will need to produce their cars and order them in advance from one of the chip manufacturers. As of now, it can take at least half of a year for a chip order to come in, says Penfield. The current demand for chips is so great that manufacturers can’t make enough chips to meet it at this time, meaning consumers will soon be seeing higher prices for fewer goods.
But the issue wasn’t just with manufacturing. As COVID made its way through Asia, ports shut down, sometimes for months. Some 90% of the world’s electronics go through China’s Yantian port, and it was recently closed, leaving hundreds of container ships waiting to dock.
What caused the chip shortage?
Bad decisions by the auto industry also added to the shortage. When COVID started, many companies canceled their orders for chips because they assumed the economy was about to take a lengthy hit, says Lewis. Car companies in particular cancelled orders, so chip companies switched to making chips for consumer products, attempting to meet the explosive demand caused by the pandemic. Having retooled their plants to make chips for consumer goods instead of cars, a shortage of car chips ensued.
There aren’t many chip manufacturing plants in the world, and the few that were running during the pandemic were subject to a series of unlucky weather events that delayed the manufacturing process further.
Japan’s Renesas plant, which creates almost one-third of the chips used in cars around the world, was severely damaged by a fire, while winter storms in Texas forced some of America’s only chip plants to halt production. Producing these chips also requires a lot of water, and severe drought in Taiwan has also affected production.
Does China play a role?
While geopolitical concerns are not the main cause of this chip shortage, one ongoing concern is Taiwan’s tense relationship with China. Taiwan is the world’s leading chip producer, and the theoretical possibility of war between China and Taiwan puts American access to the chip industry in potential jeopardy and could be catastrophic for many industries that would be unable to get the chips they rely on.
“China is deeply tempted to just seize Taiwan,” says Lewis. “The Chinese are desperate to have their own chip industry. It’s become a focal point for the competition between the US and China.”
American chip manufacturer Intel has announced plans to scale up their chip production, while Taiwan Semiconductor Manufacturing Co and Samsung eye locations for the American factories they plan to build. But while these plans are promising, it will take years before these factories can ramp up their production levels.
What are the effects of the shortage?
The auto industry is getting hit hard, with estimates saying US manufacturers will make at least 1.5 to 5 million fewer cars this year. Ford and General Motors have already limited production. Tesla revised its own software to support alternative chips to maintain its production levels.
When will the issue be resolved?
Opinions on when the shortage will end vary. The CEO of chipmaker STMicro estimated that the shortage will end by early 2023. The CEO of automaker Stellantis said that the shortage “is going to drag into ’22, easy.” Intel CEO Patrick Gelsinger said the shortage could last two more years.
“We’ve probably got about nine, 10 months of this to live through,” says Lewis. “If you can afford to wait, prices will go down.”
Source: Popular Science (By Shira Feder) Read The Article
PSR Analysis: PSR has devoted considerable time the past 12 months to examining the fragility of the global supply chain. We have addressed the topic in webinars, podcasts, and PowerTALK articles as well as in the quarterly Update Bulletins we send to our data license subscribers.
A central topic in the supply chain issue is the severe shortage of semiconductors. In this article, Shira Feder has provided an excellent overview of the issues facing the automotive industry, as well as all industries which now depend on microchips to function. Citing a combination of lagging demand due to COVID, misfortune, sheer bad luck, poor planning, geopolitical factors and disasters – both man-made and natural, this article reenforces the need to diversify supply chains.
As fleet electrification expands and autonomous drive technologies progress, the demand for microchips will intensify. Two geographically small countries which punch well above their weight class – Taiwan and South Korea – will continue to be key players moving forward. The US has done well to engage both in working to find solutions, but these will take time to realize. All the more reason for governments to examine what they need to do to either develop manufacturing at home or develop and maintain close relationships with stable and reliable partners. PSR
Erik Martin is Director – Asia Region, for Power Systems Research
