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Global Chip Shortage

Due to COVID-19, trade and other world issues, a global chip shortage has occurred. Facilities were shut down; however, people were still working from home, meaning that there was a rise in demand for hardware. This led to chip production inventories becoming depleted.

Unfortunately, this chip shortage will continue, with various companies across different sectors having their concerns. Intel’s CEO Pat Gelsinger stated that it will be “a year or two” before we will return to normality. The shortage is affecting a variety of industries such as car manufacturers, consumer appliances, and computers. The smartphone industry has had very high demand, and crypto enthusiasts are snatching most graphical processing units (GPUs). Meaning that these were the first areas to experience shortages.

The cause and detriment

The cause of the shortage is due to a number of different reasons all coming together at once.

Firstly, manufacturing a chip usually takes about three months, and the manufacturing process is incredibly in-depth. It makes use of multi-million-dollar machines, vacuum chambers and more. Increasing this complex process is timely and wouldn’t offer a quick resolution.

Secondly, the pandemic caused a surge in demand for electronic goods, but due to a lot of factories having to temporarily close, the demand only increased. However, the pandemic wasn’t the only reason for the shortage.

Thirdly, America’s tense relationship with China doesn’t aid the shortage. A lot of US companies do business with Chinese companies but increasing trade sanctions are making it more difficult for business to happen. Poor planning is also to blame, with silicon chip producers neglecting plans to build enough foundries to support automakers.

The Taiwan Semiconductor Manufacturing Company (TSMC) who are the largest manufacturer of semiconductor chips are planning to raise their prices by 10% for advanced chips. This would affect the price of Nvidia products, and more importantly Intel processors. Companies such as Google and Apple dodged the initial shortage because they had contingencies in place, but now sales have started to decline.

What's being done?

Companies such as Amazon, Apple, Meta and Tesla are planning on starting to develop certain aspects of their own chips in-house. This would involve companies no longer using contractors such as the TSMC instead, creating their own production facilities. If this costly task is successfully implemented, it would help to alleviate future shortages and benefit the industry long term. Some analysts predict the chip industry to grow by 15% in the next three years.

Governments are also getting involved. Asia manufacturers most chips, but now western countries are wanting to move production within their own borders to become self-reliant. In the US, the Biden administration has pledged $50 billion for the semiconductor industry. Joe Biden himself has met with numerous large companies such as Dell, Ford, Intel and more to help stress the importance of staying ahead of the competition. In terms of the UK, to automobile industry has been hit the hardest.

Fortunately, however, the UK already has a large internal microchip industry. Meaning they haven’t and shouldn’t expect to see as severe shortages as some other countries.

What we can expect

In conclusion, a shortage of chips seen will be throughout 2022.

By the end of 2022, JPMorgan expects this shortage to resolve, but more bearish investors, analysts, and Intel’s CEO predict the shortage to last through to 2023. This is due to the rising demand for gaming, crypto, and server needs.

Long term, the whole industry may start to see a shift in localising the manufacturing process. Meaning that countries may start producing their own chips. Overall chip manufacturing, as of right now, offers a lucrative opportunity for both companies and countries. Therefore, the industry should expect to not only recover but also thrive within the next 5 years.