Global chip shortage to hit production of computers, phones, vehicles and appliances

Semiconductors are the logic and memory chips used in computers, phones, vehicles and appliances. With the pandemic, higher demand for cell phones, laptops and other work-at-home devices and the increased use of internet have increased the requirement for semiconductor chips. The demand for chips is likely to stay strong due to elevated levels of global consumption of smart devices and a push toward advanced 5G technology.

The global automotive industry predicted that demand for cars would fall during the pandemic. After many countries have lifted the lockdowns, the demand for passenger vehicles (PVs) has substantially increased due to people's general reluctance to travel by public transport. After the auto industry has restarted production, it is now facing a shortage of semiconductor chips.

How the shortage of semiconductors has caused production cutbacks in the automotive industry is exemplified by the fact that global carmakers like Ford, Toyota, Nissan, VW, and Fiat Chrysler have scaled back output. Production of laptops and many other appliances is also being adversely affected due to semiconductor shortage. The global semiconductor shortage is impacting Indian car makers also.

“The big concern for the auto industry and Mahindra, and in fact for the world, is the semiconductor shortage. (It is) something that we’re very perplexed with, and something where the end is not clearly known as to when this fall will go away,” Pawan Goenka, MD and CEO of Mahindra & Mahindra, said during a press conference while declaring the company’s Q3 results, on February 5. Samsung Electronics Co says that there is a “serious imbalance in supply and demand” for chips. The semiconductor industry is based on the foundry model, which consists of semiconductor fabrication plants (foundries) and integrated circuit design operations - each belonging to separate companies. The foundry model has resulted in consolidation of the fabrication operations.

As of 2021, only three firms are able to manufacture the most advanced semiconductors - Taiwan Semiconductor Manufacturing Company (TSMC)  of Taiwan, Samsung of South Korea, and Intel of the United States. Advances in semiconductor fabrication are based on the number of transistors, the smallest of a chip’s electronic components, per square millimeter.

The global semiconductor industry is dominated by companies from the Asia-Pacific region including China, Japan, Singapore, South Korea and Taiwan. The U.S. share of global semiconductor fabrication is only 12%. The increasing reliance by U.S. companies on international partners to fabricate the chips they design reflects the United States’ diminished fabrication capability.

A spell of bad weather is also crippling chip production in North America. Recently, eight state governors of U.S. have asked President Biden to redouble efforts “to urge wafer and semiconductor companies to expand production capacity". TSMC recently said that it plans to invest $100 billion over the next three years to increase capacity at its chipmaking plants, days after Intel Corp announced a $20 billion plan to expand its advanced chip manufacturing capacity. It may take at least two years for the new capacities to come into production. India has also entered the race for semiconductor fabrication supremacy. India is offering more than $1 billion in cash to each semiconductor company that sets up manufacturing units in the country as it seeks to build on its smartphone assembly industry and strengthen its electronics supply chain. “The government will give cash incentives of more than $1 billion to each company which will set up chip fabrication units,” a senior government official told Reuters a few days back, declining to be named as he was not authorised to speak with media. Geopolitical factors have also played a role, specifically when the Trump administration began tightly regulating sales of semiconductors to Huawei Technologies, ZTE, and other Chinese firms. Those companies in turn began stockpiling chips essential to 5G smartphones. In October, a fire at a Japanese plant belonging to Asahi Kasei Microdevices located in Nobeoka, Miyazaki took advanced sensing devices used in automotive and other industries out of circulation. As of late February, the plant was still down. There have also been constraints in the global transportation system. According to Clear Metal, which monitors over 90% of ocean freight, nearly 7% of ocean freight is not making it out of China ports this quarter.

The lead times for chip supplies has gone up from 10 weeks to about 17 weeks on an average for certain types of microprocessors over the last year, according to data from Bain & Company. Back-to-back, around 75% of semiconductor parts suppliers had an overall jump in lead times over the last one year. Manufacturers of semiconductor components like multi-layer ceramic capacitors, substrates, microcontroller units and silicon wafers are all receiving orders that they aren’t able to cater to immediately. Texas winter storms forced the U.S. power utility, Austin Energy to shut off power to the Austin area's largest electricity users - among them chip factories operated by Samsung, NXP Semiconductors, and Infineon Semiconductors. The global chip shortage is like a long winter that won't go away so soon. ( V Venkateswara Rao is an alumnus of IIM, Ahmedabad and a retired corporate professional.)