Microchip, or semiconductor chip, or just chip, no matter what we call it, that sits quietly in our electronic device is making the loudest chaos world-wide. Imagine the first industrial revolution without steam or second without electricity? As it’s impossible, so is the fourth industrial revolution impossible without the brain of electronics- microchip. From our smartphone to microwave, automobile to iPod, microchips are present everywhere, it makes the device what it is to us. In short, no microchip means no electronic devices.
While as we proceed more into the IR4.0 (Industrial Revolution 4.0), the more dependent we get on these miniature chips. World-wide companies, governments, and markets are all making an effort to capture the potential of this increasing demand for chips in our everyday life.
However, from the past two years things have hit a rough path.
Microchip Manufacturing Factory
As of summer 2022, lead times for most semiconductors — no matter the type — are running at least 40 to 50 weeks, with many in the 50 to 60-week range. Analog chip suppliers are seeing an average book-to-bill ratio (the number of orders placed vs. the number of orders filled) above 1:1, indicating backlogs. Beyond wafer foundries, wire bonding, substrates, materials and testing are all seeing shortages or delays.
How did the Shortage Start?
The shortage of microchips is a result of the double edge sword of the economy: the demand and the supply.
The Microchip Shortage caused by Supply Side:
There are multiple reasons at play that drove this shortage:
The main culprit of this shortage is the Covid-19 pandemic which resulted in the global unrest and complete halt of the supply chain line. The ramification of this halt were echoed in multiple ways:
- Labour Shortage: Almost two years long lockdown created the void both in the manufacturing industries and the market. Semiconductor industry is labour intensive. With workers either trapped in homes due to lockdown or migrating back to their homes on one hand and closing down of industrial activities on the other resulted in a full stop of chip manufacturing.
- Crunched Logistics: Transportation proving to be the primary carrier of Covid-19 turning it into a pandemic, all modes of logistics faced a bottleneck. This affected the chip assembly which is a multinational process, the raw material coming from one place, wafer material manufacturing from other while the micro controller, processors, etc. being manufactured in some other part of the world.
- Boiling down of Investment: With looming uncertainty, investors were skeptic of putting their money into any manufacturing industry let alone microchip. This affected the on-going or keeping the little spark in manufacturing glowing. Many ancillary units, MSMEs in India and small start-up had to be shut down.
Labour Intensive Chip Manufacturing
Murphy’s Law has rightly stated, ‘if anything can go wrong, will go wrong’. With the market on a downturn and economic slowdown looming overhead, the world accepted a calmer geopolitics to steer through it. However various political upheavals have been unwrapping:
- Increasing Protectionism: It started with the trade war between China and the U.S. during the Trump administration which had offshoots in the form of rising protectionism world-wide. With distorted import, export norms and duties to favour one’s own nation affected the production cycle of microchips which doesn’t have a single country of origin.
- Unrest in Taiwan: The tussle for autonomy in Taiwan from China is affecting Taiwan’s economy which is the largest contributor in the semiconductor industry globally. TSMC, having the largest share in chip production, controls 28% of global semiconductor manufacturing capacity. Further, the persisting drought in Taiwan is leading to shortage of water availability for wafer manufacturing which is a highly water guzzling process.
- Russia-Ukraine War: When the world thought it’s time to gear up at the beginning of 2022, Putin thought differently. Ukraine being the largest supplier of raw material for microchips, with the on-going war between Russia and Ukraine since February 2022 further crippled the already sluggish supply chain.
The Microchip Shortage caused by Demand Side:
The imbalance in the economy could have been contained if the demand side was lowered to even out the shortcomings of the supply side. However, with the lockdown introduction, the demand for electronics spiked at unprecedented levels owing to many ‘new normal’ in the age of technology.
Various factors at play were:
- Change in Work Culture: While the manufacturing sector plummeted during the pandemic, the service sector managed to keep going by changing the way people worked.
Further, new forms of self-employment like youtubing, vlogging, social media influencers, etc cropped up to innovate livelihood in a halted environment. Work from home (WFH) being the new normal, people needed laptops, routers, smartphones, webcams, computers and other electronic devices to ensure smooth functioning. All of these devices sacredly hold microchips at their core.
- Modes of Entertainment got Personalized: Outdoors being out of options people adapted to more personalized mode of entertainment through gaming, VR sets, home theaters, etc.
- Skyrocketing of Automotive Industry Demand: The industry that saw maximum slowdown is the automotive industry. On one hand people switched to personal cars over car-pooling to contain the spread of coronavirus and on second with lowering of interest rates, the affordability increased.
On an average the modern automobile incorporates more than 200 electronic parts. One can imagine the shortfall an automobile industry faced due to shortage of microchips.
- Nature of Advancement: Increasing automation in everyday life is making us puppetry in the hands of microchips. Internet of Things (IoT) based products, electric vehicles (EVs), 5G, electrification and automation at homes, industries, schools and factories ascended the roar for microchips.
With Improving Conditions, Are We Making Progress to Curb this Shortage?
The second half of 2022 will start to reflect supply chain recovery according to J.P. Morgan Research.
Global car production is forecasted to be up 7% in the 2023 fiscal year, with sequential improvements expected from the second half of 2022 as the chip shortage gradually improves. The demand supply gap is bridging due to V-shaped recovery in the post-pandemic era. Countries are precisely planning their chip industry norms and global trade to overcome the shortcoming:
V-shaped economic recovery post-pandemic
- In July 2022, the United States Senate and House of Representatives passed the CHIPS Act, which includes about $52 billion in government subsidies for research and production of semiconductors in the U.S.
- South Korea has committed $450 billion to its own industry.
- Indian Government, boosting semiconductor and display fab manufacturing through a Rs 76,000-crore incentive package, the move comes at a time when shortages in the supply of the critical component have hit industrial production across automobiles, electronics and other technology-led sectors.
Huge investments are being pooled in semiconductor industries due to its visible potential both to cater the age of electronics and finding environment friendly industries with lower carbon footprint.
However, the cloud of mismatch in demand and quality of supply still looms overhead. Though we are working on reducing the lead time of these chips, the quality of these chips as per the intended function needs to be addressed.
Volkswagen believes that semiconductor supply is unlikely to meet auto industry demand until 2024.
Further, to compensate for huge demand at retail and wholesale levels, technology and labour investments are on rise. Raw materials, foundries, test and assembly, logistics and labour have all become more expensive than ever.
The cost that the manufacturers are facing will be pushed down to the consumers. TSMC has announced it will raise chip prices by 6% in January 2023 after a 10% increase for high-end semiconductors and by 20% for less advanced chips in August 2021.
As per various reports, like shortages, price increases are expected to continue into 2023.
Microchips are like our external limbs making sense of our everyday existence. To work, socialise, entertain and learn, we depend on electronics which further depend on microchips.
The global Semiconductor Market was valued at USD 429.5 Billion in 2021 and is all set to surpass USD 712.4 Billion by 2028, exhibiting a CAGR of 8.8% during the forecast period 2022-2028.
This estimate is no exaggeration. Chip is the single device that has connected the world as it is today.
We are all hinged in this global network of electronic mesh which keeps us relevant in everyday life today. If the hampering in its production doesn’t concern you, it should now.