Semiconductor Shortages and the Impact on Industry

Semiconductor chips have come to be an essential part of global industry in our modern economy. These chips are used in a wide range of products and industries including, auto, healthcare, consumer electronics, and many others. A global semiconductor chip shortage beginning in 2020 has presented global industries with major supply chain bottlenecks impacting vendors and consumers across the world. These chips are not easy to create with some advanced chips taking up to 6 months to manufacture with no viable alternative. Along with this, trade sanctions placed against some countries, mainly China, have caused companies to stockpile chips leading to further shortages. What are experts saying are the main causes of these shortages and what can we expect to see with these shortages as we move into 2022?

Semiconductor Shortage Causes

With semiconductor chips becoming used across many industries and increasing consumption of consumer electronics across the globe, annual demand for semiconductor chips has shown consistent increases in recent years. Goldman Sachs reports that the global chip shortage now has disrupted 169 different industries with the automotive, telecommunications, mobile devices, surgical instruments and construction industries being among the most impacted.

Experts point to the spread of COVID-19 in 2020 as a catalyst for the chip shortage. As lockdowns were instituted, a fall in auto sales led auto manufacturers to reduce electronic parts orders. An unforeseen recovery in auto demand in December 2020 caused automakers to suddenly place large rush orders for these parts. Due to the assumed low demand from the auto industry, top chip manufacturers allocated chips to consumer electronic products manufacturers making them largely unavailable to automakers creating a manufacturing bottleneck. Q1 2021 saw major manufacturers such as GM, Ford, Volvo, and others suspending manufacturing. In addition, new COVID policies slowed workforces as governments across the world fought to slow the spread of the virus. An IHS Markit estimate placed the estimated loss for the auto industry at $60 billion in 2021.

Another impact of COVID-19 was a rise in consumer technology demand as citizens across the globe began to adjust to the pandemic environment and shift to a remote lifestyle. As the economy began to “re-start” in late 2020 – early 2021, demand for consumer goods began to spike, putting further strain on industries already experiencing semiconductor shortages.

Manufacturing weaknesses in the chip industry were made apparent through this shortage with experts focusing on the lack of geographic diversity among chip manufacturers. 87% of all semiconductors produced are produced in Taiwan, South Korea, and China with 54% of all chips made by the Taiwan Semiconductor Manufacturing Company (TSMC). This uneven market distribution created further weaknesses in the midst of the pandemic compounding supply chain disruption.

Future Outlook

With time to analyze and react to the situation, global leaders and industry experts are now taking steps to secure chip manufacturing for the future. US officials have established communications with the Taiwanese government to work towards a solution for the shortage. Whitehouse spokesman have stated that the White House is engaging with all international partners to take the proper steps to address the shortage, but all recognize this is not a short-term issue.

Recently, the US passed the Innovation and Competition Act, allowing for $52 billion in funding for semiconductor-related projects. This is expected to create a new on-shore boom of chip manufacturing for the US which has the potential to have a long-term impact on the American economy.

Despite the measures being taken globally, there are still consequences expected for the US and global economies. US National GDP is expected to take a .5% – 1% hit in 2021 and Ford and GM have both stated that they predict individual earnings cuts of $2 billion. Looking to expert expectations, the chief executive of a large German chipmaker, Infineon, said in May that it will take time to balance supply and demand. He predicts this will happen in 2022 but could take as long as 2 years.

Industry experts and international officials have agreed that the best solution to address this shortage and protect manufacturing for the future is to undergo a large-scale expansion of production capacity. While this would ease the strain on the supply chain, new manufacturing facilities will not be ready to produce at volume until mid-late 2022 at the earliest. The EU has committed to expanding manufacturing in Europe which currently accounts for less than 10% of global chip production. American chip manufacturer Intel has announced plans to spend $20 billion on two new chip plants in Arizona with additional plans to expand production in Europe. TSMC has stated new goals to expand production and has already begun to build new factories in Arizona. TSMC predicts a 47% increase in year-over-year capital expenditures in 2022 as they work to expand production capacity with higher expenditures expected to follow. South Korea recently announced a $450 billion investment planned for the next 10 years to grow their onshore semiconductor chip manufacturing capacity. Along with this investment, the South Korean government will provide tax breaks, lower interest rates, and decreased regulations to aid in the growth of this infrastructure.

The global chip shortage and the impact on industry has continued to evolve and we will not know the full impact of this until the shortage draws to a close. It is clear that this event will continue to cause major bottlenecks for manufacturers and vendors into 2022 with leading experts confident we can begin to see a recovery in late 2022 – early 2023.