Computer chip shortage strangling global manufacturing and killing economic recovery

As technology continues to advance, computer (or semiconductor) chips are no longer exclusively found in computers and cars — they are now critical components for a staggering number of products. From toothbrushes to toys, and toasters to smart lighting, these chips can be found in virtually every product that requires power.

But a combination of factors has created a lack of these somewhat innocuous but critical components; threatening to stall the economic recovery of more than 169 industries and leading to major shortages of consumer goods.

What has caused the shortage?
The global chip crisis has arisen from a combination of events, creating a ‘perfect storm’ that is likely to cost the global economy billions of dollars.

Top of the culprit list is the current COVID-19 pandemic, as people around the world had to stay at home many purchased or upgraded electronic devices such as webcams, monitors and computers in order to work from home, home school the kids, stay in touch with loved ones, and be entertained. In the fourth quarter of 2020 alone, traditional computer sales saw a 26.1% growth over the previous year.

Last year, as the trade war between the US and China continued to escalate, the US government placed restrictions on the Semiconductor Manufacturing International Corporation (SMIC), China's biggest chip manufacturer, which made it harder for them to sell to companies with American ties. These restrictions forced companies to use other manufacturing plants such as the Taiwan Semiconductor Manufacturing Company Limited (TSMC) and Samsung. However, these companies were already producing at maximum capacity.

This year, Taiwan has experienced its worst drought in more than 50 years, creating a huge problem for chip manufacturers that use large amounts of ultra-pure water in their factory production process. TSMC's chip manufacturing facility alone requires more than 63,000 tons of water a day to keep the operation moving - that’s more than 10 percent of the total supply from two local reservoirs.

Other random events that have held back supply include fires in chip factories, power outages and the widely reported transportation blockage in the Suez Canal caused by the ‘EverGreen’ cargo vessel.

It is, therefore, no surprise that manufacturers are struggling to keep pace, but the pandemic has exposed pressure points in the global chip supply chain, with most chip manufacturing being carried out by just two companies.

Which sectors are affected by the shortage?
We are now in a world where every industry is either enabled by, or dependent upon semiconductors.

Cars: There isn’t a single industry that’s not influenced by semiconductors – and none more so than the automotive industry. Vehicles are more dependent on semiconductors that direct and manage engine performance, safety features, navigation, and entertainment systems. A modern car can have up anywhere from 1,500 to 3,000 chips.

At the start of the pandemic, car manufacturers cancelled chip orders out of concern that the pandemic would hurt sales, but unexpected demand then led to a shortage of chips in stock.

For some car firms, assembly lines have ground to a halt:

• Jaguar Land Rover was forced to pause production of vehicles at its UK and Slovakian car factories.

• Mini temporarily shut its Oxford plant.

• Volkswagen has already built 100,000 fewer cars so far in 2021.

• Daimler has dialled back its delivery expectations due to the lack of supplies.

• Ford had to park thousands of unfinished vehicles at Kentucky Speedway, waiting for the chips to finish assembling the cars.

It’s been estimated that U.S. automakers alone will make 1 million fewer cars this year because they’re unable to source the computer chips they need. For UK car makers, 311,000 fewer models have come off production lines in the first half of this year. That's down almost 40 per cent on the ten-year average and a loss of more than £8.5billion.

Rental car companies are also feeling the effects as they’re unable to buy the new vehicles they want. Hertz and Enterprise, which have traditionally profited from buying new vehicles in bulk and renting them out, have reportedly resorted to buying used cars at auction instead.

Video game consoles: The COVID-19 pandemic led to a rise in popularity of video game consoles. With the release of the ninth generation of video game consoles, demand increased even more, with Sony warning that short supply of the PlayStation 5 console will last into 2022, while Microsoft expected shortages of the Xbox Series X and Series S to last into at least late-2021.

Phones and tech: Computer giant Apple says the chip shortage is already hurting sales of iPads and Mac computers and will soon impact iPhone production. Another phone maker, China-based electronics company Xiaomi, delayed the shipment of a new device model in India. And Elon Musk recently stated that the chip shortage meant Tesla would only be able to manufacture about half as many Powerwall home batteries as it thinks it can sell.

Domestic appliances: Production of low-margin processors used to weigh clothes in a washing machine or toast bread in a smart toaster have also been hit. While most retailers are still able to get their hands on these products, Whirlpool has admitted that the sparsity of these chips is hampering the manufacture of its domestic appliances.

And it doesn’t stop there – the shortage has affected more random companies such as a US business that makes dog-washing booths, and one San Francisco based sex toy company has been stockpiling microchips to fend of future supply chain problems!

How does this affect the consumer?
First and foremost, the chip shortage is causing an overwhelming lack of supply across all consumer goods that require semiconductors. Huge production delays are being seen across the board and the scarcity of products is driving up prices.

The latest generation of video game consoles are being resold on websites like eBay for 50% to 100% more than their retail prices.

New car prices are increasing due to lack of supply and the used car market is also being affected. Used car values in the US have shot up more than 5% in June/July and 50% in the past year; whilst the UK used car market has seen a 20% increase in the value of used cars sold.

Some products are even destined to be shipped out missing previously planned features. Nissan is leaving navigation systems out of cars that would normally have them, while Renault is no longer putting an oversized digital screen behind the steering wheel of certain models.

What’s being done to resolve the problem?
With demand for semiconductors likely to increase as industries undergo digital transformation, chip makers and governments are working to build more capacity into supply chains.

TSMC is investing $100m in additional capacity over the next three years, while Samsung and SK Hynix, along with the South Korean government, have pledged to make $451bn of investment in capacity and incentives for chip makers.

But there is a recognition that supply chains need to decrease the reliance on Taiwan and South Korea. The US only makes about 10% of the chips it uses and so US president Joe Biden has pledged to support the semiconductor sector. A massive tech funding bill would see $52bn earmarked for US chip production. Intel plans to expand its capacity and is spending $20bn on two new factories in Arizona.

The European Commission also wants to build up its chip manufacturing capacity, which currently accounts for less than 10% of global chip production. It wants to double that figure to 20% and is looking to invest $24-36 billion to make it happen. But the UK government has yet to reveal any plans to help its domestic semiconductor sector. Indeed, the UK’s biggest chip factory, Newport Wafer Fab, is now in the hands of the Chinese after a take-over by Nexperia.

When will the global chip shortage end?
Semiconductor supply had been expected to rebound by the end of 2021, but the global chip shortage now looks set to last into next year - and could remain until 2023, some experts fear.

Stellantis, the world’s fourth biggest car maker, said that the chip shortage had gotten worse in the last quarter. Richard Palmer, the chief financial officer of the firm warned the disruption could last into 2022.

The chief executive of German chipmaker Infineon, Reinhard Ploss, said the semiconductor industry is in unchartered territory. “It is very clear it will take time. I think two years is too long, but we will definitely see it reaching out to 2022,” he said.

The main reason the chip shortage has been prolonged is that it takes a huge amount of time and money to build new semiconductor manufacturing plants. It takes roughly 2.5 years and around $10 billion to build a new plant.

Is this likely to happen again?
Even when the current global chip shortage ends it is likely more supply problems are just around the corner as demand for electronics grows further.

Ongoing global chip production is likely to face a cyclical ‘boom and bust’ effect in the future. The chip-making capacity that is being put into place will likely be enough for the next few years, but as these plants come on stream, we will start to see a glut in supply.

However, give it another five years and we’ll be maxing out capacity again as demand for things like smart homes and electric vehicles increases.