The past quarter of 2021 can be reflected upon as a critical turning point for the world, as countries continue grappling with the influx of coronavirus cases in various hotspots around the globe. However, whilst this is all taking place, the effects of cross-border isolation and hampering of international supply chains have begun to take a clearer shape and is having sweeping effects across multiple industries. Whilst economic demand continues the rise, the other end of the spectrum continues to tussle with a lack of raw materials, a sustainable working force, and high trade barriers. It has been difficult year for industrial suppliers, and a solution cannot come quickly enough.
It is the global distribution of goods and resources that spurs economic growth. Unfortunately, it is this global distribution that has also suffered from the worst of the pandemic. International trade remains in one of its worst positions in years; amongst the abundance of bottlenecks faced by corporate institutions and manufacturers, probably of the most prominent of them all lies within the tech industry. Like missing a cog in the machine, there is a critical shortage of microchips – otherwise dubbed internal circuits (ICs) or semiconductors – all around the world, and the repercussions are echoing across nearly every sector imaginable. Here, we will take a look into the context behind semiconductors, how we came to this point, and how the shortage will play out, now and into the foreseeable future.
The history of semiconductors in everyday products is hardly more than a century old, and yet we would incontrovertibly exist in a very archaic society if it were not for their development. It is pretty difficult to fail at naming a product or appliance that you use in the average day that does not depend on the technology.
A semiconductor is a material used in circuits, chips, transistors, and ultimately for the purpose of powering electronics. As its name suggests, semiconductors do not fully conduct electricity, sitting somewhere between a conductive and insulative substance. This property makes it much easier to control and requires much less power than its pure counterparts. Typically made from silicon or germanium, or other related compounds, semiconductors have extended to use cases beyond any other technological advancement available in the world. Electronic devices are just the tip of the iceberg; semiconductors are responsible for nearly every industrial advancement, including communications, military systems, transportation, energy, and healthcare.
Even more fascinating is the fact that the material is becoming increasingly small, yet increasingly powerful. Within an integrated circuit are billions of transistors, devices made of semiconductor material that amplify, control, and generate the electrical signals necessary to keep its applications active. According to empirical observations, semiconductors are interlinked with a concept named Moore’s law; a notional ‘rule of thumb’ that the number of transistors in a dense IC at optimal price/performance doubles roughly every two years . This has significant implications for the growth of computational power, customer demand, and competition over time, yielding increasingly condensed but increasingly robust devices. Of course, such trends over elongated periods of time are rarely ever so linearly balanced, and some circulating arguments suggest that the law is breaking down but is still valid or so for the next 10-20 years, supported by Moore himself as well.
The first case of semiconductor usage actually traces back to the basic AC-DC converter in 1874. Could the early pioneers have imagined that this seemingly elementary material would be used to power the fantastic likes of self-driving cars and portable electronics?
If we account for the significance of semiconductors within society, then a glimpse at the semiconductor market should not present any surprises. The market share is dominated by behemoths of corporations; the likes of Intel and Samsung, both of which are household names in the tech industry. A 2019 analysis reported an overall market valuation of US$513.08 billion; this is expected to become $762.73 billion by 2027.
What is attributing to this upside is, of course, the rising consumption of electronic goods and tech-reliant services. Furthermore, the gradual normalisation of the Internet of Things, Machine Learning, and Artificial Intelligence, are helping to make the technology hold greater utility, and make future advancements a lot more feasible in a shorter time frame.
In light of dwindling supply, demand paid no mind and continued to boom; March sales of semiconductors worldwide totalled $123.1 billion, roughly 18% higher than the first quarter of 2020 .
The relationship between COVID-19 and the chip shortage is by no means a causal one, but rather, the shortage is an exacerbated result of its events. The issue really only blossomed shortly after the first several waves of lockdown protocols across several countries in mid-2020. These countries happened to be some of the most economically liquid and dependent on global trade, such as China, the United States, Australia, and parts of Europe. It just so happens that carmakers are either headquartered or are running their factories in these countries. As such, a tightening of international trade channels had a significant impact on their ability to acquire car parts, chips, and basically generate revenue from their products. With these hurdles in place, it became a lot more difficult to cover the basic labour and capital costs, and so we witnessed a sizeable frequency of factory outages and automobile production coming to a relative standstill. General Motors, Ford, and Volkswagen shut down their supply lines, cancelling the chip orders that would’ve been used to build the advanced driver assistance and navigation systems we’ve normalised today.
No matter how small a component is, if you cannot find it and use it in your product, then your product isn’t finished. This is especially important for mass production vehicles that are distributed worldwide, where quality control is of utmost priority. A lack of such can cause irrevocable damage to reputation and profit margins from a global recall or lawsuit. We have seen this before with Takata’s exploding airbags, or Samsung’s self-combusting Galaxy Note 7. When it comes to components as fundamental as semiconductors, it is virtually impossible to even make the product functional in the first place, presenting an annoying hindrance to the production cycle.
But it was not as if manufacturers could not get any semiconductors at all: if they just wait about three to four months that is!
The car industry was not alone in its fight. The disruption to trade had rippling effects into electric vehicles, renewable energy, medical technology, and electronic consumer products. Let’s walk through a few examples.
For one, the long-awaited PlayStation 5 saw its release last November, seven years since its predecessor It takes the title of being the fastest-selling console in US history to date, completely outstripping supply in about five months . What the chip shortage has really done is made it nearly impossible to buy another one without going through secondary markets or using automated bots on retail platforms, because the growth rate of production is being utterly hindered by the lack of AMDs, the benchmark product from American semiconductor manufacturer, Advanced Micro Devices.
Furthermore, the newfound normality of staying at home has also brought on greater demand for digital entertainment, TVs, mobile devices, and home appliances. Indeed, the future of work is changing, and now, with working remotely becoming increasingly habitual within modern work culture, it is likely this demand will not be offset any time soon.
Finally, the job market landscape itself has gone through many adjustments; as the nature of work transformed, so too did the job prospects. There has been such a massive movement into opportunities to work remotely whilst generating income, such as e-commerce, digital marketing, and even cryptocurrency mining .
What can manufacturers do, when they don’t have the parts to build the products being stipulated by their consumers? On one hand, you could cancel your semiconductor orders and, of course, close up shop, either on a temporary or permanent basis. On the other hand, however, you could buy additional inventory by any means possible. After all, if your business is in a financial position where you can place inventory orders before they sell out, and your thesis is that you won’t be able to stock up on this inventory for the foreseeable future, what would you do? Of course, it would be to place orders in excess for that rainy day. This is another fundamental catalyst to the shortage; manufacturers that relied on semiconductor materials but faced low cost-benefits from the idea of stopping their operations and taking what they could, ‘double-booked’ orders on inventory; in our case, semiconductors. This was intensified even further by the anxious foresight of near-term market uncertainty and the escalating geopolitical tension between China and the US at the time, and this interplay accumulated into the problem we see today: a global shortage in semiconductors, one that will likely continue for the next two to three years .
Indeed, it’s not just international travel that remains idle. The shortage will see its effects reverberating for an extended period of time. German chipmaker Infineon calls it unchartered territory, and it does not seem to be working out so far. The estimated cost of semiconductor production is evaluated to have increased by 80% since the shortage emerged; that’s US$110 billion. Furthermore, global carmakers face an opportunity cost of over 3.9 million vehicles in production. Put simply, if the entire population of Los Angeles could drive, and every individual wanted to buy a car each for themselves, pretty much the entire city would be unable to get one.
TSMC, or Taiwan Semiconductor Manufacturing Co., is one of the few giants in the sector, and accounts for over 54% of the total production revenue of semiconductors . Interestingly, in 2020, carmakers were only 3% of the company’s profits . For a multibillion-dollar industry that is publicly reported as facing its worst downturn in half a century, to make up only 3% of sales for the largest global puts a lot into perspective. What it really shows is how dependent and focused the automobile industry is on such a small fraction of suppliers and exposes how vulnerable the sector is to sudden economic shocks. The car industry is by no means unaccustomed to these demand-supple dynamics going haywire, but the issue brings rise to a few important discussions on supply chain management and optimisation, in both a tumultuous economy, and a prosperous one.
The shortage speaks leaps and bounds on the increasing globalisation of economies and the importance of stable trade relationships between nations; the US-China trade war is the prime suspect for compromising the latter. It’s shown us the double-edged sword effect of enjoying the assimilation of a technology that is continuously progressing and changing lives but struggling as a society on a global scale from a basic economic supply shock. Perhaps the question often posed by traditionalists isn’t so outrageous after all: are we too dependent on technology? What if semiconductors ceased production completely? What is it doing to our natural resources? Though ever rarely are these questions present in our minds, they do pose a challenge for a sustainable and robust society in the face of devastating to cataclysmic events that could wipe out or substantially dismantle the very structures that we take for granted.
Bringing the conversation back to the shortage, fortunately there is work being done. TSMC is investing US$100 billion over the next three years to increase operating capacity, whilst Intel plans to throw down $20 billion to plant expansion and offer its chip services to other companies outside of the bigger players, such as Apple.
The bottom line, however, is that as with any kind of capital formation and development, time is one’s greatest enemy, and creating capacity does not happen overnight. What companies can do, however, is polish the planning and decision-making that comes with resource allocation, making the right sensitivity analyses to account for even the wildest of future phenomena, and learning to mitigate as many risks as possible to make the right processes happen. Doing so is not an easy feat, nor is it ever so predictable, but doing so is a sure measure that any firm should be actioning, should they wish to show economic resilience in the wake of any economic crisis.
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