Some of the world’s biggest companies are currently staring at massive losses and an uncertain future triggered by the shortage of something that costs just a few dollars apiece, but plays an important role in production of automated and smart devices.
We’re going to talk about the ongoing global shortage of semiconductor chips and how it is affecting industries across the spectrum, ranging from automobiles, consumer electronics, power generation and many more.
What is a semiconductor chip?
Semiconductor chips are integrated electric circuits made with silicon and consist of many transistors and wirings on a wafer-thin base.
These semiconductor chips are embedded in systems of products like mobile phones, large and small computers, new-age automobiles, etc. These chips execute many key functions in these systems like data processing, storage, input and output management, wireless connectivity, high-speed computing operations and sensor controls.
Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s biggest chip manufacturer, supplying to almost every industry all over the world.
Why is it so crucial for industries?
With automation being incorporated in almost every aspect of our lives, major industries have invested heavily into smart technologies. For instance, automobile manufacturers use these semiconductor chips in many of their car components and features like infotainment systems, computerized engine management, driver assistance and digital speedometers.
Similarly, these chips are the brain of the new age technology and systems in modern smartphones and computers, which are used not just by regular people, but in sectors like healthcare, automotive technology, Fintech and cybersecurity, cloud computing and consumer electronics.
These smart chips are an important cog in the wheel right from the manufacturing, processing and consumption of products and services of various industries globally.
To understand this better, this data by McKinsey & Company shows how the demand has only risen leaps and bounds.
What caused the shortage?
When the pandemic rendered almost everyone to their homes and major industries halting their manufacturing operations due to the lockdown, the demand for these silicon chips went down massively.
But on the other hand, the demand for electronic goods like smart mobile devices, computers, laptops, home servers and video game consoles went up as people started working from home. This was the first stage of the crisis that was coming to be in 2020.
But geographical and logistical challenges due to the lockdown further hit the supply chain, since most of these chips are manufactured in East Asian countries like Taiwan and China, where the pandemic was raging. This caused a delay in the production and as a result prices of consumer durables and computer systems skyrocketed.
Another reason behind the shortage is the limited stock of these semiconductor manufacturers, in order to minimize waste. This, majorly to cater to the automobile industry who keep their chip supplies lean to keep their production costs low. As a result, when this unexpected shortage hit these industries, they had very little inventory to meet the burgeoning demand.
The after effects
A Goldman Sachs analysis states that a whopping 169 industries have been affected by the pandemic, the worst hit being automobile manufacturing.
Carmaker Ford had to cancel shifts at 2 of its car manufacturing units and said that their profits could take a hit of up to $2.5bn in 2021 due to chip shortages. Volkswagen, Jaguar Land Rover, Nissan and Renault too are facing the heat.
Apple, who manufactures the wildly popular iPhones had to delay the launch of their hyped next-gen iPhone 12 by 2 months in 2020 and was launched in mid-October. The $2 trillion company spends close to $85 billion annually on purchase of semiconductor chips and are the world’s biggest buyers.
South Korean consumer electronics giant Samsung too raised similar concerns and had stated that their smart televisions and appliances products are severely hit.
How are the industries coping with it?
Industry Advisory firm Forrester’s Glenn O’Donnell in a recent interview with CNBC had stated that this global semiconductor chip starvation will stretch till 2023. But TSMC is positive about meeting the demands of at least automobile makers by this year.
While companies are exploring short term solutions for the demands, by sourcing their chips from smaller manufacturers, this data here shows it won’t fulfill the requirements, since the time duration for the switch will still be long.
Intel had earlier in March 2021 announced that it would be investing close to $20 billion in building at least 2 chip manufacturing units in Arizona, USA. But again, this will take over 2 years to set up and doesn’t satiate the current demand.
Meanwhile, India wishes to cut its dependence on China for chip supplies and further help the world reduce the dependence on Taiwan for their chip demands. For which, the Indian government, under its Make In India scheme, is offering cash incentives of up to $1 billion to companies who set up chip manufacturing units in the country.
What makes India confident about this move, is the success of the smartphone manufacturing industry in the country.
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