Semiconductor chips have become essential to modern technology, powering everything from smartphones and laptops to cars and household appliances. And, as the world increasingly relies on these advanced chips, a global shortage has emerged, disrupting supply chains, and causing ripple effects throughout the global economy.
Oil defined geopolitics in the 20th century, and now, experts predict that the next world order will be determined by semiconductor chip production and supply chains, making chips the ‘new oil.’ What makes the situation critical is that chip fabrication units are currently scarcer and more concentrated than oil reserves.
The semiconductor chip shortage results from various factors, including pandemic-related disruptions, supply chain challenges, and increased demand for electronics as more people work and learn from home. The restrictions on exporting critical semiconductor and chip tools and equipment to China, by the U.S. and a few other countries, and the new retaliatory export curbs announced by China on two metals, gallium and germanium, both critical for chip manufacturing, may make the market more volatile. As lead times for cars and flagship phones get longer and utility appliances become exorbitant, we are starting to realize how much this tiny device drives not just global economies but also our daily lives.
The global semiconductor chip shortage has impacted over 169 countries worldwide, disrupted manufacturing and supply chain units, and increased global unemployment. This shortage has led to production slowdowns and price increases across various industries, from automotive and consumer electronics to healthcare and aerospace. If the chip shortage persists, it can lead to a massive economic breakdown.
Role of Semiconductors in Technology and the Economy
Semiconductor chips, the backbone of all electronics and technology products, are crucial to most economic sectors, such as communications, automobiles, aerospace, clean energy, medical technology, and defense equipment.
Although semiconductors contribute to a small percentage of the global GDP, they are a core component of goods and processes worth trillions of dollars. The sectors hardest hit by the chip shortage are consumer electronics, automobiles, LED fixtures, and renewable energy.
Despite losses, the global semiconductor sales touched USD 580.13 billion in 2022 with a y-o-y growth of 4.4%.
The Rising Demand for Semiconductor Chips
Judging by megatrends such as the increasing preference for electric vehicles, the growth of IoT and AI-based applications, cloud computing needs, and the proliferation of remote working models, the demand for semiconductor chips will grow exponentially in the next few years.
According to a McKinsey's analysis, assuming a yearly price increase of 2% and a return to balanced conditions after the current volatility, the semiconductor market can grow into a $1 trillion industry by 2030. The fastest-growing semiconductor-driven verticals will be automobiles, wireless communication, and cloud computation, accounting for 70% of the total growth.
The Supply Challenge
Multinational corporations like Intel, Samsung, and Taiwan Semiconductor Manufacturing Company Limited (TSMC) have announced their plans to localize chip-building and find sustainable solutions to the chip shortage. SEMI estimates that over $500 billion will be invested in 84 global chipmaking facilities by 2024. More than 50 fabrication units are already under construction, predominantly in Asia and the U.S.
Despite these efforts, there are multiple challenges in reversing the semiconductor chip shortage. The main roadblocks to the process are:
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- Time and Expense - Chip fabrication plants take 3 to 5 years to build and involve considerable risk, expense, and expertise. There are no quick fixes.
- Component Unavailability - Some critical chipmaking components, including photolithography tools, wire bonders, and packaging substrates, remain scarce, with lead times stretching over 10 months. The chip shortage is expected to persist until they become readily accessible.
- Supply Chain Complexities - The semiconductor supply chain is highly intricate, with the production of a top-tier chip involving more than a thousand steps and core components that cross international borders over 70 times before the final product reaches the end customer. Policies impacting a segment of the process have ripple effects throughout the production line.
Overcome these challenges
The Way Forward
So far, industries have survived the semiconductor chip shortage with temporary fixes such as using up stockpiled chips and reducing luxury features on their high-end products. However, exploring long-term measures for re-balancing the demand-and-supply dynamics is crucial.
Below are some potential solutions to chip shortage:
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- Government intervention – Given the magnitude of chip shortage-induced problems, government intervention is crucial in improving international trade policies and providing aid and subsidy for localized chip-building.
- Design for adaptability – Companies should design their products to align with component availability and their suppliers’ strategies. Adaptable designs that can function with reduced customization during the supply crunch can help maintain production volumes during crises.
- Diversify suppliers – Having a single supplier for a critical component or multiple suppliers concentrated in one region can be risky during a supply crunch. Companies should plan for supply resiliency by having a list of approved suppliers operating from various locations.
- Invest in buffer inventories – Buffer inventories provide a security layer during emergencies and supply chain failures.
- Leverage AI – Algorithms often work better in crises than human intelligence. Analytical insights can help in risk analysis, trend forecasting, increasing visibility, and streamlining operations across the supply chain.
The semiconductor chip shortage has highlighted the critical role these small but mighty components play in the global economy and the challenges that arise when supply chain disruptions occur.
As the world continues to rely on technology to power its daily life, finding solutions to this shortage will be crucial to maintaining economic stability and growth.
How Can Knowledge Ridge Help?
The global semiconductor shortage and supply challenge is a complex problem that requires a multi-disciplinary approach to find a solution. The importance of tapping into the knowledge and expertise of an expert network firm cannot be overstated.
The custom-vetted experts at Knowledge Ridge have extensive knowledge and experience in the semiconductor industry, which enables them to provide insights into industry trends, technological advancements, and supply chain challenges. They can help companies identify potential solutions to the chip shortage, such as diversifying suppliers, optimizing inventory management, and increasing production capacity.
Through Knowledge Ridge's Expert Calls, organizations can obtain extensive insights and recommendations regarding the semiconductor chip shortage, including supply chain optimization, inventory management, and alternative sourcing strategies. Expert Calls can also help organizations identify emerging technologies and trends that may impact the semiconductor industry and global supply chain, enabling informed decision-making for continued success in the marketplace.
The right leadership is critical to finding and implementing long-term solutions to the chip shortage. Knowledge Ridge's executive and board placement services can help identify and recruit the best talent for the job to guide organizations through the current market challenges and drive innovation in the industry.
Reach out to know how Knowledge Ridge can provide valuable insights and expertise to companies in the semiconductor industry looking for solutions to the global chip shortage.
Frequently Asked Questions
Why is there a semiconductor chip shortage?
The semiconductor chip shortage is the result of various factors, with the COVID-19 pandemic being a significant contributor that triggered a snowball effect and exacerbated global chip shortages beyond anyone's control. The pandemic led to lockdowns, which caused an abrupt surge in demand for electronic gadgets while chipmaking facilities had to close.
Despite manufacturers' efforts to meet the growing demand, transport and supply chain disruptions worsened the already imbalanced market dynamics. Other factors, such as the 2021 drought in Taiwan and the ongoing international trade wars, have further compounded the situation.
How long will the semiconductor chip shortage last?
It is difficult to predict with certainty how long the semiconductor chip shortage will last, as it depends on various factors and variables.
The semiconductor chip shortage which began in 2020 due to a combination of factors, including the COVID-19 pandemic and increased demand for electronics and technology products is continuing to impact supply chains, causing delays and disruptions in producing and delivering semiconductor chips.
However, even if the chip supply improves, it may take time for the market to stabilize and for prices and supply to return to pre-shortage levels.
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