Causes and consequences of semiconductor shortage

Why are these little chips so important?

Semiconductors have allowed us to live in a world as technologically advanced as we see it today. Semiconductor chips are the basis of almost all electronic devices, from the phone, to the laptop, to the electronic vehicles that have become increasingly popular in the last decade. Without these chips, we would still be in the age of old, bulky computers, further demonstrating how the semiconductor industry can be considered the pinnacle of technological advancement. In 2010, the average car used US$300 worth of microchips, and by the end of 2022, this number is estimated to rise to US$500 as cars become increasingly digitized. This has led to increased pressure due to growing demand from the semiconductor industry.

Causes of shortage

There are several reasons that explain how the global shortage of semiconductors arose and among them, the impact of COVID 19. In the first half of 2020, the automotive industry experienced a considerable drop in demand as lockdowns were implemented throughout the world. world.
Even as sales began to pick up in the second half of the year, negative and uncertain economic sentiment led automakers to lower their own sales forecasts, causing them to underestimate the inventory they needed and thus cut back. its demand for semiconductors.

At the same time, however, the demand for these chips was increasing in other industries. Remote work has become the norm for many, increasing the need for laptops, mobile phones and other accessories such as cloud storage and software drives. Even as the pandemic approaches an epidemic, these demand levels have yet to return to pre-pandemic levels. In fact, the pandemic caused PC sales to jump more than 50% in early 2021. Chipmakers shifted production from automotive chips to chips compatible with home electronics.

Therefore, when the demand for semiconductors from the automotive sector increased at the end of 2020, the semiconductor industry, which was already under pressure from other sectors, did not have the capacity to increase the supply of chips. For this reason, the auto industry became one of the first to experience supply bottlenecks, as shortages halted production. This has affected all automakers, including the largest companies such as General Motors, which saw its sales fall by 30% in 3Q21, Toyota, which saw its earnings in 3Q21 fall by 21%, and Ford, which recently laid out plans to cut or reduce production at eight of its factories in the United States, Mexico and Canada.

However, this shortage has not only affected the car manufacturing industry. As mentioned, semiconductors are the backbone of almost all electronic devices, making their lack of availability a major crisis for many companies that not only produce electronic products, but also those that benefit from them in their manufacturing processes. Even Apple, the nearly $3 trillion company and the world's largest buyer of semiconductors ($58 billion annually) was forced to delay the launch of the iPhone 13 in 2021. For the same reasons, Amazon also revealed in its report of third-quarter earnings, which missed its revenue estimates.

What's next for the chip industry?

Chipmakers are struggling to keep up with demand, and in 2021 we saw the three largest chipmakers announce cumulative capital expenditures of more than $60 billion, and this figure will increase during this year. Additionally, governments pledged to help local industries as, as of 2020, 81% of semiconductor manufacturing was based in Taiwan or South Korea. Now, China, the US and the EU are fully committed to increasing their countries' chip production, in a bid to lessen international dependency and avoid future supply chain disruptions, while also filling this gap in the market and use it as an opportunity to make a profit, not only through arbitrage, but also due to international scarcity and thus greater bargaining power.

The debate over when the semiconductor shortage is likely to end continues, with some estimates saying we should see it abate by the second half of 2022, while others suggest the easing won't be seen until at least 2023. It will be interesting to see how quickly global production will be able to recover and how companies and governments will avoid future disruptions in the chip industry, especially as we find ourselves in a period of increasing reliance on technology. Overall, however, it is clear that the semiconductor shortage has severely affected production, supply and profits around the world.

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Microchip shortage continues