Inside the Growing Global Chip Shortage

The world as we know it is heavily reliant on electronic devices. In your morning routine alone, you'll probably use your smartphone, your TV, your fridge, your coffee machine, your car, and even your electric toothbrush. All of these things require semiconductor chips to run—and we're currently experiencing a global shortage of them.

These chips, which are built on silicone wafers, are so tiny and complex that they cannot be made by hand. According to 
one of our reports here at Global Market Monitor, they're so versatile that nearly every modern device makes use of them, and the demand for them is so huge that they have to be produced in the trillions each year.

This dilemma poses the following questions: How did we get here? What does a global chip shortage mean? And will there be far-reaching consequences?

COVID-19 and globalized production

To understand how the shortage started, we need to have a simple understanding of how chips are made. To keep production costs down, manufacturers take advantage of globalization trends by decentralizing production. This means that one product is assembled through various stages at multiple factories across the globe.

Semiconductor chips are no different. 
This in-depth report by the BBC explains that raw materials for the chips are sourced from Japan and Mexico, and the chips themselves are assembled in the US and China. Afterwards, they're shipped elsewhere to be installed in various devices.

With the rise of the COVID-19 pandemic in 2020, however, came travel restrictions that disrupted supply chains across the globe. And as the world shifted to online means of communication—such as working from home and distance learning, among others—the demand for electronic devices only increased.

These aren't the only factors that precipitated the shortage, however. Both political tensions, such as that between the US and China, and unforeseen disasters, like the burning of a major chipmaking center in Japan, have sorely limited the capability of the industry to produce chips amid the pandemic. And those who have access to chips are hoarding them, making it more difficult to balance out supply and demand.

What it all means

Initially, only car manufacturers were affected by the lack of chips, but now the shortage is affecting other industries, as well. This may mean that the average consumer will feel the effects of the shortage soon, whether it be through an increase in price or an actual shortage of a product. Indeed, 
an overview of Altium 365 highlights how up to 70% of a product’s total cost is down to its electronic components—primary among them the chips that form the brains of our devices. As engineers continue to optimize work processes to boost design efficiency and improve supply chains, the very real expense of the hardware will only continue to be a critical factor.

Intel, for example, is holding a helping hand out to electronic manufacturers in North America and Europe by building two new chip factories, worth $10 billion each, in Arizona, and, if they can pull public funding, one factory in Europe, as well. These factories, however, will take at least two to three years to become fully functional, and the shortage will continue to go on in that time.

Looking to the Future

Industry experts are stating that, while they've faced chip shortages before, they've never witnessed one on this scale—and, as a result, that means they're unsure about how long the effects of the current shortage will last.

“I think two years is too long, but we will definitely see it reaching out to 2022,” Reinhard Ploss, CEO of Infineon Technologies AG, elaborated. “I expect a more balanced situation in the next calendar year.”

In contrast, Glenn O'Donnell, Vice President and Research Director at Forrester Research, believes that, "because demand will remain high and supply will remain constrained," the shortage will last until 2023.

In the end, the best that manufacturers reliant on chips can do right now is to avoid hoarding current stocks of chips, 
according to Credit Suisse's Wenzhe Zhao, director of global economics and strategy. He also recommends that firms continue to adjust prices and production schedules to ease the effects of the shortage for all involved.

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