Author: Logan Carney, Graphics: Nina Tagliabue
The BRB Bottomline
The increased demand for silicon chips in recent months has caused a vast shortage of an integral piece of modern technology. As a result, industries are facing production delays that could prove detrimental to their post-pandemic success.
Causes of the Chip Crunch
The start of the pandemic ushered in a wave of canceled silicon chip shipments as companies invoked force majeure clauses in their contracts due to uncontrollable events, i.e. the pandemic, freeing them from financial liability of ordered product. Unable to predict demand curves due to the instability of the economy at the time, semiconductor companies chose not to stockpile supplies. Rather, they halted production lines and filled incoming orders with existing inventory from canceled orders. As American society adjusted to pandemic life, however, these companies received an immediate influx of orders for silicon chips as laptops, phones, servers, and similar electronics surged in demand, particularly with many more people beginning to work from home. On top of this, many Americans began suffering from cabin fever after remaining inside for months, triggering a desire for new forms of entertainment. This led to a rise in sales for leisure technologies such as gaming consoles and home entertainment systems. With broken supply chains, increasing demand, and strained shipping lines resulting from trade and travel restrictions, semiconductor companies fell far behind in fulfilling orders and are now forced to play catch-up. Furthermore, the price of silicon chips has risen as their supply has decreased, affecting every input price of the silicon chip value chain, resulting in potential changes to consumer technology prices.
Impacted Industries
Although virtually every part of the electronic industry has been affected by the chip shortage, a few have been hit particularly hard: automotive, electronic, and gaming.
Automotive
The dawn of the pandemic produced record low demand in the automotive industry. In Summer and Fall 2020, starting in May and June, however, sales bounced back, and a market rebound looked imminent. However, a mere few months later, in December, Volkswagen announced the halting of production of many child company brands. This included Audi, which was forced to furlough 10,000 factory workers due to the silicon chip shortage. Not only this, an estimated 700,000 fewer cars, globally, were produced in just the first three months of 2021 as manufacturing could not continue without a supply of the vital silicon chips. General Motors, alone, estimates a lost $2 billion this year due to silicon chip shortages. Despite an early sale recovery, the entire automotive industry is threatened as rebounding sales are disappearing due to production delays with consumers potentially turning to other industries to spend their pandemic savings.
Gaming
The intensified appetite for new forms of entertainment during the pandemic saw record high demand for gaming consoles. Americans sought Nintendo’s Switch, Sony’s PlayStation, and Microsoft’s Xbox. Within a matter of a few months, there were nationwide shortages for these products with inventories being immediately purchased after restocking. To make things even worse, Sony and Microsoft announced next-generation consoles that drew the attention of the entirety of the country. When the products officially launched, supply immediately vanished, once again leaving an enormous demand unmet. The PS5 was widely known as taking the hardest hit from this. Not only are the electronics companies missing out on profits, consumers are taking a hit as well, for they are forced to purchase the consoles for resale at an average 100% markup if they are not lucky enough to snag one during the limited drops every few weeks. Sony, amongst other console producers as well, announced it expects this limited supply to continue into the next fiscal year as the company awaits silicon chip orders to be sufficiently filled.
General Electronic Industry
While many companies have solved supply issues after the initial spike in demand for common products like computers and webcams, delays in production are becoming increasingly prevalent due to chip shortages. Although existing products do not particularly face the issue, essentially anything new or next generation is struggling to reach the market. For example, many smart home devices, home audio equipment, and headphones are being released in limited quantities, despite the high demand, because silicon chip supply lines are tied up. Not only this, consumers are beginning to see widespread price increases in all semiconductor products, as the backlog of orders continue to plague silicon chip manufacturers.
New Industry Beginning to See Detrimental Effects
Although not impacted heavily at the start of the semiconductor shortages, the medical community is beginning to be greatly affected as it struggles to find affordable and available parts for life-saving equipment. Medical devices, such as pacemakers, MRI machines, blood-sugar monitors, and portable ultrasound machines, are facing limited production, despite their strong need in hospitals across the world. A Deloitte survey of medical technology companies revealed that every respondent faced supply issues, and some companies, such as the portable ultrasound manufacturer Fujifilm SonoSite, reported recently paying upwards of $65 apiece for a part usually sold at $1.49. In order for hospitals to stay adequately equipped for patient care, medical device manufacturers and hospitals have begun reaching out directly to semiconductor manufacturer executives and raising awareness of the issue with the hope of getting to reserve certain levels of supply needed.
Projections and Potential Resolutions in Spring 2021
Although some optimists believe that the supply of chips can be stabilized to the demand in a number of months, the shortage is looking more likely to last through the end of 2022. To reduce this timetable, leaders are working globally to solve the crisis. In Spring 2021, President Biden issued an executive order mandating a review of the supply chains for semiconductor manufacturing. Although the United States only possesses a 12% share of the global semiconductor fabrication, this is a strong step forward in bringing stability to its production and potentially reducing shortages. China, who shares a similar production share as the US but accounts for 60% of its global consumption, has continued to increase financial incentives for its domestic semiconductor manufacturers in an effort to decrease its reliance on the United States and other nations and also to aid in fixing supply chain issues. On top of this, recent U.S. policies have tightened licensing policies on Chinese semiconductors due to Chinese surveillance fears, further increasing the lag time between chip manufacturers and product manufacturers. The main root of this issue, however, lies with pandemic-caused factory closures and spending decreases. Silicon chip producers halted and then limited manufacturing during the beginning months of the pandemic. Then, as things began to open and the economy began rebounding, manufacturers received a huge influx of orders for silicon chips that are powering skyrocketing and emerging technologies, and this strain has put supply on a hold, as new machinery would take far too long and cost far too much to make a difference in the short term. The only true solution to the shortages is time.
Fall 2021 Updates and Outlooks
As Fall begins, little to no progress can be seen in solving the silicon chip shortage. With the global chip shortage already damaging automotive and electronics industries since the early months of the global reopening of economies, these sectors can expect issues to continue in the foreseeable future with next year predicted to be nearly equally challenging. This could mean losses of up to $210 billion in lost revenues for a second year for car companies, posing strong risk to their financial stability. As a result, employee layoffs are a very real fear for a vast number of manufacturers, and Ford Motor Co.’s chief executive has noted in an interview that all jobs are at risk within the company. This has the potential to create a much higher unemployment rate. With a limited number of production occurring, demand has shifted to the used car market, resulting in a 25% increase across auction prices since September 2020.
Due to the continued effects of the chip shortage, both consumers and companies are taking the burden of supply issues and hiked prices, while silicon chip manufacturers are benefiting greatly. Consumers are forced to pay higher prices for the limited supply of chip-goods available as businesses struggle to maintain similar profit-margins as before the shortages began. A few companies, such as Tesla, have been able to escape the effects that have upended the auto and tech industries through innovative methods. Tesla, in particular, had its engineers rewrite software to allow for a wider variety of available chips to power its vehicles, amongst other methods, ushering in a record number of vehicle deliveries in the most recent financial quarter. Going forward, however, Elon Musk’s company can expect chip shortages to pose more of an issue if not solved, as shortages are spreading to less sophisticated hardware now as well.
Recent United States Government Efforts
The United States and Europe are looking to work together, going forward, in an effort to strengthen the semiconductor supply chain and maintain a leadership presence in emerging technologies powered by silicon chips. The formation of a joint council comes in light of Chinese dominance in the sector and their strong subsidies for favored technological industries. Recently, the United States federal government passed the US Innovation and Competition Act, investing billions domestically in innovative technologies like artificial intelligence, semiconductors, and quantum computing. Although this is a long-term solution to the problem at hand, it will help grow the manufacturing abilities of chip production in the country, aiding in preventing future supply chain disruptions, and increase U.S. competition in emerging technologies.
New Potential Disruptions to the Supply Chain
Recent Chinese governmental efforts to reduce carbon emissions and curb energy consumption have resulted in widespread power outages in the country. Many factories in China’s Guangdong and Jiangsu provinces have been forced to reduce work hours and even shut down operations in order to comply with the Chinese government’s regulations. In other parts of the country yet to be affected by the outages, surges in coal prices are causing factories to limit production as well. In a country that manufacturers close to 20% of the world’s semiconductors, curbed output due to production limitations could prove to be potent to the already damaged chip supply chains, thus having the potential to extend shortages even further. This comes after recent predictions expect the global chip shortage to remain until 2023, a year after what was anticipated in Spring 2021.
Take-Home Points
- While quickly building new manufacturing infrastructure sounds like an easy solution to the semiconductor shortage, the process takes a long time and is not feasible in the short-term.
- As seen, however, this is taking place globally to help prevent a similar situation in the future.
- Because the only true solution to the issue is time, both consumers and companies can expect shortages and hiked prices for chip-powered products to remain at least until next year with the possibility of an extended timeline. Furthermore, economic growth remains at risk.