The Global Chip Shortage
Due to the combined effects of COVID-19, global trade tensions, and other international issues, a worldwide chip shortage has emerged. While production facilities were shut down, the demand for hardware rose significantly as people continued to work from home, leading to a rapid depletion of chip production inventories.
Unfortunately, this shortage is expected to persist, with various companies across different sectors expressing concerns. Intel’s CEO, Pat Gelsinger, has indicated that it could take "a year or two" before the situation returns to normal. The shortage is impacting a range of industries, including automotive manufacturers, consumer electronics, and computer hardware. The smartphone sector has experienced exceptionally high demand, and cryptocurrency miners are rapidly acquiring the most available graphical processing units (GPUs). Consequently, these were the first areas to experience severe shortages.
Causes and Consequences
The chip shortage results from a confluence of several factors occurring simultaneously.
Firstly, producing a semiconductor chip typically takes about three months, involving an intricate and highly specialised process. This process requires multi-million-pound machinery, vacuum chambers, and other sophisticated equipment. Expanding this complex manufacturing process is time-consuming and does not offer a quick solution.
Secondly, the pandemic triggered a surge in demand for electronic goods, yet the temporary closure of many factories exacerbated this demand. However, the pandemic is not the sole cause of the shortage.
Thirdly, strained relations between the United States and China have further complicated the situation. Many US companies conduct business with Chinese suppliers, but increasing trade sanctions have made these transactions more difficult. Additionally, inadequate planning has contributed to the issue, with chip manufacturers failing to build enough foundries to meet the needs of industries such as automotive manufacturing.
The Taiwan Semiconductor Manufacturing Company (TSMC), the largest producer of semiconductor chips, plans to increase prices by 10% for advanced chips, which will affect the cost of products from companies like Nvidia and, more critically, Intel. Firms such as Google and Apple initially avoided the worst of the shortage by having contingency plans in place, but even their sales are now beginning to decline.
Current Measures and Future Plans
In response, companies like Amazon, Apple, Meta, and Tesla are considering developing certain aspects of their chips in-house. This strategy would involve reducing reliance on contractors like TSMC and establishing their own production facilities. While this is an expensive undertaking, it could help mitigate future shortages and benefit the industry in the long term. Some analysts predict that the chip sector could grow by 15% over the next three years.
Governments are also stepping in to address the issue. While most chips are currently manufactured in Asia, Western countries are now seeking to move production within their borders to achieve greater self-reliance. In the United States, the Biden administration has committed $50 billion to support the semiconductor industry. President Biden has also engaged with major companies, including Dell, Ford, and Intel, to emphasise the need to maintain a competitive edge. In the UK, the automotive sector has been particularly hard hit.
Fortunately, the UK already possesses a substantial domestic microchip industry, which has mitigated the impact of the shortage compared to other countries. This position should help the UK avoid the most severe supply disruptions experienced elsewhere.
Future Expectations
In conclusion, the chip shortage is expected to continue throughout 2022. JPMorgan anticipates that the shortage will be resolved by the end of 2022, but more cautious investors, analysts, and Intel’s CEO suggest it could persist into 2023 due to rising demand for gaming, cryptocurrency, and server infrastructure.
In the long term, the industry may see a shift towards localising the manufacturing process, with countries increasingly looking to produce their own chips. Overall, chip manufacturing currently presents a lucrative opportunity for both companies and nations. Therefore, the sector is likely not only to recover but also to thrive over the next five years.