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Why is the Semiconductor Industry Facing a Global Shortage?

Editor, TRANSFIN.
Apr 27, 2021 11:05 AM 6 min read
Editorial

You may have to wait months (if not till well into 2022) before you can buy an Xbox Series X or a PlayStation 5 without much difficulty.

Meanwhile, the price tag of that high-end Nvidia GPU-equipped laptop you had an eye on or the fancy car you were saving up for will likely climb upwards.

The culprit? The global semiconductor supply shortage. 

What’s Going On?

As the basic building blocks of modern technology, semiconductors make the modern world go round. They are the veritable “brains” of virtually all electronic gadgets, powering everything from hand-held calculators and computers to autonomous cars and data centres.

But even as demand for these chips has soared during the coronavirus pandemic - propelled by work-from-home mandates, consumers snapping up electronic devices, remote learning, health-tech etc. - as well as due to increasingly sophisticated technology used in the auto industry, supply has struggled to keep up.

Moreover, supply chains themselves have become constrained due to a variety of factors (we’ll discuss these in a bit), leading to a crippling shortage that could persist for months.

 

What are Semiconductors Again?

These are basically materials which have a conductivity between conductors and nonconductors (aka insulators). They can be pure elements (silicon or germanium) or even compounds (gallium arsenide or cadmium selenide).

Semiconductors' lure stems from their unique properties, such as variable resistance, sensitivity to light or heat, and ability to pass current unidirectionally. Above all, a semiconductor material’s properties can be modified by adding impurities in a process known as doping. This allows engineers to, well, engineer these materials to perform a variety of tasks in countless devices.

These chips are also scalable and work well even under high miniaturisation. These properties make them the lifeline of several industries including telecommunications, IT, industrial machinery and automation, medical electronics, automobiles, engineering, power, renewable energy, defence and aerospace, and consumer electronics.

FYI: Some semiconductor companies (like Intel) both design and manufacture their own chips. But there are also “fabless semiconductor firms”, which design their own chips but outsource manufacturing to so-called foundries (like Samsung).

Fun Fact: Invented in Bell Labs in 1959, MOSFET is a transistor, a solid state semiconductor, that enabled the tech industry to balloon in a matter of decades. It is also the most widely manufactured human artifact in history, with an estimated total of 13 sextillion (1.3 × 1022) MOSFETs having been manufactured between 1960 and 2018!

Fun Fact #2: For decades, the semiconductor industry (and Silicon Valley as a whole) set its targets based on Moore’s Law, which argued that the number of transistors on a silicon chip would roughly double every year. The “law” worked as a prophecy for a long time - today, transistors are as small as 10 nanometers! - but it may be breaking down.

Fun Fact #3: Semiconductors are the world’s fourth-most traded product (counting imports + exports), after crude oil, refined oil and cars!

 

Now, Why is There a Shortage?

Even before the pandemic, semiconductor supply chains were under stress due to US-China trade tensions. While Mr. Trump has left the White House now, distrust towards China - one of Trumpism's top tenets - remains ingrained in Washington.

In December, the US blacklisted the largest Chinese manufacturer of computer chips (Semiconductor Manufacturing International Corp.) over its alleged ties with the Chinese military. It has also restricted the sale of chips made or designed in the States to some Chinese buyers.

Fears of more sanctions or a return to a full-fledged trade war have prompted Chinese tech giants like Huawei to hoard chips. (Chinese semiconductor imports in fact jumped by 15% last year.) Obviously, this aggressive stockpiling put a strain on global supply chains.

The semiconductor industry may have weathered trade tirades between the two largest economies had it not been for a series of (unrelated) unfortunate events.

A plant fire in Japan, freezing weather in the southern US and a drought in Taiwan hurt outputs from these chip-making hubs.

Then, of course, there’s the elephant in all our rooms - the coronavirus. In early 2020, rising infection curves, raw material bottlenecks and labour shortages forced many package and testing plants to reduce or even suspended operations. This had a chain-reaction effect across global trade, affecting end-product assembly or transportation in many industries.​ At the same time, increasing demand for electronic gadgets further strained things on the supply side.

The resulting crunch trickled down and reverberates to this day.

 

How Acute is the Shortage?

The mismatch between supply and demand is having real-world implications. Particularly for the consumer electronics and auto industries.

It’s reached a point where devices like chromebook laptops and next-generation consoles are either sold out or subject to lengthy shipping times. Sony has said it might not hit sales targets for the new PS5 in 2021. MacBook and iPad production has been affected. Apple was actually forced to delay the launch of the iPhone 12 by two months last year due to this shortage.

Even Samsung, the chip titan, the company that “sells $56bn of semiconductors to others and consumes $36bn of them itself”, has said it might skip the launch of the next Galaxy Note smartphone, citing “serious imbalance” in the semiconductor industry.

Last week, Tata Motors-owned Jaguar Land Rover said it would stop car production for a “limited period” at its plants in England as a result of the chip shortage. Germany’s Daimler AG said it would be cutting the hours of up to 18,500 workers and pausing production at two plants. France’s Renault saw its sales in the most recent quarter take a hit by the semiconductor shortage.

US auto giant General Motors has announced that it is shutting down three plants and slowing production at a fourth. Honda’s plant in Swindon, UK was shut down for several days in January due to a chip shortage. Ford’s factory in Germany was shut down for a month while Volkswagen said in December that it would be making 100,000 fewer cars this quarter. And Sweden’s Volvo has been forced to halt truck production and anticipates more risk from the “unstable” chip supply chains.

Needless to say, all this is bad news for industries that were hit hard by the pandemic and were staging a slow but steady recovery, which is now bound to cost more and take longer. It’s also bad news for consumers, who may face the brunt of a rise in prices or lengthy shortages.

 

Chip Wars: The Geopolitics of Semiconductors

Because semiconductors are so indispensable, geopolitics is intricately tied to the industry. And in the age of geopolitical polarisation, globalisation is a double-edged sword and trade is a means to an end!

The two biggest actors in semiconductor geopolitics are the US and China, the mounting animosity between whom has blurred the lines between business and politics.

And at the heart of this growing power struggle is Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest semiconductor company. The US has been pressuring TSMC to stop supplying Huawei while Beijing has warned against any reckless actions (warnings that often devolve into unsubtle threats to invade Taiwan, an island China claims as a breakaway province). With plants and interests in both China and the US, TSMC has been hedging its bets and playing the long game.

The chip conflict is also unique in that China is at a significant disadvantage. It is the country’s strategic Achilles’ heel. It is a net importer of semiconductors, its domestic industry is a fledgling one, and it is heavily dependent on American and Taiwanese expertise.

No wonder then that China’s latest five-year plan highlighted autonomy in semiconductor production as a means to achieve technological self-reliance. The country’s National Integrated Circuit Plan aims to meet local chip demand by 2030. And the China Integrated Circuit Industry Investment Fund has raised $51bn as of 2019 to start over 70 projects in the semiconductor industry.

 

In the Long Run...

While the current supply shortage may end within this year, the larger issue remains of there not being enough manufacturing facilities to meet demand.

The semiconductor industry needs to invest heavily to scale up. To this end, some plans are already afoot. TSMC has said it will invest $100bn over the next three years to increase its capacity. Intel plans to spend $20bn on expanding its plants as well as opening its doors to produce chips for other companies (similar to the foundry system followed by TSMC and Samsung).

Governments are upping their stakes too. India is offering more than $1bn to each semiconductor company that sets up manufacturing units in the country. US President Joe Biden earmarked $50bn for the American semiconductor industry in his mammoth $2trn infrastructure plan.

Going forward, demand for semiconductors will undoubtedly surge, as will the geopolitical intrigues associated with it. And as polarisation rises and US-China ties sour, chip-making companies will find maneuvering space becoming thinner than the 3 nanometers-thick chips they manufacture!

FIN.
 

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