Title: Group End Term Assignment

Subject: Consumers, Firms and Markets

Batch: 2022-24 Section: B Group No: 10
Total Words in the Assignment: Total pages:
Group Members:

Sr.No. Name Roll. No.

1 Avantika Ruia 202212010
2 Ekansh Gupta 202212015
3 Narayan Patidar 202212023
4 Nikhil Chhabra 202212024
5 Sumon Mondal 202212044

News Highlights – ‘My kingdom for a chip: The semiconductor shortage extends into 2022’

The world is in the midst of a semiconductor chip shortage with the growing demand for electronics
products enhanced by powerful semiconductor chips. In the Deloitte report by Stewart et. al. (2022),
the authors argue that the semiconductor industry is struggling to keep up to the growing demand of
consumers, industry and government for semiconductor chips. According to Deloitte Global, the chip
shortage would still prevail throughout 2022 and may continue even in 2023. The prolongation of the
chip shortage is guided by one predominant factor i.e., the significant rise in the demand of
semiconductor chips due to digitization and the onset of the COVID-19 pandemic. The pandemic
witnessed an increase in PC sales by up to 50%. Some of the major sectors impacted by this shortage
are – automobile, healthcare, AI etc. among many. The automobile sector faced a major setback
towards its growth in the foreseeable future as micro-chips play a major role in manufacturing
automobiles. The demand for chips in the healthcare and artificial intelligence sector is also expected
to increase. In the face of this crisis, the global chip manufacturing giants are gearing up to increase
their production capability with governments pushing for localized manufacturing (Stewart, Hamling,
Bucaille, & Crossan, 2021).

Article Link - https://www2.deloitte.com/xe/en/insights/industry/technology/technology-media-and-

telecom-predictions/2022/semiconductor-chip-shortage.html

Introduction
In 2022, the global semiconductor chip industry is expected to reach about US$600 billion.

Across multiple end markets, the absence of a single critical chip, often costing less than a dollar, can
prevent the sale of a device worth tens of thousands of dollars. Based on analysis, the chip shortage of
the past two years resulted in revenue misses of more than US$500 billion worldwide between the
semiconductor and its customer industries, with lost auto sales of more than US$210 billion in 2021
alone.

Over the long run, semiconductor revenues are likely to oscillate around a trend line. Still, that trend
line looks steeper than ever before as we enter a period of robust secular growth.

It is expected that shortages and supply chain issues will remain front and center for the year's first
half, hopefully easing by the back half, but with longer lead times for some components stretching
into 2023, possibly well into 2023.

The ongoing talent shortage will be made even more severe by the addition of increased
semiconductor manufacturing facilities outside Taiwan, China, and South Korea. The higher demand
for software skills required to program and integrate chips into fast-growing markets will further
exacerbate the shortage.

Finally, it is expected that the digital transformation within the industry to continue and accelerate.
Nearly three out of five chip companies have already begun their transformation journey. Still, over
half of those are modifying their transformation process as they go, in response to various pressures.

Market Structure
The semiconductor industry is operating in an oligopolistic market structure. In this type of market
structure, the major characteristics are:

 Interdependence of firm
 Five- firm’s concentration ratio is more than 50%
 Some barriers to entry
 Product differentiation
Now, we will try to compare these characteristics with the semiconductor chip industry to support our
statement that it is operating in an oligopolistic market structure. First is the interdependence of the
firm, in this, found that the mutual interdependence between a supplier and its buyer can enhance
cooperative behaviors and power asymmetry hurt firms' investment in cooperative behaviors.

The next characteristic is a 50% plus market share of the top five firms, this characteristic is shown
through research done by the visual capitalist that shows the top 10 companies in the world according
to market share. According to the report, the top 10 companies and their market share are:

Company Market Share(In %) Origin Country

TSMC 54 TAIWAN
SAMSUNG 17 SOUTH KOREA
UMC 7 TAIWAN
GLOBALFOUNDRIES 7 U.S
SMIC 5 CHINA
HH GRACE 1 CHINA
PSMC 1 TAIWAN
VIS 1 TAIWAN
DB HiTek 1 CHINA
TOWER SEMICONDUCTOR 1 ISRAEL
Now, if we look at the above table, we can easily find out that the top 5 companies (TSMC, Samsung,
UMC, GlobalFoundries, SMIC) hold more than 60% of the global market share which is one of the
most important characteristics of an oligopoly market.

The Third characteristic is Some barriers to entry into the market which can be supported by a report
by Moody in which they state that the manufacturing of semiconductor chips is a capital-intensive and
complex process, and with the acceleration of the replacement of the new generation of chips, the
industry's barriers to entry are rising, which may lead to a long period of supply tension in the
industry, while the participation of global governments in the industry will help to balance supply.

To elaborate, they explained that new supplies could not be achieved overnight and could sometimes
take years because of the need to build new plants and equip them with the right technology. In
addition, the capital-intensive nature of semiconductor manufacturing is concentrated in the hands of
a few companies, and the barriers to entry of new companies are also raised with the change of a new
generation of chips.

The next characteristic is product differentiation we got to know about this characteristic from the
article of the Economic Times dated September 23rd, 2021 in which they tell about how the big firms
like Samsung and all are hiring an experienced engineer to design better performing, power-efficient
computer chips for all kinds of applications, from networking and cloud to autonomous driving all
this is done by the big companies to make their product different from competitors.

At last, a Graphical representation of a semiconductor industry company depending on the action of

its rival company to show the interdependency of the companies-

Demand if rivals match

price changes
C

Demand if rivals do not

Price
A match price changes
P0 B

D2

D1
0 Q0
Quantity

Pricing Policy
When competing, oligopolists prefer non-price competition in order to avoid price wars. A price
reduction may achieve strategic benefits, such as gaining market share, or deterring entry, but the
danger is that rivals will simply reduce their prices in response. This leads to little or no gain, but can
lead to falling revenues and profits. Hence, a far more beneficial strategy may be to undertake non-
price competition.

Strategies for semiconductor Pricing

Cost-plus pricing is a straightforward pricing method, where a firm sets a price by calculating
average production costs and then adding a fixed mark-up to achieve a desired profit level.
Cost-plus pricing is also called rule of thumb pricing. There are different versions of cost-pus
pricing, including full cost pricing, where all costs - that is, fixed and variable costs - are
calculated, plus a mark-up for profits, and contribution pricing, where only variable costs are
calculated with precision and the mark-up is a contribution to both fixed costs and profits.

Cost & Revenue

ATC + 25%

ATC
Price

Cost

Output

Cost-plus pricing is very useful for firms that produce a number of different products, or
where uncertainty exists. It has been suggested that cost-plus pricing is common because a
precise calculation of marginal cost and marginal revenue is difficult for many oligopolists.
Hence, it can be regarded as a response to information failure. Cost-plus pricing is also
common in oligopoly markets because it is likely that the few firms that dominate may often
share similar costs, as in the case of petrol retailers. However, there is a risk with such a rigid
pricing strategy as rivals could adopt a more flexible discounting strategy to gain market
share. Cost-plus pricing can also be explained through the application of game theory. If one
firm uses cost-plus pricing - perhaps the dominant firm with the greatest market share -
others may follow-suit so that the strategy becomes a shared one, which acts as a pricing
rule. This takes some of the risk out of pricing decisions, given that all firms will abide by the
rule. This could be considered a form of tacit collusion.

Managerial Dilemma and Brief Solution

Q.1.) Suppose you are a top-level manager in Intel Corporation? As a result of COVID-19 pandemic
demand for digital products has increased exponentially and companies making these products are
demanding more chips. As a result, there is shortage of semiconductor chips in the market with
many companies heavily dependent on chips shutting down production As a manager, steps would
you take to increase production and meet the demand?

Ans.) As manager, I would rethink my approach in five critical areas which are as follows:

1.) Technology Leadership: To achieve this objective, following steps should be taken:-

 Product differentiation: This can be done by making chips using materials such as
silicon carbide (SiC) and gallium nitride (GaN) which are particularly well suited for
applications requiring both high power and frequency, since they limit energy loss
and allow for the creation of smaller form factors.

 Advanced packaging of semiconductor components: These techniques provide

better heat management during operations, allowing companies to place
semiconductor components closer together. With a greater number of connection
points, these chips provide higher data-transfer rates and better performance. In
addition, advanced packaging allows semiconductor companies to combine mature
and leading-edge chips in an integrated system for applications that need both
types, which lowers costs. This trend, called heterogeneous integration, enables
companies to combine multiple smaller chips instead of making one large chip.

 Specialized applications:  Application-specific integrated chips (ASIC) integrate well-

defined algorithms and functions into their chip design and are customized for
specific purposes, such as for use in artificial intelligence and cloud computing. The
segment has recently grown significantly and could offer a good opportunity for
additional players.

2.) Build Long term R&D Investment: Although this is a long-term strategy and Intel may not
see any immediate returns, investing heavily in long-term R&D projects could help promote
technological leaps—often far more than node reduction—could help improve society. The
creation of specialized chips for quantum computing, for example, could improve
pharmaceutical development, sustainability programs, and other initiatives across industries.
In most cases, semiconductor companies are focusing on increasing investment in areas
where they are already strong, rather than branching into new areas to extend their
technological advantage even further.

3.) Greater Resilience in a volatile world: The recent semiconductor crises due COVID-19
pandemic has made one thing clear: the post-pandemic world will likely remain more
volatile, which will require greater resilience. For instance, in markets with a large mismatch
between local supply and demand, Intel could consider dedicating more capacity for the
nodes that are most urgently needed to provide some short-term relief. Example: European
end customers largely require semiconductors with nodes larger than 28 nm for automotive
and industrial applications, while customers in the United States have a much higher need
for semiconductors with nodes smaller than seven nm. Additional capacity might best be
 tailored to meet such needs. In addition to helping the local market, these moves would
increase supply chain resilience and lessen intermarket dependencies

4.) A strong talent pipeline: With greater competition, Intel would be wise to increase its
efforts to recruit talent, including staff with expertise in process technology and operations
management. The company must also address an image problem of the industry as a whole.
In a recent survey of employees, the semiconductor industry ranked lower than tech and
automotive on multiple dimensions of workplace attractiveness, including work–life balance,
career opportunities, and diversity and inclusion. Intel should review its own operations to
ensure that it is competitive in these areas. One possible solution to the labor shortage
might involve forming partnerships with academic institutions, especially in markets where
talent is in very short supply.

5.) Improved collaboration within the semiconductor ecosystem: The increased complexity of
chip design, combined with shifts in the value chain and greater competition for talent, have
increased the importance of ecosystem building within the semiconductor industry. Intel can
collaborate with its customers like automobile manufacturers to improve the design
capabilities and development of application specific solutions. In another type of
collaboration, Intel may create ecosystem where it develops intellectual-property (IP) blocks
that many customers can leverage.