Semiconductor chip

shortage and its impact

Following the pandemic in 2020, a global chip supply shortage developed. The deficit has worsened in
recent months, with about 170 businesses straining to fulfil increased demand for electronic goods and
components, according to a Goldman Sachs analyst. The world economy is on the verge of collapse,
with no clear cure in sight, at least till 2022.

So, what are semiconductor chips?

Semiconductors are found in a variety of items, including data centres, smartphones, computers,
laptops, tablets, smart devices, cars, home appliances, life-saving pharmaceutical devices, Agri-tech,
ATMs, and more.
Semiconductors are materials that have characteristics that fall midway between conductivity and
insulator. They're utilized to build integrated circuits (ICs) and discrete electronic components like
resistors and capacitors.
Microcircuits power a wide range of modern electronic goods and components, and semiconductor
chips are used to power them. Semiconductor materials are used to construct all active components,
integrated circuits, microchips, transistors, and electronic sensors. They are also the foundation of
modern computation. More than 1,000 steps and several country border crossings can be involved in
the production of such chips.
Main manufacturing companies: Intel, Samsung, TSMC (Taiwan Semiconductor Manufacturing
Company), Broadcom, and Nvidia are among the companies that make semiconductors. In terms of
chip R&D, the United States is at the top, whereas Taiwan is the leader in semiconductor assembly,
packaging, and testing. China produces most of the world's chips.

What went wrong?

All of this started with a modest increase in consumer demand caused by the pandemic. To begin with,
consumer spending plummeted. Then, a few months later, as people set up home offices or sought
electronic diversions, demand for all kinds of chip-heavy gadgets unexpectedly increased. The
manufacturers of those gadgets subsequently sent a flood of semiconductor orders up the supply
chain, quickly overwhelming the few chip foundries that produce nearly all of the world's computer
chips. There were shortages as a result.
The increase in inventories in response to consumer demand as we further move up the supply chain is
called the Bullwhip Effect. It is similar to what was observed during the panic buying of toilet paper in
the US in the initial stages of the pandemic.

Bullwhip Effect:

When a cowboy cracks a bullwhip, with the swift hand movement, the ripple along the length of the
whip grows larger until the tip of the whip snaps several feet into the air. This phenomenon explains
how the variations in demand strain the supply chain of products and lead to larger output swings. As
the middleman cannot predict the future, they insert errors while increasing the bulk of their orders
parallelly with the increased demand. This error gets magnified along the supply chain distorting the
further demand signals. This is exactly what happened in the semiconductors last year. Manufacturers
of phones, automobiles, and consumer electronics exponentially increased the output and made
pressure on the demand for semiconductors. Eager to ramp up production, rushed orders in for more
semiconductors which created a sudden surge of demand for suppliers, and these suppliers, in turn,
put their own extra orders like Samsung, Intel and Taiwan’s TSMC for assembling advanced
semiconductors which worsened the situation.

Reasons:
The pandemic naturally played a major role in the demand-supply disruptions. The hoarding of goods
witnessed in the early days of the pandemic and people rushing to set up home offices, televisions and
game consoles for beating lockdown boredom created that initial ripple in the demand for electronic
goods especially.
The US-China Trade War played a role in this scenario. Last August, the US banned foreign companies
whose chips used American technology to Chinese giant Huawei over espionage allegations. Huawei
began stockpiling ahead of the sanctions and further disturbing the supply chain.
Other causes have also contributed to the shortage. Chip production in the United States has dropped
from 50% of global capacity in 1990 to only 12% today. Even though Asia now produces 75% of all
semiconductors, natural catastrophes have impeded production in Japan and Taiwan. During last
February's terrible winter storm in Texas, snow and ice shut down production at four wafer fabs —
Samsung Austin Semiconductor, Infineon Technologies, and two NXP Semiconductors plants for weeks
making highways impassable and knocking out much of the state's electric infrastructure.

Impact

1. Automobile Sector:

Assume you are saving up to shop for your dream automotive. However, you're sad once the dealer
informs you that the stay up for the new stock has multiplied. In several circumstances, the
responsibility should be placed on semiconductor deficiency. The provision chain has been
noncontinuous because of a worldwide deficiency of semiconductor chips employed in cars. The Covid-
19 epidemic resulted in an exceedingly increase in Demand for client physical science as additional folks
began to figure from home, and other people most well-liked to drive their own cars instead of taking
public transportation. So, however, do semiconductors relate to automobiles? Yes. Cars are not any
longer simply mechanical machines. Whether it is the amusement system or the navigation system,
cars these days have a great deal of technology in them.
As vehicles and trucks become additional digital, the automotive sector is losing billions of bucks
because of a shortage of semiconductors. As a result of the extended interval, the worldwide
semiconductor shortage, which began within the half-moon of 2021, has brought production lines
everywhere in the globe to a halt. This is often the newest in an exceedingly series of challenges for the
automotive vehicle business, that began within the early months of the COVID-19 epidemic, once
automotive vehicle sales fell by the maximum amount as 80% in Europe, 70% in China, and 50% within
the US.
A rider vehicle usually desires 1,000 semiconductors, and any disruption within the supply chain will
cause manufacture to stop. India, like several other countries, is excessively dependent on Taiwan.
Taiwan is home to the world's largest semiconductor plant. Taiwan Semiconductor producing Company
(TSMC), the world's largest semiconductor manufacturing plant, is one of the first producers. TSMC is
believed to own a silicon chip producing capability of roughly twelve million. In the U.S., the shortage
has caused the Biden administration to order a 100-day review of U.S. supply chains. regarding $50
billion of President Joe Biden’s $2 trillion infrastructure proposal is additionally earmarked for the yank
semiconductor business.
Automakers like Ford Motor and General Motors expect large earnings cuts this year because of the
chip shortage. The semiconductor inadequacy is anticipated to price gram $1.5 billion to $2 billion in
earnings. Consultants estimate that reckoning on the automotive and its decisions, it would contain
many chips.
“Covid-19 related supply chain issues, together with a worldwide deficiency of semiconductor chips,
plague the automotive vehicle business,” a Tata Motors proponent declared. Tata Motors is taking
necessary efforts to cut back the impact on vehicle production, which can influence our customers,
through higher designing and shut cooperation with all of its affected suppliers. Because of a recent
deficiency of semiconductors, Ford India was duty-bound to briefly stop producing. “The worldwide
semiconductor deficiency can impair vehicle production at Ford within the coming back months,” the
firm warned. This downside has effects on the full industry.

2. Cell Phone and Gaming Industry (Electronics):

The smartphone and gaming industries have also begun to bear the weight of this. In this industry, the
issues are dispersed unevenly. Buyers are witnessing major price rises as deliveries delay. As a result,
some manufacturers had to reduce manufacturing and postpone the release of new equipment. The
good news for the smartphone business was that the major firms were able to postpone the impact.
Apple, which sells a significant number of devices each year, was able to circumvent these issues by
exerting influence over supply chains. The same may be said about Samsung phones. However, chip
shortages have left more than 80% of the smartphone sector stranded.
Fortunately for the smartphone business, the major firms – Apple and Samsung – were able to
postpone the impact. However, the ramifications are here to stay and will manifest themselves in the
future. The gaming business has been hit hard by semiconductor shortages. Consumers faced
production troubles with the PS5, Xbox Series X/S, and other gaming gear due to massive stock
shortages. The gaming industry's supply chain has been severely disrupted as a result of this. Massive
shortages in gaming hardware, such as Sony and Microsoft's flagship systems, are the most relevant
example. As the global chip crisis persists, new consoles, GPUs, and CPUs, as well as most other
electrical devices outside of gaming, will be in short supply. This puts the gaming sector at a
disadvantage because other businesses, such as smartphones and laptops, will receive first dibs on the
current batch of semiconductor chips, making logistics of shipping consoles to satisfy the growing
demand from gamers much more difficult. The outbreak forced everyone to stay at home, resulting in a
surge in demand for the latest consoles, GPUs, and CPUs. However, due to a lack of semiconductors,
these items were in short supply, leading to stockpiling and resale.

Why can’t we simply make more chips?

The obvious solution to the supply crunch in the market seems to be to make more chips. However,
this isn’t as easy as it sounds. Although seeing the current scenario, the semiconductor manufacturers
immediately swung into action by announcing production expansions and increase in scale, but the
actual demand and supply matching would not be solved before 2022. This dynamic is very common
and creates a dangerous loop for the economy. When the scale of an industry is stagnant, and the
demand is gradually catching with the supply, it is possible that after a point of time, a small increase in
the demand suddenly creates a large shock like in the Bullwhip effect.
Obviously, the situation was worsened by the pandemic.
Sources:

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economy-1828911-2021-07-16
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playing-out-for-stocks-11616909284496.html
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