A Perfect Storm of Worldwide Catastrophes Is Causing the Global Semiconductor Shortage

By: Patrick J. Kiger  | 

semiconductor shortage
Production plants for semiconductors, such as the Global Foundries facility in Malta, New York, have become a focal point as economic recovery from the pandemic is held back by a shortage of critical electronic components necessary for semiconductor production. Adam Glanzman/Bloomberg/Getty Images

Whether you've gone shopping lately for a new car, a washing machine, a game console or any number of other items, you've probably discovered that the stuff you want is way more expensive than it used to be — and increasingly hard to find. The price tags on some high-end TVs, for example, have risen nearly 30 percent since this time last year, as Wired recently reported. New cars are in such short supply that the cost of used vehicles is skyrocketing, to the extent that the price of a Saturn, a brand that's been defunct for more than a decade, is up by more than 26 percent over last year, according to The Drive.

So what's up with that? All of these products have something in common, in that they contain semiconductors. Also referred to as microchips or integrated circuits, they have become a vital component in the smart gadgetry of our modern world, enabling the myriad miracles we expect our possessions to routinely perform. And right now, as a result of the COVID-19's disruptive impact upon semiconductor plants in Asia and pandemic-induced distortions of consumer demand that caught U.S. manufacturers off guard, there aren't enough semiconductors to go around.

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And the crisis is likely to get worse before it gets better. Global market research and advisory firm Gartner recently predicted that the worldwide semiconductor shortage will persist for the rest of this year, and that normal supply levels won't be available until the second quarter of 2022.

semiconductor shortage
U.S. President Joe Biden, center, speaks during a virtual summit in the Roosevelt Room of the White House in Washington, D.C. as the White House tries to figure out how to relieve a shortage that's idled automakers worldwide.
Bloomberg/Getty Images

"Dishwashers, thermostats, vacuum cleaners, coffee makers and cars — everything has electronics in it," explains Rob Handfield. He's the Bank of America university distinguished professor of supply chain management at North Carolina State University, and director of the school's Supply Chain Resource Cooperative, which studies and works to improve the flow of products in various industries.

The most obvious cause of the shortage has been the disruption caused over the past year-and-a-half by COVID-19. Three quarters of the world's semiconductor-making capacity is in east Asia, and early on, the pandemic forced a few countries to temporarily shut down semiconductor manufacturing plants along with other businesses — though others, such as China, deemed semiconductor industry labor forces to be essential workers, as BBC News reports. International shipping of electronics also has been hindered by the pandemic. And recently, a new surge in COVID-19 infections in Taiwan, one of the world's key sources of semiconductors, threatens to interfere with production at a time when it's needed more than ever.

The shortage of semiconductors occurred at a time when pandemic isolation was forcing millions to stay at home and work and play remotely. That stimulated the consumer craving for electronics. Expecting a slump in the market, semiconductor manufacturers didn't invest in additional capacity, according to Handfield. When instead, demand surged, the chip foundries – "fabs," in industry lingo – weren't ready to meet it. A McKinsey and Company analysis shows that semiconductor makers utilized 88 percent of their plants' capacity in 2020, which doesn't leave much room to quickly ramp up production to meet demand.

As a result, the time needed to fill orders at some factories has gone from the usual 12 weeks to 20 to 22 weeks, according to Handfield. "When you order them, you won't see them for almost six months," he explains.

Meanwhile, manufacturers who need semiconductors as components miscalculated as well. Some of the biggest pain has been felt in the automotive sector. Today's cars and SUVs depend upon computers to regulate everything from the fuel going into the cylinders to the brakes and steering, and according to a recent New York Times article, a high-end vehicle can contain 3,000 or more microchips.

When the pandemic hit last spring, most automakers reduced their forecasts, explains Brent B. Moritz, associate professor of supply chain management at Penn State University's Smeal School of Business. Instead, "demand for cars and trucks is higher than expected," Moritz explains in an email. "Many people who relied on public transport or ridesharing want their own cars."

A fire this spring a major Japanese supplier of chips and electronic modules for several major automakers helped exacerbate the auto industry shortage, though the plant again is nearing full production, according to Moritz.

semiconductor shortage
The reservoir at the Zenwen Dam in southern Taiwan is running dry as the island experiences its worst drought in decades — a crisis that risks deepening an already acute global semiconductor shortage, as production requires massive amounts of water.
SAM YEH/AFP/Getty Images

Fixing the problem isn't going to be simple or easy. Manufacturing semiconductors, which can involve etching as many as 20 patterned layers of circuitry onto a tiny piece of silicon, is a complex process, as this FAQ from the Semiconductor Industry Association, a Washington, D.C.-based trade group, explains. And the factories needed to perform these tasks can take two to three years to build, according to Handfield.

The U.S. Senate recently passed a bill, designed to bolster the U.S. tech sector's ability to compete with China, that would provide $52 billion in subsidies to domestic semiconductor manufacturers for research and development as well as manufacturing, CNBC reports.

That legislation, which still must be voted upon by the House, would provide a boost to U.S. chipmaking, which today only accounts for 12 percent of the global capacity, down from 37 percent back in 1990.) Building new fabs here could help provide a bigger supply of U.S.-made semiconductors. But it wouldn't have much immediate impact upon today's shortage.

"There's a lot of discussion around bringing more chip manufacturing back to the U.S., but it's not as if you can just build a factory and start making chips," Handfield explains. Semiconductor manufacturers require their own supply chains as well. Handfield cites the example of one large Asian manufacturer has 2,500 different suppliers.

"It's unlikely we can just recreate that overnight," Handfield says.

Meanwhile, as the pandemic recedes in the U.S. due to vaccines, the demand for semiconductors and the resulting shortage may grow even more dire.

semiconductor shortage
An employee checks a printed circuit board at a production facility in the U.K., April 28, 2021. The global chip shortage is going from bad to worse with automakers on three continents joining tech giants Apple and Samsung in flagging production and lost revenue due to the crisis.
Bloomberg/Getty Images

"The combination of stimulus funds and the fact that people have not been spending money on other things — like vacations, air travel, restaurant meals — has seen people want to spend on consumer goods that use chips, things like new computers, monitors, tablets and all manner of consumer electronics," Moritz explains. "This is putting additional strain on the supply chain."

Looking forward, "our use of semiconductors will be growing," says Morris A. Cohen, the Panasonic professor of manufacturing & logistics at the University of Pennsylvania's Wharton School. "Adding manufacturing capacity is expensive and takes a long time. So as we embed more intelligence and computing power into products and services, the problem of matching supply with demand should become even more difficult."

But on the positive side, Moritz expects automakers and other manufacturers to learn from the crisis, and learn how to avoid future incidences.

"Probably, the largest innovation that can help right now is building supply chain resiliency," Moritz says. "The auto industry was famous for reducing inventory, yet in this circumstance, the drive for efficiency and low inventories has resulted in shortages. Of course, inventory is not the only way to build resiliency, yet having spare capacity, flexibility and good supplier relationships can help mitigate the future shortages. I expect that the auto industry will be treating semiconductors more strategically rather than as a commodity, yet that mindset is hard to break."

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