Should We Be Worried About the Global Chip Shortage?

The pandemic's effects on the global market have been far-reaching, and for car and video-game-console manufacturers, the consequences have been particularly severe because of the global chip-shortage crisis. The high demand for semiconductor chips is threatening practically every industry dependent on electronic components, leading to a halt in vehicle production and a price surge of daily consumer electronics. In fact, as this supply and demand problem continues, consumers are likely to find that these products will be less readily available and more expensive.

The biggest catalyst of the chip deficit is Covid-19 and the effects of the lockdown, which brought about a sudden sharp growth in demand for consumer goods and left companies scrambling to find enough chips. Other factors attributed to supply problems have been restrictions placed by the U.S. government on Chinese semiconductor manufacturers as well as Taiwan's drought, which affected huge chip manufacturers that require large amounts of water to create the chips. While semiconductor manufacturers are trying to ramp up production, they are simply unable to keep up with growing demands. And with demands not likely to calm down, industry insiders are considering how long this crisis will last.

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Will the shortage last long term?

Some manufacturers have a bleak view of this crisis, suggesting the shortage will last for at least another year. Flex, one of the world's largest electronics contract manufacturers, forecasts that the shortage may even continue into 2023. The company, which itself relies on a large number of chips, has been forced to stall production for a wide range of electronics. Intel's CEO also stated that it could take several years for the worldwide scarcity in chips to be resolved. The company, which is one of the few remaining that both designs and manufactures its own chips, even revealed a $20 billion plan in March to greatly expand its capacity for manufacturing advanced chips.

Others, however, have a more optimistic perspective on the crisis. Goldman Sachs' chief Asia economist Andrew Tilton revealed that the bank's analysts predict the shortage is currently in its worst period and "will gradually ease over the back half of the year." Still, Tilton stated that the situation should be monitored closely in case other disruptions in the supply chain emerge, such as the ongoing Taiwanese drought or even another Covid outbreak. Consulting firm AlixPartners also expects the worst impact on the industry to occur in the second quarter and then progressive improvement throughout the second half of the year. At the same time, the firm forecasts that the chip shortage will cost the auto industry $110 billion in revenue in 2021.

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Alternative solutions to the crisis

Whether relying on the more optimistic or pessimistic picture of the crisis, this shortage has revealed faults in the semiconductor manufacturing industry, and industry experts and policymakers must find fast solutions to resolve the giant supply issue. In the U.S., where only about 12% of the world's semiconductor chips are produced, the amount of chips is simply insufficient. In response to the shortage, President Biden has asked Congress for $50 million to support the domestic semiconductor industry and $50 billion to create a new Commerce Department to monitor domestic industrial capacity.

Biden's bid may already be encouraging more U.S. domestic growth. TSMC, the world's largest semiconductor manufacturer based in Taiwan, is rumored to be planning a major U.S. expansion of manufacturing facilities, with several more factories in the works beyond the $12 billion Arizona plant it has already announced. Further speculation suggests that the expansion was a response to a request from the U.S., as foreign firms like TSMC could be eligible to receive some of Biden's promised funds.

In an effort to overcome the shortage, other manufacturers have also made plans to expand their own facilities. Medical-imaging technology company Nanox, which is developing a commercial-grade digital X-ray source, announced the scaling up of its semiconductor fabrication plant in South Korea to support key source manufacturing in light of growth in global demand. It was previously reported that Tesla was interested in outright buying a semiconductor plant, but may change those plans because of the prohibitive costs involved in such a purchase. The electric carmaker is taking the unusual step of making advance payments for chips to secure critical materials. And Tesla isn't alone — many companies are adopting a more assertive approach and purchasing chips in advance. This has modified chip manufacturers' business models, providing less flexibility in catering to clients based on changing demands.

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Such initiatives will be crucial in preventing future manufacturing deficiencies, but they fail to solve the current ongoing supply problem. Whether the shortage lasts for another six months or another two years, many industries will feel the ramifications for the next several years. Yet the crisis also has the potential to strengthen the electronics and auto manufacturing industry, building supply-chain resiliency for the long term.