Semiconductors are electronic microchips that power almost every modern electronic item. As all of our vehicles, gadgets and appliances get smarter, the demand for these chips rises. In 2020, semiconductor global sales reached a record $439 billion1. This surge in demand was also driven by the pandemic. Employers needed new IT equipment to kit out remote working systems, while consumers flocked to buy new entertainment systems and gaming consoles. This demand has however, caused a critical shortage in the supply of chips. Consequently, technology companies across the globe are reeling. Automakers are cutting vehicle productions while smartphone makers are delaying new launches as there aren’t enough of these essential chips. This article will explore the semiconductor shortage and the wider implications.
What caused the shortage?
There are various contributing factors to the shortage. Demand for chips has been increasing year-on-year due to the wider variety of items requiring them. The Internet of Things has seen chips inserted in everyday household appliances such as fridges and coffee machines. This rapidly increasing demand has outstripped supply over the past few years. Fundamentally however, the problem was exacerbated, both on the supply and demand side, by the pandemic. Lockdown orders sent demand for PCs, laptops and personal entertainment systems soaring. Demand for consoles soared 155%2 during the pandemic while US TV sales also rose by 19%3 last year. PC sales also hit their highest levels since 2014, with billions of pounds spent by both employers and workers to facilitate remote working. This unexpected spike in demand has been a primary factor in the shortage.
On the supply side, coronavirus restrictions caused a significant slowdown in production. Taiwan produces the majority of the world’s chips. The east-Asian island dealt well with the pandemic but measures to curb the spread of the virus cut production notably. Restrictions in other chip producing nations also resulted in a collapse in the global of supply semiconductor chips. These factors resulted in the shortage we are seeing today.
What are the implications?
The microchip shortage has been devastating for many industries, but the automotive industry has been most acutely affected. Modern vehicles are now wholly dependent on semiconductor chips to operate the majority of features from emergency braking to entertainment systems. The global industry is predicted to lose a staggering $110 billion4. Major names including General Motors, Volkswagen and Toyota have all announced plans to slash production. General Motors alone is predicted to lose $2 billion5 due to closed factories.
In the tech industry, both Microsoft’s Xbox X Series and Sony’s PS5 are facing severe shortages in stock. Apple was forced to delay the launch of its latest iPhone due to the shortage while prices of TVs, laptops and tablets are surging by up to 30% due to the shortage. For automakers, the chip shortage combined with a collapse in demand due to the pandemic has been a painful cocktail to stomach. The longer the shortage continues, the deeper in the red many of these companies will go.
The commercial implications of the semiconductor shortage are almost insignificant compared to the wider geopolitical implications and consequences. In the political world, the shortage has forced the major world superpowers, namely the US and China, to reconsider their supply chains. Both giants are firmly on a drive for technological self-sufficiency.
Self-sufficiency is no easy feat as it typically requires not just government subsidies but large direct investments. Creating semiconductor chips is both technologically and capital intensive. The average semiconductor factory will cost around $10 billion and will only return profits after 5 years. It’s a costly project but with microchips being critical components in military and surveillance equipment, semiconductor chips have become a matter of national security. The US and China have made firm commitments to limit their dependency on microchip imports.
China is by far leading the spending race to achieve this. It will spend roughly $1.4 trillion to ensure that by 2025, 70% of chips used in China are made in China. Furthermore, China waived taxes on imported semiconductor materials. The US approved $52 billion of investment in semiconductor production and research. Furthermore, $250 billion of US government spending has been announced to counter China’s drive for technological supremacy.
Another great concern for the US is the potential fragility of its supply chain. Nearly 80% of the world’s chips comes from east Asia, with Taiwan alone producing over 60%6. Taiwan is however, under increasing threat of invasion from China. An invasion by China could severely impact supply chains in the US and the wider western world.
The semiconductor shortage is hugely significant politically as it has jolted both superpowers to speed up in their technological race. Such technological supremacy and self-sufficiency in the chip space, amongst other technologies, will set the foundation for geopolitical relations over the coming decade.
There is no quick solution to the semiconductor chip shortage. The only option is to ramp up supply. Industry experts expect the shortage to last between 18-24 months, in light of the time needed to expand production. The race for technological supremacy and self-sufficiency is underway and semiconductors will be at the centre of this. Global powers are likely to further ramp up investments in an attempt to repatriate their supply chains. Some analysts predict however, that this mass production expansion could swing the pendulum the other way and lead to oversupply. It is likely that we could indeed see oversupply and an accompanying price depression in the mid-2020’s. Regardless, the shortage is evidently here to stay, at least for the short term. Waiting lists and short supplies of our favourite gadgets and consoles will undoubtedly be the norm over the next few years.