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Microchip shortages are far from a new problem. But, current inventory shortfalls are limiting global industrial production in many sectors. A miscalculation by the auto industry, coupled with production and supply problems caused by the pandemic, contributed to the current shortage.

Dealerships are running out of new and used cars, which has driven up the price of vehicles. There are constraints on producing high-end appliances, airplanes or smartphones, and anything that uses semiconductors to function.

These small parts, which often go unnoticed, are as essential components in the industry as toilet paper is in our homes. The world is facing the worst chip shortage in its history. Just at a time when the most industrialized economies are beginning to show signs of recovery.

Why is there a shortage of microchips and how does it affect us?

Several factors came together to make the world face the current shortage of semiconductor chips. First, the shutdown of car assembly plants due to the pandemic led to a drop in demand. Microchip fabs then had to adjust and redirect their production.

On the other hand, chip inventory was reduced by the demand for electronic products: laptops, game consoles, televisions, and other equipment. In addition, car buying did not stop during the pandemic shutdowns last year as expected.

Manufacturers sold more cars than estimated and did not think demand would increase this year. By the time they tried to place more orders for computer chips, it was too late. Manufacturers had changed their production line. All this contributed to further depleting supplies.

Additionally, U.S. sanctions against Chinese manufacturing companies exacerbated the crisis. Initially, the microchip shortage was restricted to the automotive industry.

Now the crisis has spread to almost all industrial sectors that employ semiconductors in their products. Including, washing machines, microwaves, refrigerators, ships or aircraft or a simple electrical installation.

The shortage has generated nervous purchases of chips, reducing stocks and raising the costs of all components. Even, the cheapest ones on the market, because the shortage of semiconductors coincided with the shortage of raw materials as well. The result has been an increasing inflation in many products.

Why is the automotive industry so dependent on microchips?

The reason is that new cars employ the chips to improve the computerized operation of engines in terms of fuel efficiency, driving automation, emergency braking and driver assistance.

Due to the microchip crisis, manufacturers are cutting production of less profitable cars. Already, carmakers such as Ford and General Motors have announced that they will reduce production. Other manufacturers such as Toyota, Subaru Corp, Nissan Motor and Volkswagen AG are joining this policy.

It is estimated that around 1.3 million light cars would have been affected during the first quarter of the year, according to data from market research firm IHS Markit. The company revealed that the situation in the industry worsened, following a fire at a Japanese microchip plant.

The factory, owned by Renesas Electronics Corp, produces almost a third of the world’s demand for microcontroller units used in car manufacturing.

Likewise, last winter’s severe winter in Texas forced the industrial plants of Samsung Electronics Co Ltd, Infineon and NXP Semiconductors to close. These companies are major suppliers of microchips to U.S. vehicle manufacturing companies.

Analysts predict that disruptions in semiconductor supplies, coupled with the sector’s own shortcomings, will deepen the crisis in the automotive industry this year.

Samsung Microchip Factory in South Korea.
Samsung Microchip Factory in South Korea.

Divestment in Asian chip manufacturing plants

Another cause of the semiconductor crisis, is the lack of investment in 8-inch chip fabs. Most of these plants located in Asia and owned by companies in that region have been unable to ramp up production.

Most of it is being consumed by 5G phone makers and laptop makers, whose demand increased faster than expected. A new 5G smartphone requires 100 chips to connect to the different frequencies. Much more than any computer.

Among the manufacturers trying to meet the growing demand are Qualcomm Inc. Its chips are used by Samsung phones. Apple Inc.’s main supplier, Foxconn, had already warned of coming chip shortages. With the current crisis, all customer supply chains have been affected.

Taiwan Semiconductor Manufacturing Co Ltd (TSMC), is another major contract manufacturer of microchips in Asia. Together with Samsung, they feed production for a variety of chip manufacturing companies.

Although U.S. semiconductor companies produce 47% of the world’s total chips sold, only 12% of global manufacturing is done in the United States.

Does the U.S. want to decrease its dependence as well?

In the face of looming chip shortages, U.S. President Joe Biden ordered a review of the microchip supply chain. The president discussed the current situation with 19 executives from major technology companies. The aim is to reduce dependence on semiconductors produced by South Korea and Taiwan.

In order to promote legislation aimed at increasing microchip manufacturing in the country, Biden has managed funds for 37 billion dollars. The plan calls for the installation of four new manufacturing plants. One TSMC and two Intel Corp factories in Arizona, and a fourth by Samsung that would be located in Texas.

Meanwhile, China is also offering subsidies for chipmakers in order to reduce its dependence on Western technology in this sector.

The shortage is believed to last at least another year, but no one dares to predict that the situation cannot get worse. Some of the scarcer types of microchips are manufactured by older plants. These plants will be a little more difficult to upgrade to raise production.

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