Understanding the Current Chip Shortage

A recent spike in demand and lack of supply has caused a semiconductor chip shortage. Learn about the causes — and the unexpected silver lining.

Since January 2021, the world has seen a major semiconductor chip shortage — one whose effects we are only just beginning to understand. Though rare, chip shortages do occasionally occur in the semiconductor and integrated circuit industry when demand is higher than supply. The current chip shortage represents a larger-scale incident than usual, causing a major disruption in real-world production.

The biggest reason for this level of disruption is that advances in technology over the years have brought semiconductor chips to more products than ever before. They now extend beyond just cars and smartphones and into everything from tumble dryers to toothbrushes. This growing demand puts chip manufacturers in a precarious position to begin with. Any kind of sudden change in circumstance — whether it’s a forced slowdown of manufacturing or a sudden spike in demand — can have major consequences. We are now starting to see those consequences play out with businesses of all sizes suffering.

While the automobile industry may have been hit first and strongest, everything from the largest enterprise to the smallest dog-grooming business is now feeling the pinch. Even the solutions that IT teams need to purchase for their organizations, including essential products like smart cameras and access points, are now harder to come by due to the lack of semiconductor chips. The good news is that there’s an end in sight for the current chip shortage — and manufacturers are taking steps that could help prevent similar shortages in the future.

 

What Caused the Current Chip Shortage?

The root cause of the recent chip shortage is undeniably linked to the ongoing COVID-19 pandemic, which created a unique cycle of supply and demand shortages.

When the virus first hit China, it caused a wave of supply constraints. As factories shuttered in response to the pandemic, there was a slowdown in manufacturing, including the creation of many items that would require semiconductor chips. As the pandemic spread around the world, consumer demand shifted, with demand for automobiles in particular coming to a relative halt. This forced chip manufacturers to shift their focus to other applications (including computer equipment, data centers, and communications), which were seeing an unprecedented rise in demand in response to the growth of remote work.

That demand alone caused a chip crunch given that it was not simply a single spike, but rather a more permanent shift caused by consumers wanting not only devices to help them work from home, but also devices to make a home-centric lifestyle more comfortable. That included smart TVs, tablets, gaming consoles, and more. Plus, the automobile industry recovered quickly (far more quickly than anyone anticipated), causing a significant supply bottleneck.

All of these demands far exceeded any forecasts. In fact, worldwide semiconductor sales had been dropping in the two years before the pandemic. As we look forward, it will be up to chip manufacturers to catch up with this demand and implement changes that will help them prepare for future fluctuations.

 

Finding the Silver Lining

The good news is that the top manufacturers are actively taking steps to do just that. Profits are skyrocketing for semiconductor companies in the face of this unprecedented demand. In fact, the combined revenue of the top 10 foundries (which make the silicon wafers that constitute the basis of finished chips) alone reached a record high of $22.75 billion in the first quarter of 2021. And now semiconductor companies are reinvesting these funds back into their own supply chain infrastructure.

With demand for semiconductor chips expected to keep growing as even more industries undergo digital transformation, chip makers and national governments alike are working to build more capacity into their chip supply chains. Taiwanese semiconductor manufacturer TSMC plans to invest $100 million in additional capacity over the next three years. Meanwhile SK Hynix and Samsung, along with the South Korean government, have promised to invest $451 billion in capacity and incentives for chip manufacturers.

These investments are designed to improve the supply chain, increase capacity, and help ensure that semiconductor makers can meet growing demand. Even if the investments will not have an immediate effect on the current shortage, their impact could prove very significant in the coming years.

 

Looking to the Future

Though there is a significant chip shortage, fortunately things are not as daunting as they may seem. It’s clear that the end is near and, more importantly, the chip supply chain will come out stronger as a result of this challenge. After all, without the shortage, manufacturers may never have had the resources or the motivation to make positive investments in their supply chains.

Even though the end of the shortage is in sight, we aren’t quite there yet. If you need help procuring devices or solutions faster — or you want help stretching solutions you’ve already bought — Turn-key Technologies, Inc. is the team you need. Our experts can help you navigate these challenging times so that you, like the semiconductor chip industry, can come out stronger than ever. Contact us today to learn how TTI can help you.

By Craig Badrick

August 13, 2021

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