The global chip shortage that began in late 2020 has now halted assembly lines around the world, as the extensive lead time for these tiny silicon chips has led to major supply deficiencies, elevated pricing, and queues amongst consumers for cars, mobile phones, computer video cards, video game consoles, and many other electrical devices. Semiconductors, also known as integrated circuits (ICs) or "chips," are indispensable components in virtually all electronic products we use, from the handheld controller for your favorite video game console to smartphones and the network system that provides the internet connection that allows us to read articles like this one.
What Caused This Semiconductor Shortage?
Like many other industries impacted by COVID-19, the capacity to manufacture and distribute chips relies on a long supply chain that has suffered from delays and capacity constraints due to sudden staff shortages and the temporary closure of upstream suppliers for indeterminate periods of time and on extremely short notice. Entire industries that buy chips swiftly responded to the "new normal" in early 2020 by slowing down their production and reducing or canceling parts orders in a bid to control their costs. However, nobody predicted that consumer demand for cars, TVs, smart devices, gaming consoles, and home office equipment would actually increase and significantly outstrip supply.
Thanks to the COVID-19 pandemic, a large proportion of the world's working population suddenly found themselves spending significantly more time at home, often without the ability to travel outside their local community. While some chose to spend this time developing new skills like making sourdough bread, growing vegetables, or performing home renovations, others chose to enjoy the opportunity for more relaxation time. The net result has been huge spikes in demand for the supply of flour for baking, gardening supplies, paint and lumber for home repairs, and of course, electronic devices of all kinds.
Spike in Global Chip Demand
In response to the unexpected and unprecedented demand, the same manufacturing industries that reduced or canceled orders just months prior made the snap decision to ramp up production. These manufacturers went beyond the originally planned volume, which further exacerbated the problems and put added strain on the production schedules for chipmakers and component suppliers.
While it is easy to pin the blame solely on the effects of COVID-19, the reality is more complex. Most of the world's semiconductor fabrication plants are running at their maximum capacity, in fact, according to EPS News, an electronics industry magazine, the top 5 manufacturers, that together represent over 53% of total global capacity, increased their production volumes by between 4 and 15% in 2020 compared to 2019 numbers.
While global chip production capacity is at an all-time high, sometimes Mother Nature or industrial accidents intervene and limit production. Envista Forensics has been playing its part to assist in getting facilities back online as quickly as possible when such incidents occur, as has happened to facilities in North America, Asia, and Europe since the COVID-19 pandemic began. Our in-house semiconductor experience has enabled us to respond to catastrophic events, such as the Texas ice storms, to limit the loss of in-progress production. Adding to this difficult situation, escalating political tensions between China and the U.S., where a technological trade war has blocked the sale of certain chips and devices across borders, has led the semiconductor industry in the enviable position of demand exceeding capacity to supply, yet unable to meet that demand.
Decline in Global Chip Supply
The supply of chips cannot be simply turned on and off on-demand. Changing the production schedule for a chip manufacturer can take weeks or months, and once a company has given up its production slot for the chips it wants, it may even take years before the chipmaker has a slot open to take in new orders. Equally, adding new production capacity takes multi-billion-dollar investments and years before being production-ready.
Major industries that practice "just in time" or LEAN manufacturing intentionally don't hold large volumes of parts in stock for cost control purposes. As a result, when car manufacturers and builders of consumer electronics suddenly found that they had massively miscalculated the demand for their products (and also perhaps having previously canceled or reduced their orders for chips), they faced the difficult choice to either overpay for chips to move up the production schedule and hope to sell all they can manufacture, or face long delays in the supply of these essential parts for their products and potentially lose sales to competitors willing to overpay.
The situation has reached the point whereby global leaders have been addressing the issue directly and calling for renewed domestic investment in Europe and the U.S., including President Biden's call for a USD 50 billion investment fund to provide some counterbalance to Asia's majority share of the global chip manufacturing capacity. In return, China has ramped up expansion plans of its own and current industry leaders, such as Samsung and Hynix of Korea and TSMC of Taiwan, which are racing to expand capacity to meet the current surge in demand.
Multiply the chip shortage across dozens of industries and navigating our way out of this chip shortage storm does not seem to be expected to end any time soon. Industry leaders believe it could be mid-2023 before the supply-demand balance is restored.
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