Microchip Shortage: Causes, Impact, and Government Strategies

November 03 2021 Jihane Benazzouz

Industrial Goods

The Global Microchip Shortage

Critical shortages of crucial semiconductors are causing severe problems in various industries across the globe. Why is there a microchip shortage, how is it influencing policies and strategies implemented by governments, and will it end anytime soon?

Table of Contents

What are microchips?

A microchip (sometimes referred to as a chip, a computer chip, an integrated circuit or IC) is a set of electronic circuits on a small flat piece of silicon. Transistors on the chip act as small electrical switches.

Silicon, the material of choice in the chip manufacturing industry, is a ‘semiconductor’. By mixing it with other materials such as phosphorus or boron, its conductive properties can be increased, which makes it possible to turn an electrical current on or off.

Microchips are used in many consumer products such as smartphones, laptops, gaming consoles, household appliances like fridges and washing machines, alarm clocks, and even cars, as well as a variety of other industries, including medical devices and networking equipment.

What are the causes of the shortage?

Chips themselves are quite resilient pieces of technology. They are made to handle external shocks such as vibrations and extreme temperatures. However, the global supply chain, as has been demonstrated these past months, is fragile and prone to disruptions from natural and artificial shocks.

In Spring 2020, the COVID-19 pandemic caused a significant drop in auto sales. This prompted car manufacturers to cancel orders of various materials and parts, including microchips, which are used for everything from computer management of engines for better fuel economy to driver-assistance features such as emergency braking.

At the same time, a significant part of the workforce purchased equipment to recreate the office at home, school systems switched to virtual learning through laptops and tablets, and households increased their spending on home entertainment products. These changes, accompanied by the continuous growth experienced by cloud computing, as well as the 5G rollout, ended up capturing the capacity that had been freed up by car manufacturers. When the latter realized demand was bouncing back sooner than they had forecasted, chip factories were already committed to their customers in industries such as consumer electronics. But these ended up experiencing shortages as well due to the “stay at home” effect that resulted in some of the strongest demand in decades.

Shortages were also exacerbated by geopolitical factors. Since early 2017, the US and Chinese administrations triggered a new era of trade restrictions that led to major microchip supply chain disruptions. These became even more critical after official bans in 2019 for Huawei, the world’s largest communications equipment and second-largest smartphone manufacturer, and in 2020 against Semiconductor Manufacturing International Corporation (SMIC), China’s largest semiconductor foundry and the fifth largest in the world, while over 40 major Chinese technology companies were designated as military-related entities by the US department of Defense in 2020 and 2021.

Constraints in the global transportation system have added another layer of complexity. With shortages of shipping containers, companies ended up having to pay premiums for shipping, thus driving demand towards airfreight. The latter was, however, already under heavy strain because of the pandemic, and thus lacked the necessary freight capacity.

Finally, weather-related disruptions contributed as well to transforming a supply shortage into this global supply crisis. The state of Texas was hit by a record blizzard and extreme cold weather in February 2021, which triggered a triple power outage of the electric grid, gas and diesel. Several major semiconductor manufacturers, including Samsung, NXP Semiconductors and Infineon, were thus forced to shut down their local plants. In Japan, a fire at the main facility of Renesas Electronics’ Naka plant in March shut down production. These events were devastating for the automotive sector since Renesas, NXP and Infineon represent nearly one-third of the entire supply of auto semiconductors. In Taiwan, the worst drought the country has experienced in half a century placed a strain on semiconductor producers, who require large volumes of water for chip manufacturing.

How are governments reacting to the crisis?

Since these devastating chip shortages have exposed the fragility of the global supply chain, governments across the world have started to take action.

In the United States, an estimated 169 industries spend more than 1% of their GDP on chips and have thus been impacted by the crisis, according to a Goldman Sachs analysis. Acknowledging the importance of semiconductors for the economy, President Biden signed Executive Order 14017, “America’s Supply Chains” in February 2021, directing the government to undertake a comprehensive review of domestic supply chains to identify and address risks and vulnerabilities, as well as develop a strategy to foster resilience. Congress also introduced in June 2020 the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act. The Senate approved in June 2021 $52 billion in order to strengthen domestic capacity for semiconductor manufacturing.

As part of its $2 trillion COVID-19 economic recovery package, the European Union’s “Digital Compass” includes as one of its goals the production of at least 20% of the world’s next-generation semiconductors by value in 2030, compared with 10% of the world chip market in 2020. In September 2021, during her State of the European Union address, President of the European Commission Ursula von der Leyen announced a European Chips Act. With member states currently designing national strategies, the Act would aim to integrate these efforts through a European semiconductor research strategy, a collective plan to enhance European production capacity, and a framework for international cooperation and partnership.

In South Korea, Samsung Electronics and SK Hynix will be leading a $451 billion investment on domestic semiconductor production over the next decade under a national blueprint devised by President Moon Jae-in’s administration. They will be among 153 companies, focusing on the K-semiconductor belt, a newly named region south of Seoul that hopes to be the epicenter of South Korea’s semiconductor push.

Kung Ming-hsin, the head of Taiwan’s economic planning agency, the National Development Council, told Reuters in late April 2021 that between now and 2025, Taiwanese companies have planned more than $107 billion in investments in the semiconductor industry, with chip giants such as Taiwan Semiconductor Manufacturing Co Ltd (TSMC) and Powerchip Semiconductor Manufacturing Corp looking to expand.

How is the crisis evolving?

While the semiconductor crisis had been expected to be solved by the end of 2021, experts believe that the global supply chain could remain in dire straits until 2023. This sentiment was also mirrored by Intel CEO Pat Gelsinger: “We’re in the worst of it now, every quarter, next year we’ll get incrementally better, but they’re not going to have supply-demand balance until 2023,” Gelsinger was quoted as saying.

Indeed, while investments have started to accelerate, it will take time before they can have a real impact. Furthermore, supply chains are bound to keep experiencing severe strains as demand for electronics grows. As Gartner analyst Alan Priestley put it, “The capacity [the chip makers] are putting in place now will be enough for the next few years, and as these things come on stream there’ll be too much capacity. But then, in another five years, we’ll be maxing out capacity again because everyone wants the latest smartphones, and we expect to see demand for things like smart homes and electric vehicles increasing. The industry is very cyclical; that’s just the nature of the beast.”