What Caused the Global Chip Shortage?

Dave Seeman
global chip shortage
Illustration: © IoT For All

We’ve all heard or experienced how supply chain issues have affected businesses since the pandemic. However, one such issue, the global chip shortage, started even before the pandemic. When the US placed export bans on Huawei in 2019, some Chinese companies started hoarding chips out of fear of facing similar challenges of being put on the U.S. Entity List.

Global semiconductor sales were 18 percent higher in 1Q21 than in 1Q20, 29 percent higher in 2Q21 than in 2Q20, and 28 percent higher in 3Q21 than in 3Q20. Demand was at record highs. Government-mandated lock-downs forced several fabs to shut down temporarily.

Some Good News: Demand Is Up

The pandemic caused more people to work from home. Tons of companies bought laptops, headphones, mics, and more, therefore increasing consumer electronics demand. With everyone working from home, web/infrastructure services had to expand. Servers were bought or “ranted” (AWS, Azure, GCP) which caused all major data centers and companies that run on-premise, to purchase more server hardware.

Why the Auto Industry Was Hit Hard

Automakers decided to cancel chip orders during 1Q20 and 2Q20 because of pessimistic demand prospects due to COVID-19. This “freed up” wafer capacity at foundries and IDMs were quickly filled with orders from consumer electronics companies as demand in this sector skyrocketed. When automotive demand increased sooner than expected, car manufacturers quickly ran out of chips because of their just-in-time supply chain model, which generally tries to avoid inventories. This situation only worked to worsen the global chip shortage.

Front-end and back-end manufacturing rely on hundreds of different chemicals and materials. The lack of one type of chemical can have a domino effect throughout the entire value chain and can interrupt the whole manufacturing process.

Expanding (back-end or front-end) capacity in existing fabs can be done much quicker than building new fabs. This can be done in 18 months instead of 3 years). However, supply constraints for certain types of manufacturing equipment do pose a challenge to short term capacity expansions.

The Impact of Extreme Weather in Texas

In February 2021, Samsung, NXP and Infineon had to temporarily suspend plant operations for several weeks due to power failures in Austin, Texas, caused by major snowstorms, resulting in lost production and hundreds of millions of U.S. dollars in lost revenue.

The power outage damaged not only manufacturing equipment but also components in the facilities’ infrastructure that had been expected to last the life of the facility. The semiconductor industry is already highly susceptible due to:

  • High division of labor (very highly specialized).
  • High capital investment/barrier to entry ($20B for 5nm manufacturing).
  • High utilization rates. Once you start fabbing, you need to let it run for high quantities to make money, switching out/back and forth is very bad/costly.
  • Semiconductor manufacturing has one of the highest R&D expenditures.
  • Long manufacturing times. One chip has 1500 steps with hundreds of variables (about 20 weeks from start to finish).
  • Transnationality. All of the above and materials/supplies are spread across many countries.
  • Strong vendor lock-in.

The Many Factors of the Global Chip Shortage

In short, there were many causes of the global chip shortage. From the beginning, some Chinese companies began stockpiling chips out of concerns with US foreign policy and relations. Then when the pandemic began and brought with it a shift to working from home, demand for consumer electronics and server hardware increased substantially.

Meanwhile, many factories were forced to shut down to prevent the spread of disease. As demand returned for automobiles more quickly than expected, supply couldn’t keep up, especially since new facilities can take up to 3 years to build. And finally, plant operations in the US were suspended for weeks due to the power failures in Texas caused by snowstorms. This doesn’t even capture the extent of the factors at play, but it does begin to paint a picture of how a massively complex system built for efficiency instead of resiliency is having a hard time bouncing back from so much concentrated stress. Luckily, demand is still up and rising, and companies like IBM are responding by building more facilities.

Author
Dave Seeman
Dave Seeman - Partner, Ovyl
We help you build the best hardware for your business. We specialize in high-tech devices with high-end industrial design. Founded by an electrical engineer, an industrial designer, and a mechanical engineer, we've been solving cross-disciplina...
We help you build the best hardware for your business. We specialize in high-tech devices with high-end industrial design. Founded by an electrical engineer, an industrial designer, and a mechanical engineer, we've been solving cross-disciplina...