By: Ajay V.
Revised by: Raiyan B
The microchip... a small, tiny device, that is more important than it may seem. At a glance, they just look like some tiny, insignificant piece of a device that may seem fairly easy to replace. However, on the inside, microchips are a tiny computer vital in hundreds of industries and have grown to be an essential part of everyday goods and products.
Cars, laundry machines, and even toothbrushes use microchips. It seemed like microchips were everywhere… And then the pandemic hit. People no longer went outside, and the demand for buying things dropped due to factors such as job security, eviction, etc. The desire for microchips had fallen just as many other products. And producing more microchips had reduced speed. However, as the vaccine has become readily available, the economy began opening up.
Industry after industry started rolling back to their pre-pandemic standards, and the demand for many goods spiked unlike anything in the past. Companies were eager to start selling regularly again, except a few weren’t able to. These companies couldn’t go back to selling at their normal rates due to the global shortage in microchips. This caused massive corporations such as Ford and Tesla to experience devastating effects on their supply lines, and it seems like this shortage won't go away anytime soon. So, this begs the questions, how did we end up with a shortage of these important devices? And when will it finally go away…?
Pent-up demand
Most economists believe that this shortage was caused by the pent-up demand right after the COVID vaccine was released to the general public. The shortage first appeared towards the end of April and the beginning of May 2021 after people could freely go outside after a year of lockdown. This caused a rapid increase in demand for products in many industries, including ones that required microchips. Unfortunately, the supply of microchips could not keep up with the sudden demand, especially after being slower than usual due to the pandemic.
This is because, unlike other industries, the supply of microchips cannot be easily scaled up and down. The process for making microchips is a highly intensive tech process that takes several months to create. In order to increase production, the companies that produce microchips would have to add new factories and new manufacturing plants. A task which costs quite a lot of time and money. Furthermore, the trade war between China and the US also contributed to the cut off of the supply of chips. The problem was further worsened by the fact that the entire microchip market is controlled by only three companies: the Taiwan Semiconductor Manufacturing Company, Samsung, and Intel. With all these significant constraints on the production of chips, these companies have been unable to keep up with the post-lockdown spike in demand.
The effect of the shortage.
The shortage has had devastating effects on many supply chains. However, the automobile industry is possibly the worst hit. Numerous automakers such as Ford, Audi, and GM were forced to close several of their manufacturing plants and factories as a result of this shortage. The lack of microchip supply is rippling into the automobile industry resulting in a lack of cars, in turn causing a spike in prices for everyday consumers. The chip shortage is also causing car companies to remove certain features in new car models such as the navigation features in Nissan cars. Other companies, like electric car manufacturer Tesla, have tried to adapt to the situation by changing the software in their vehicles to make their cars compatible with other types of chips. Tesla’s CEO, Elon Musk, has acknowledged that “the global chip shortage situation remains quite intense” in an earnings call according to The Verge. Aside from the automobile industry, the chip shortage is also affecting the tech industry harshly. Sony, manufacturers and distributors or the high-demand ps5s say they cannot produce enough consoles until 2022. Makers of common tech appliances such as TVs and laundry machines are being hit by the shortage. Even Apple, the world’s biggest company, which has historically been able to weather shortages in the market like these is being hit hard. All of these factors are contributing to higher prices for products, as availability of chips is scarce.
When will it be over?
Companies estimate that this devastating shortage will be over towards the third or fourth quarter of 2021. Though a few estimates point to as late as 2022. Companies like TSMC, Samsung, and even Intel are ramping up the production of semiconductors, however it's unclear how quickly, and how much, they can ramp up. Regardless, you can expect the shortage to linger for a while longer. Although, after the events of this shortage, companies have hinted at the possibility of moving away from China as their preferred location for manufacturing semiconductors. Intel is reportedly in talks to build facilities in Europe as well as the US.
Overall the shortage is a continuing problem and is affecting supply chains for several industries around the world. Even powerful corporations like Ford, Tesla, Sony, and Samsung have felt the impacts of the global chip shortage. While chip producers such as TSMC and Samsung have tried to ramp up production to catch up to the demand, the shortage is likely to stay for a while. Economists predict that the shortage will be resolved by the end of 2021 or 2022. So what are your thoughts about the global chip shortage? Feel free to share them below.
Sources:
Hawkins, Andrew J. “Tesla Rewrote Its Own Software to Survive the Chip Shortage.” The Verge, The Verge, 26 July 2021, www.theverge.com/2021/7/26/22595060/tesla-chip-shortage-software-rewriting-ev-processor.
Shead, Sam. “The Global Chip Shortage Is Starting to Have Major Real-World Consequences.” CNBC, CNBC, 18 May 2021, www.cnbc.com/2021/05/07/chip-shortage-is-starting-to-have-major-real-world-consequences.html.
“Why the World Is Running out of Computers.” YouTube, YouTube, 28 May 2021, www.youtube.com/watch?v=IOvqN23Sr4o&ab_channel=PolyMatter.
Rhodes, Phil. “The Global Chip Shortage: What's Going on?” RedShark News, www.redsharknews.com/the-global-chip-shortage-whats-causing-it.