There’s a certain material that is crucial to the functioning of our daily lives. It exists in just about any device we use. Without it, as the design of things currently stands, company’s have to face the prospect of shutting shop because that is how important this material is. We’re speaking of Semiconductors!
Semiconductors conduct electricity between conductors such as metals and non-conductors or insulators such as ceramics. They are usually made out of silicon or germanium and make up the foundation of almost all modern day electronics. On the semiconductor is where you would find an integrated circuit, otherwise known as the ‘chip’.
The COVID-19 pandemic, like with all other things, has severely affected this industry. Supply is low and since it is so fundamental to the manufacturing of so many devices, a number of other industries have been affected as well. The ‘lead time’, which is the amount of time that it takes for semiconductors to be delivered from the time the order was placed is up to 15 weeks as of February 2021. It was around 12.5 weeks during the same time last year. This is the longest time taken since data collection began in 2017.
Sales of semiconductors have grown steadily over the course of the past decade. Computing is now central to how we live our lives whether that is at work or at home and as such the demand for chips has increased. Until now there has been no issue in terms of supply. More than 90% of the world’s semiconductors are manufactured in Asia, with the Taiwan Semiconductor Manufacturing Company Ltd. (TSMC) and Samsung Electronics Co. making up the lion’s share of the same.
TSMC sells chips directly to tech firms or indirectly by selling first to chip designers such as Qualcomm or Broadcom. These firms then in turn sell on the chips after making certain modifications to companies like Apple, Dell, Nvidia, HP, Amazon, Alphabet, and so on. In recent years, with every device becoming a smart device, the demand for chips has extended beyond the traditional computing firms. Cars now come fitted with smart devices that perform a host of functions and as such car makers like Ford, Toyota, Tesla, etc. have also emerged as significant clients. By 2030, the electronics in a car are expected to make up 45% of the cost of manufacturing.
One of the reasons as to why car sales have been low this year has been because of the shortage of semiconductors. Nio Inc., which is China’s equivalent of Tesla, has had to temporarily suspend production because of this shortage. Since the pandemic has forced most people to stay at home, the expectation was that the majority of sales would be centered around devices that will be used in the house. Car manufacturers estimated that demand for vehicles wouldn’t be the usual amount this year because of this reason, and therefore did not shore up their inventory of semiconductors. As it turned out, demand for vehicles did not go down as much they expected, and now they are struggling to keep up. The automotive industry is expected to lose out on $61 billion worth of sales this year alone.
The situation has gotten so serious that top government officials have vowed to take action. Joe Biden announced in February that he is directing senior officials in his government to work with industry experts in order to address the shortage. Intel Corp. last week unveiled a $20 billion plan to set up its own semiconductor foundry in the US. As of right now, United Microelectronics Corp. is the biggest US producer of semiconductors and its sales make up less than a 10th of what TSMC does.
There is no quick solution on offer, however. TSMC has demonstrated that it takes decades and billions of dollars in investment to perfect the chip making process. The reason why it boasts the largest sales of semiconductors and why it takes up such a large share of the market is because its chips are superior to anything else available. US officials have been in contact with officials from Taiwan in order to get some help, but even if they were to help out it still takes years to merely set up a foundry and to get operations running smoothly.
Like all other industries that have taken a hit due to the pandemic, they did so because they did not see this coming. We explained in another article about the phenomenon of ‘just-in-time manufacturing’ where companies now prefer to not waste money on storage costs and only order what they need for the immediate future. The advent of the internet has meant that they can do this without really failing to meet demand. But now, of course, this approach is revealing its weakness due to the disruptions to the global supply chain. Industry experts expect the shortage of semiconductors to continue being a problem for the rest of the year and this might even extend to the first 1 or 2 quarters of next year.