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Why is the semiconductor shortage affecting so many industries across the world?

Why is the semiconductor shortage affecting so many industries across the world?

COVID-19 has caused ripple effects across the world for almost two years now. 

Supply chain issues and petrol shortages are just some of the issues that have been affecting the UK in the last couple of months.

You might have wondered in recent months – why is it so expensive for me to buy a second-hand car this year? Why is it taking six months to receive my new console? Why are iPhones shooting up in price?

The shortage of semiconductor chips has been a prevalent issue across all technology-involved sectors since the beginning of the pandemic when businesses and work began shutting down. 

And now, manufacturers can’t get their hands on one of the key components for all assets with any electrical components. From cars to phones, there are not enough chips to go round.

What are semiconductor chips?

Semiconductor chips are die-cut silicon wafers with electronic connections built into the framework and are used in most electronic devices.

They have numerous uses, and are necessary across most sectors and industries, including vehicles, technology, nano and micro machines and even some biological analysis functions.

Why is there a shortage?

While COVID-19 has been pointed to frequently as the cause for the shortage, it is strongly argued that this was only the catalyst for a much larger and longstanding logistical nightmare.

The arguments that the shortage is the “logical outcome for a supply chain sector that has been asking far too much of outdated technologies for far too long” have been uttered and that COVID-19 wasn’t the cause.

Poetically put, COVID has merely been the tide that went out and showed which businesses had been swimming naked.

However, COVID-19 has accelerated the problem radically. As a result of the pandemic, many factories had to close, temporarily or permanently, with the components of semiconductor chips being unavailable for months on end. On top of this, there was a global labour shortage causing ripple effects throughout the mining, processing, and transporting of the necessary supplies.

Vehicles

Automakers are currently liable for around 10% of the semiconductor chips on the market. A normal, fossil-fuelled car uses between 50 and 150 semiconductors. Modern electric vehicles, on the other hand, can use up to 3,000 chips. With countries leaning further towards green vehicles, there is expected to be even more of a demand for semiconductor chips in the automotive arena.

COVID-19 lockdowns and restrictions immediately led to a drop in car sales. With the majority of the country’s workforce stuck at home and without need of a car – the auto industry had no choice but to reduce their semiconductor purchases. Toyota made an announcement last month that it would reduce production by 40% and a recent survey showed that US automakers are on track to produce 1.28 million less cars this year.

Switching Priorities

As the pandemic progressed, demand for semiconductor chips were fluctuating heavily across industries and without a precedent for how to handle COVID-19 and no knowledge of how the pandemic would progress, there were many issues caused by the stockpiling and advance ordering by certain companies, leaving other, less prolific companies unable to acquire the chips.

When the demand for PC and gaming devices increasing drastically due to global lockdowns and countries shifting to working from home and online education, semiconductor manufacturers had no choice but to readjust their productions to fulfil the orders from their in-demand industries and drastically cut production of the chips targeted at auto groups. It should also be noted that tech and telecoms contracts are far more lucrative for semiconductor manufacturers.

Another stressor on the chip industry throughout the pandemic has been the introduction and rise of 5G. This increased the demand for semiconductor chips, and with the trade war between the US and China causing restrictions on China’s Semiconductor Manufacturing International Corporation (SMIC), it’s been difficult for the corporation to make trade with companies with any US connection at all, furthered by the US’s decision to halt any and all dealings with Huawei, with chip manufacturers outside the US inundated with orders from the Chinese company.

Logistical concerns

And then there’s the logistical issues.

This concern can widely be attributed to COVID-19 and the fluctuating demands for moving shipping containers that has caused the cost to balloon drastically. To send a single 40ft container from Asia to Europe has increased ten-fold from last year, says George Griffiths, editor of global container markets at S&P Global Platts. It currently costs £12,480 to send a single container, with the cost last year being a nominal amount in comparison at £1,101.

Alongside this, there have been large increases in air freight fees and a widespread lorry driver shortage in Europe.

Accidents happen

And there have been freak accidents that have slowed down progress.

A fire broke out at Japan’s Renesas semiconductor manufacturing plant in March 2021, with the company typically producing around one third of microcontroller chips embedded in cars globally. The cost that goes into these factories is so colossal that not only the stoppage of production, but the rebuilding itself meant that the factory had to shut for several months.

A vicious winter storm in Texas also shut down a semiconductor factory, causing similar delays, that can only be attributed to bad luck but nonetheless the effect has ricocheted and been felt globally.

Environmental Concerns

A potential solution for the shortage is to stray away from semiconductor chips completely with safer and more effective alternatives. 

Gallium Nitride (GaN) has been noted to conduct electrons better than the usual semiconductor silicon at a lower manufacturing cost. Essentially, this would use less carbon dioxide than the normal chips and would allow things like electric cars to save more energy and charge faster.

Photonic (optics) materials operate on light rather than electricity to run chip processes and apply to any computing process such as cars. These chips are smaller, use less power, no rare earth minerals and run three to ten times faster. Photonics has remained largely off the grid, having only recently been applied to devices available to the public.

The future of semiconductors

Predictably, there is no single, clear-cut solution to the semiconductor shortage.

Semiconductor factories cost billions of pounds to build, and the majority of semiconductor manufacturing is dominated by Asian companies. While the Semiconductor Manufacturing International Corporation (SMIC) has declared plans to build a new £6.5 billion factory in Shanghai to produce semiconductors at the 28-nanometer node, a possible solution to the shortage is to rather diversify global manufacturing, in part dealing with the logistical issues as well.

The UK has had a respectable representation in the chip industry for a number of years due to companies such as Newport Wafer Fab in Newport and Graphcore in Bristol. 

But to help address the shortage and mitigate future risk, the UK needs to take advantage of its experience and expertise in design and apply it to manufacturing, championing supply chain diversification.

There are, of course, positive elements to take away from the shortage. New technologies and practices are being introduced and supported, digitisation is being fast-tracked rapidly and the cruciality of semiconductors is now being realised and respected.

While this has been the ‘perfect storm’, it is wholly unlikely that the combination of the circumstances leading to the shortage will happen again, with the world still recovering and learning how to deal with the tail end of COVID-19.

In its report, What does the semiconductor shortage mean for telecoms?, telecoms research firm STL Partners predicts that the shortage will last until 2023, “until foundry capacity, substrates and component demand softens out”.

By this point, it is expected that preventative measures will have been introduced globally, and will involve industries and governments working alongside each other, as apart, there may not be a feasible longstanding solution.

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