It is almost common knowledge by now, that multiple industries and companies are suffering the effects of an unprecedented crisis, a global shortage of semiconductor chips. To properly analyze the effects of this, it is very important to understand the origins of this crisis and the way it has manifested and been instrumental in causing panic across supply chains.
The roots of this crisis can be traced back to the early days of the COVID-19 pandemic, when multiple organizations, notably those from the automotive industry such as General Motors, Ford Motors, and Volkswagen temporarily shut down their production. This in turn translated into them rescinding on the orders that were placed for semiconductor chips, which are instrumental in the control electronics of the automobiles, such as the infotainment system, navigation, and many more such systems. During this time, chip manufacturers like Taiwan Semiconductor Manufacturing Corp reassigned the produced chips to other industries, like the potable devices industries, which saw a huge demand for products like laptops and smartphones amidst the pandemic and even adjusting their supply according to the forecasting done which predicted a shortage in demand for a relatively long period.
The carmakers, however, saw an unexpected rise in sales starting in the third quarter of 2020, which translated to ramped up production. However, the chip-makers did not anticipate this, and could not respond fast enough to the increased orders. Thus, a huge backlog of orders started, with manufacturing capabilities not being enough to cope up with demand. This particular problem is a clear impact of what is known as the ‘Bullwhip Effect’.
The Bullwhip effect is a concept in supply chain management, which explains inventory fluctuations or inefficient asset allocation. This effect indicates that upstream manufacturers in the supply chain often experience a decrease in forecast accuracy with the demand changes that occur on the customer side.
To make it easier to understand, imagine a person with a whip, and he slightly nudges the whip at the handle. This creates a little movement t the part closer to the handle of the whip (Customer), but the effects can be seen largely when moved further away from the handle ( Manufacturers). This is exactly what is happening now, with the demand from the main manufacturers affecting the manufacturing of the chips, which also means the availability is affected, especially to the automotive industry.
The global automotive industry is said to make at least 5 million fewer cars this year than expected due to this scarcity, while this could also have a negative impact on the prices, with SUVs potentially costing 20% more than it would have last year.
Longer waiting periods are also estimated, while some international car-makers have completely stopped bookings locally. This is an effective impact of the problem, which has been highlighted by Ford, BMW, Volkswagen as causing a huge bottleneck. However, the effects of this have been highly varied across nations and companies, especially with Indian companies like TATA Motors seeing not so much of a significant loss of production, owing to their partial success to “better visibility across our multi-tier supply chain to manage lead time sensitivity”. These effects were more prominently visible in European markets and manufacturers.
While the impacts started with the automotive industry, it has clearly has expanded to other industries. This is due to expanding use of electronics, which are seen from toothbrushes to smartphones. The impacts, therefore, have been widespread, owing to a shift in having to manufacture just for the stay-at-home economy, to now manufacturing for other purposes also. Many electronic giants have reported production hits, like Samsung reporting a shortage of chips for usage in their TVs and other home appliances like Air Conditioners. Ben Suh, Head of Samsung’s investor relations was seen quoting- “We are discussing with retailers and major channels about supply plans so that we are able to allocate the components to the products that have more urgency or higher priority in terms of supply”. This shortage is also expected to take as much as a $4 billion bite out of Apple’s quarterly sales due to supply constraints on iPads and Macs. Another problem is the stockpiling of such chips, which is something Huawei Technologies Co. did from the start of 2019, in anticipation of it being put on a US trade Blacklist, or other tactics such as “Double Booking”, which has further had consequences on companies trying to place new orders to revive manufacturing.
This particular problem that started as a result of the COVID-19 pandemic has further been aggravated by several other factors, such as a draught in Taiwan, where a majority of the chip manufacturing units are located, or a complete shutdown of manufacturing plants in Texas due to abnormally cold temperatures. Other incidents, such as the Suez Blockade, which blocked a majority of the transport to Europe from Asia was also a huge factor in this. This has further re-iterated what is already an existing problem within global supply chains especially in the post-pandemic world and has further made calls for a revamped supply chain process much more evident, especially within the Europe and EU.
The impacts of this are also said to be long-lasting, with Glenn O’Donnell, a vice president research director at advisory firm Forrester saying his analysis shows the shortage could last until 2023, due to constrained supply and increasing demand. In response, TSMC has pledged an additional investment of US $ 2.87 billion to expand its facilities in Nanjing, China, which is a part of a larger US$ 100 billion investment plan over the next three years, with other manufacturers like Intel and NXP semiconductors also ramping up their investments. However, these present very long-term solutions, with the short-term effects still being visible. This will directly translate into an increase in prices, which will inherently affect the customers of these products directly.
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