A global semiconductor shortage has embroiled not only the electronics industry but the automotive industry as well. Chips are likely to remain in short supply in the coming months as demand remains higher than ever. The Semiconductor Industry Association said in December of last year that there was a 5.1% growth between 2019 and 2020, a number which sounds small but is a significant jump given that global chip sales in 2020 stood at $433 billion.
The shortage that started with consumer electronics like PCs being stocked up by consumers during the Covid-19 pandemic now threatens car production around the world. Carmakers around the world have been forced to slow down production because of this shortage which is expected to cost the industry $61 billion in sales. It’s not just the automotive industry that’s struggling to get enough semiconductors to build their products. Chip designer companies like AMD, Nvidia, and Qualcomm have all been affected by this. GPU supply at this point can’t keep with the demand and that has had a domino effect on the supply of new generation gaming consoles from Sony and Microsoft.
Origins of this sudden shortage can be attributed to the Covid-19 pandemic, you know, the thing you have to regularly convince your parents still exists. Auto and electronics makers that cut back drastically in the early days of the outbreak are now rushing to re-up orders, only to get turned away because chipmakers are operating at full capacity supplying smartphone giants. This situation also highlights a structural change in the semiconductor industry. Many of the top semiconductor companies design their chips and don’t fabricate in-house, instead rely on a few companies in Asia. Companies such as the Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Semiconductor, and Global Foundries are contracted to fabricate their products. Chip fabrication requires huge investment in technology and years of planning which while making the business model of outsourcing economically viable, also makes them very dependent on such foundries essentially putting all their eggs in one basket.
Those who cancelled orders in the early days of the pandemic had to get back in line. Since tech companies have long-term contracts and never cut their orders, the automotive industry is naturally a low priority for the foundries. Automotive production usually employs the “just-in-time” model, meaning they avoid having extra parts in storage. The surge in demand for cars means the automakers have to stand in a queue while the capacity of the said foundries is fully utilized with demand from every sector.
Last year, the U.S. under the presidency of Donald Trump locked horns with China followed by a trade war which led to the U.S imposing sanctions on Chinese firms. One of these firms was Semiconductor Manufacturing International (SMIC), the biggest foundry in China, which was barred from getting advanced chip manufacturing technology and making it harder to sell its products to companies with U.S. ties. This prompted customers to shift their orders to competitors like TSMC. Some companies like Huawei even stockpiled essential chips before the deadline, using up production capacity last year. Led by Huawei, Chinese imports of chips of all kinds climbed to almost $380 billion in 2020, making up almost a fifth of the country’s overall imports for the year.
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