Global Chip Shortages Cast a Long Shadow With No End in Sight

Once there was a clear delineation between high-tech and low-tech products, but today products across the board, from electric toothbrushes to satellites, carry intelligence created by electronic components. Plus, many products contain more chips than we ever imagined. Consider this: In 1990, the average high-end automobile incorporated between seven and thirty semiconductors. It was predicted that number might surge to three hundred.

That prediction, it turns out, was way off. Now, the average car (not just the luxury models) integrates an average of 1,300 semiconductors across its various subsystems. Unimaginable in 1990, taken for granted now, or at least it was until recently. What historians may one day call “The Great Chip Shortage of 2021” has reminded everyone of the critical role semiconductors play in automobiles and all the other devices we enjoy.

We consumers may experience some pain as those devices become scarcer and more costly, but there’s plenty of pain to go around. Electronics component makers and distributors are working overtime to meet customers’ supply demands, despite long lead times. Then, device makers are painfully aware of cargo ships floating without port as store shelves that should be displaying their products lay bare.

We know how it got this bad, what we don’t know is how much worse it’s going to get and how soon it will start to get better.

Tracing the shortages

Semiconductor lead times, usually measured in weeks, are now being measured by the year—with waits of 12 to 15 months not uncommon. This can be traced to a handful of market realities, including:

  1. Covid-19: During lockdown, supply chain issues and disruptions were common, while increasing demands from healthcare manufacturers making medical devices, such ventilators, thermometers, and other life-saving equipment ramped up quickly.
  2. Poor demand planning: In facing potential business challenges, customers and suppliers pulled back on spending, expecting business opportunities to dry up—reducing the availability of both chips and end-products.
  3. Surging demand: Demand surged for vehicles, home appliances, home theater systems, gaming consoles, and other goods. At-home workers and students soaked up almost all inventory of computers and related productivity devices.
  4. Industry changes: The cost of building a leading-edge foundry is high, averaging $15 to $20 billion on average by some estimates. Further, these plants take a long time to build—two years or more from the ground up. Although current foundries are at capacity, ramping up production to meet higher demand is clearly proving difficult, and many customers are being forced to absorb higher prices along with chip shortages.
  5. New technologies: Newer technologies, such as artificial intelligence (AI), electric vehicles (EVs), cloud computing, and 5G networks, are using more chips than ever before. Demand will continue to climb.
  6. Climate changes: Shifting climate patterns have translated into a variety of natural disasters, including flooding, weather events, and fires, all of which have impacted the electronics supply chain.

Figure 1: Sales have grown quickly in the semiconductor industry in the past year and a half, driven largely by the realities created by the pandemic. (Image source: Semiconductor Industry Association)

Further, although semiconductors shortages are making headlines, shortages have carried over to other components, according to distributors. Resistors, capacitors, and products that use semiconductors as a building block, such as oscillators, are also harder to get. Worse, there are also constraints on a variety of ingredients, such as resins and some precious metals, needed to make electronic components.

Substrates used in advanced semiconductors and lead frames are also in short supply. And it’s not just materials—workers are also in short supply, so finding human resources has been an ongoing challenge. Together, these various realities tell us that this problem will not be solved in weeks or months but that shortages will likely be with us for years.

The problem’s scope is underappreciated

The size and breadth of this issue cannot be overstated. In a recent Industry Tech Days keynote titled, “The Impact of Chip Shortages on the Electronics Industry” Steve Sanghi, Executive Chair of Microchip Technology, noted that the company’s net sales for the quarter ending June 30 were $1.5 billion but the figure for delinquent sales (orders that couldn’t be fulfilled due to shortages) accounted for another 50 percent of that figure. “The total backlog, if you consider pre-pandemic levels as normal, is four times normal,” he said, adding that every product they sell is at more than 52 weeks in lead time. He predicts that, at minimum, the semiconductor industry will be scrambling for capacity for at least another year.

The carmakers that have been forced to shut down production because of chip shortages may be simply the tip of the shortage iceberg. Automotive designs tend to use older semiconductors which, understandably, have a more fixed and predictable capacity demand since semiconductor companies and their customers move on to newer and higher-margin designs. Now, however, market researchers are eying other markets with concern. Most notably, the cellphone industry.

Earlier this month, Apple announced2 new cell phone and tablet models to consumers—and got products into their hands. This accomplishment points to a stellar supply chain and careful planning. Other phone makers may not be quite so ready, and smartphone sales are on the rise. Gartner tracked a 26% increase in smartphone sales for the first quarter in 2021 and found that overall mobile phone sales grew 22 percent year over year. Although Gartner said that the global chip shortage hasn’t impacted the smartphone industry, the analysts there say that that’s a real possibility—and that cellphone prices may increase as a result.

Figure 2: Gartner’s index of semiconductor inventory in the supply chain points to shortages that will last at least through the middle of this year. (Image source: Gartner, May 2021)

Demand for processing power is never going to go down. We will continue to use more devices that incorporate more electronic components. In many ways, the picture for the electronics industry is rosy—but building the right supply-chain infrastructure will be critical to reducing the pain. With new foundries for chip makers and more capacity for holding stock for distributors, investing in the future through rigorous supply-chain and delicate customer relationship management resources will pay dividends.




About this author

Image of Hailey Lynne McKeefry

Hailey Lynne McKeefry is a freelance writer on the subject of supply chains, particularly in the context of the electronics components industry. Formerly editor-in-chief of EBN, “The Premier Online Community for Supply Chain Professionals”, Hailey has held various editorial contribution and leadership roles throughout her career, but as a Deacon she balances her work with her other passion: being a Chaplain and Bereavement Counsellor.

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