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Semiconductor Shortage

No Quick Fix for Semiconductor Shortage

July 2, 2021
Overordering, growth in 5G automation and limited production are all ongoing factors.

The global microchip shortage dominating headlines for the past few months is now estimated to last well beyond 2022. Never slated as a short-term problem, it’s become a bottleneck as more and more companies put in orders for chips, and chip producers simply do not have the facilities to make them.

What’s going on with the chips?

Microchips are the brains within nearly all machinery society depends on for day-to-day functioning, from our cars to our laptops. TSMC in Taiwan is responsible for about 60% of the chip production in the world, and the vast majority of those chips go into consumer electronics, such as cell phones and laptops.

Because the world largely relies on just a small collection of chipmakers, mostly in Asia, demand has now outstripped supply by many months–and the orders just keep coming. The bottleneck effect extends all the way out to companies like ASML that are responsible for providing the machinery that TSMC needs to produce the chips.

The Dirty Triangle

There was an early misconception by many that the absence of chips was just another of COVID-19’s many halted enterprises. The reality is slowly emerging that the shortage of chips is less about the pandemic and more about a significant crack in supply chain infrastructure. The problem ballooned with the fears many chip-dependent manufacturers are feeling in regard to the future of the United States’ relationship with China.

The semiconductor trouble here is three-pronged:

●  Growth of 5G-based automation

●  Increase in demand for chips in general

●  Governments attempting to position themselves around the United States’ current sanctions on China

Many global producers of cars and consumer electronics began to over-order early—hoarding chips in an attempt to stave off drops in inventory. This means there is still no clear picture as to exactly how extreme the chip shortage is, and there won’t be until those hoards run dry and government policy can stabilize the supply chain.

Who is impacted by the lack of chips?

With losses totaling over $61 billion, the automaking industry still leads the charge in the chip shortage. General Motors halted production at three of its North American plants in February. Ford just lowered 2021 outlook projections, and talk of how all of this could cause damaging and protracted inflation is everywhere.

The conversation surrounding the chip shortage drums up greater insecurity. It’s one thing when the lack of chips appears to the public as though it is isolated to the automotive industry. It’s quite another when it trickles down to impacting can’t-live-without items like phones and game consoles. Apple has already clocked losses in sales for the iPhone 12 attributed to the chip shortage. Businesses of every kind despise the inability to predict the future outcomes, and are reacting differently to the evolving bad news.

How do we untangle the chip shortage?

Greater global manufacturing capacity is the only real solution. Both TSMC and Intel are investing major capital to build out their capacities. TSMC is also promising a new foundry in the United States in order to be closer to production.

New companies can certainly jump in on this sky-high demand, but the problem with bringing in fresh producers is the time that it takes to get chip factories up and running. Newer players in the chip game also face the challenge of innovating and developing their technology at a rate where they could be instantly competitive with a company as established as TSMC.

The Biden administration is attempting to inject money into this area of need and incentivizing leading companies like Intel to build new factories. But the real emphasis must be on building capacity where the consumption is taking place. Eradicating the necessity for chips to travel long distances and potentially cross testy borders will reduce exposure to a risk like this in the future.

Chip startups who want a piece of the demand rush can try to get their IPs up to par, but all of this is an extremely capital-intensive and time-consuming process. All the while, orders keep coming in from every corner of the market--and there is less and less ability by anyone to fill them.

Specialization could help bridge the gap

While TSMC remains, and is likely to remain, the unquestioned leader in chip production for the foreseeable future, it is crucial to remember that different kinds of chips perform different functions. A chip produced for an iPhone, for instance, is not the same as a chip produced for a car.

As more startups join the field to take a run at the growing demand, specialization into a particular category of chip may become the new calling card for success. A niche company could strike out in any specific area--like car manufacturing--and begin to take over the lion’s share of that production from TSMC, who might then focus their tech in other areas as well.

Arguably the most fanged factor in all of this is that everything from agricultural equipment to home appliance builders are growing more automated every day. The appetite of the United States government to fund investments in nationally based chip manufacturing will increase if the risks of chip manufacturing overseas remain a problem. 

In that light, the chip manufacturing issue begins to impact international communications, spark worry over the potential to harness our IP  and perhaps even allow easy espionage. There are certainly no clear, concise solutions to the semiconductor situation at present. But it’s become crystal clear that the old style of outsourcing to drive down costs brings risks that many companies understand to be unrepeatable.

Maziar Adl is co-founder and CTO, Gocious.

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