The ongoing global semiconductor shortage was initially triggered by the COVID-19 pandemic in March 2020 and the production of these chips was first shut down from production lines in 2021. What came next was multiple whispers around the world about the impact of a shortage of these tiny chips utilized in multiple applications.
From being used in interior lighting to seating control or even blind-spot detection in cars, the storage of these semiconductor chips soon had an exponential impact on industries. Just to put a number to it, the chip shortage emerged as a global supply chain crisis affecting a whopping 169 industries in total!
With the economic situation slowly worsening in 2023, the shortage of semiconductor chips is expected to continue adversely affecting supply chains. According to Statista, the global semiconductor industry in itself is projected to nosedive by 3.6% with nearly a 22 million drop as compared to the previous year.
After industry chatter about the impact on supply chains, economic crises and sporadic inflationary constraints, the question remains. Why is there a semiconductor shortage worldwide? What caused this global economic havoc and till what extent does this affect end-user industries around the globe? Let’s find out.
From Pandemic to Trade War: Semiconductor Shortage Skyrockets
Semiconductors are considered the mastermind behind the birth of modern electronics. They enable various applications including the communication sector, computing services, healthcare industry, military systems, production of cleaner sources of energy, and endless more applications.
When the COVID-19 pandemic hit, there was a 13% increase in global demand for PCs as work-from-home activities increased substantially. The sudden unavailability of these chips was further deteriorated by the trade war in late 2020 between two super economies, namely China and the United States. As a result of this trade war, the U.S. Department of Commerce imposed various trade restrictions on China’s leading chip manufacturer, narrowing the sales of these semiconductor chips.
In April 2022, the Russia-Ukraine war further aggravated the problem. Ukraine was responsible for nearly 90% of Neon supplies while Russia exported approximately 35% of Palladium worldwide. Both of these were halted as a direct result of the war, skyrocketing the shortage of semiconductors and disrupting the supply chain.
Why is There a Shortage of Semiconductor Chips in the Automotive Industry?
China and Taiwan, two of the world’s leading manufacturers of semiconductors, are still en route to recovery. This has resulted in labor shortages which are delaying the production of chips for the automotive industry. Nearly 62% of the automotive industry relies on analog or mixed-signal chips, microcontroller units, and other components.
According to the New York Times, a modern vehicle requires up to 3,000 semiconductor chips. This could range from power windows, door locks, and side-view mirrors to interior lighting and blind-spot detection in-car sensors. In the U.S. market, pricing power has been robust across original equipment manufacturers (OEMs). Since there is a high demand for automobiles, retailers no longer need to worry about pricing strategies or offer cash incentives to attract new customers.
Furthermore, it was observed by J.D. Power that the average price of new cars towards the end of 2022 increased by nearly 16% due to chip shortages and growing customer demand. When customers demand better vehicles, the brands charge higher prices because they are confident that customers will pay for them.
Volkswagen, a global leader in vehicle manufacturing, still believes that even though more chips have become available since the second half of 2022, the industry is unlikely to meet the increasing demands of the automotive industry until almost early 2024.
However, the increasing number of OEMs in the automotive production plants by strengthening the workforce is expected to boost the automotive industry. For instance, the production stabilization of automotive parts is projected to improve in Europe as well as in China. This may bring more stability to the industry, after going through tons of obstacles.
Why Is There a Semiconductor Shortage Even in 2023?
In 2023, semiconductor shortages are still on the rise but there is some relief for the industry. International governments have also begun pushing the chip production capacity. For instance, the United States Senate and the House of Representatives passed the Creating Helpful Incentives to Produce Semiconductors or the “CHIPS” Act in July 2022 which will include nearly $52 billion investment for research and production of semiconductors in the country.
Despite the fact that governments around the globe are putting in efforts to spur the production and distribution of semiconductor chips, the rest of the year is still expected to face a shortage of chips. According to KPMG, approximately 56% of chip leaders still project a shortage of these semiconductor chips to last until 2023.
However, there is an oversupply of memory chips in smartphones which is resulting in a drop in the prices of these devices. This is because semiconductors are generated differently for various industries. So, when there is a component missing to complete a semiconductor, the OEMs have no other option but to store the components in the inventory.
Hence, the glut of these semiconductor chips utilized in data centers will continue to weaken the advertising revenue for firms dealing in the production of smartphones. On the other hand, the shortage of semiconductor chips in the automotive industry is expected to experience turmoil throughout the year.
When Will the Semiconductor Shortage End?
The shortage of semiconductor chips is expected to continue in the year 2023 as well. So, when will the semiconductor shortage end? The short and simple answer is that there is no certainty of the uncertainty about the end of semiconductor shortages. To effectively navigate rough waters, various key OEMs in the market can take some steps to get past the chip shortages problem with the least amount of difficulties.
It is necessary for brands to stay aligned with the technology roadmaps of their suppliers and try to maximize their capital investment plans. Reshaping short-term and long-term strategies and emphasizing the importance of effective supply chain management and strengthened supplier relationships, it’s essential to prepare in advance for the shortage of these chips.
May it be in the automotive industry or healthcare industry, chip manufacturers need to expand their capacity with the growing demand for these chips. If the shortage of semiconductor chips gets carried forward even in 2024, companies need to refine strategies to resolve supply chain restraints.
As OEMs aim to become more resilient and self-sufficient for semiconductor chips, digitization in automotive supply chain management may also contribute to the recovery of the market. By revamping their business operations model and investing in supply chain innovations, industries can steadily tackle the problem of the shortage of semiconductor chips. Until then, it’s essential for companies to closely monitor the market to effectively assess and mitigate risks associated with these shortages for surviving in the market.