Advanced factories, like those using the industrial Internet of Things (IoT), automation, and artificial intelligence (AI), are transforming manufacturing. However, the progress of this smart factory revolution is currently slowed down because there’s a shortage of a crucial component: semiconductor chips.
For a long time, globalization has been a significant force driving growth and creating wealth, but it has also made our world more complicated. Now, we need to ask if this interconnectedness is becoming a problem.
To understand why this question is arising, let’s first look at why there’s a shortage of semiconductor chips and why they are so vital in today’s world. We’ll also explore the measures being taken to address this chip shortage.
Semiconductor Chips are Insufficient
Despite increased demand for electronic items, vehicles, smartphones, and other gadgets, there is a severe scarcity of semiconductor chips, which has resulted in significant losses.
The global chip supply shortage, which began after the pandemic in 2020, has deteriorated in recent months, with major corporations in many industries straining to fulfill greater needs for electronic goods and components.
The global chip supply shortage, according to Goldman Sachs, has impacted at least 169 industries. With no solution in sight until at least 2022, but now all countries face a major challenge. This has begun to influence large economies, such as the US.
Why is There a Semiconductor Shortage?
The ongoing global chip shortage is being exacerbated by supply chain disruptions triggered by the pandemic, rapid growth in demand for electronic goods as more people work from home, and a lack of investment in chip manufacturing capacity.
The US Department of Commerce placed limitations on Semiconductor Manufacturing International Corporation (SMIC), China’s largest chip manufacturer, in light of the economic dispute between China and the US, making it more difficult for them to do business with organizations with American ties.
The vast majority of people remember the chip shortage for how it affected the automobile sector. The entire supply chain is concerned about chip shortages, not just automakers and other end customers. The majority of supply chains are built to be consolidated and cost-effective, yet such adequacy can make them brittle. A “bullwhip effect” can occur when there is a lack of visibility and real-time communication between supplier tiers, causing modest variations in demand to be exaggerated, resulting in cumulative demand volatility.
The Global Stake on Semiconductor
Semiconductor businesses’ decisions could have a huge economic impact, both on their industry and on the economy as a whole. And there’s never been a time when the stakes have been higher. Profit margins for semiconductor companies were poor in the early 2000s, with most generating returns below the cost of capital.
However, due to the soaring demand for microchips in most industries, rapid expansion in the technology sector, increased cloud usage, and continuing consolidation in many sub-segments, profitability has improved over the last decade. As a result, the semiconductor industry’s profitability has greatly improved compared to other industries, and this trend is projected to continue.
Chip scarcity has now become a topic of discussion not only among companies and governments but also among world leaders. Western countries are working to make manufacturing local and become more self-sufficient.
The Department of Commerce invested $50 billion towards the U.S. semiconductor industry, including $39 billion in semiconductor incentives, to revive the U.S. semiconductor industry as part of the bipartisan CHIPS and Science Act.
To that effect, US President Joe Biden met with the CEOs of AT&T, Dell, Ford, GM, Stellantis, Intel, Northrop Grumman, and other companies. He emphasized the importance of the role of the US government in encouraging investment in the business to stay ahead in the competitive scenario. In a similar instance, the South Korean government has pledged $450 billion to assist companies in increasing semiconductor production.
Chipping the Chip Shortage
Chipmakers are frantically trying to keep up. According to Deloitte Global, the top semiconductor businesses in the world could invest $300 million in internal and external AI tools for building circuits in 2023.
Aside from boosting manufacturing capacity, semiconductor companies could take a myriad of other actions to maintain growth and meet consumer demand. They could pursue more mergers and acquisitions (M&A) and collaborations to achieve a competitive advantage in profitable industries and grow their client base.
Semiconductor companies may also increase their investments in cutting-edge technology to aid in the development of advanced chips for self-driving cars, the Internet of Things, AI, and other high-growth areas. Nimbler strategies, above all, may be necessary in these unpredictable times.
Semiconductor Crisis: The Impact on Us
Due to the obvious global supply chain disruption, prices of household appliances and electronic items — from televisions to smartphones — have soared. Meanwhile, carmakers have been compelled to raise vehicle pricing due to auto chip shortage. To cite an instance, automotive giant Maruti Suzuki has increased car pricing in India due to rising production costs.
Increased input expenses could be due to global semiconductor scarcity. Given the lack of processors, it wouldn’t be shocking if other carmakers raised their pricing as well. The worldwide chip crisis is far from finished, and prices of numerous electronic items and components may continue to rise as a result.
While major chip manufacturing companies have declared plans to scale up production lines, analysts estimate that the new semiconductor chip manufacturing plants will take at least two to three years to build.
Closing Thoughts
Ensuring the resilience of supply chains may involve stepping back from widespread globalization. However, finding solutions is neither quick nor straightforward. The intricate production processes in industries, especially those reliant on specialized machinery, face the challenge of building such machinery first. Complicating matters further is the fact that critical materials like neon, krypton, or argon, essential in semiconductor production, depend heavily on specific suppliers, particularly Ukraine and the Russian Federation. The shortage of these crucial materials has worsened the semiconductor crisis.
In both the semiconductor industry and the global economy, maintaining a continuous supply might mean accepting slimmer profit margins. The highly optimized, just-in-time (JIT) models could be replaced by a shift towards keeping goods in stock. Transactional relationships between suppliers and customers may evolve into more strategic and collaborative networks rather than zero-sum interactions. The trend of hyper-globalization is receding, not necessarily a new development, but current global circumstances are compelling countries to adopt strategies that have long been sensible — placing a stronger emphasis on regionalized value chains rather than relying solely on globalized ones.