The world is experiencing a continued semiconductor shortage that has caused significant disruptions across various industries, from automotive to consumer electronics. Since 2020, the demand for chips has outpaced production capacity, and there’s no well-defined end in sight.
Primarily driven by a combination of factors, including increased demand for electronics, supply chain disruptions, and geopolitical tensions, there are also institutional shortfalls contributing to this ongoing problem. In this article, we will provide an update on the current state of the semiconductor shortage and how the situation may play out.
Semiconductor chips are used in an increasingly wide array of industry applications. Currently, the manufacture of consumer electronics represents the largest demand for chips at around 50%. But the automotive industry also consumes a significant portion of the global supply at around 20%. In fact, well over a third of the cost of manufacturing a new car is in semiconductor chips alone.
Additionally, nearly every area of life relies on these all-important chips. They are in our watches, our refrigerators, our home systems, and our farming equipment.
But when the global crisis occurred in 2020, factory shutdowns coincided with a historic peak in consumer spending. As a result, demand drastically outpaced supply. In 2022, the Ukraine war and geopolitical disruptions only exacerbated the problem, leading to a perfect storm.
Since then, the world has seen an increased demand for electronics as more people work from home. And the global shift towards electric vehicles and the Internet of Things (IoT) has put additional strain on the supply of semiconductors, which are essential components in these technologies.
According to many analysts, the semiconductor shortage likely will not end in 2023, although there is hope that the problem will gradually ease up over time – likely over the next year or two.
To address the shortage, semiconductor manufacturers have been ramping up production, but the process will take time in order to reach full impact. In the short term, some companies have been forced to reduce production or delay product launches due to a lack of available chips.
As an alternative, the semiconductor shortage has also resulted in a renewed market for older and less advanced chips, causing prices for this dated technology to skyrocket. In a trickle-down effect, this has placed a strain on small and medium-sized companies that rely on these chips to manufacture their products. As a result, many of these companies are facing budget shortfalls and are unable to pay the higher prices to stay competitive. Often, this means cutting production or even closing operations entirely.
In response to the long-term capacity problem plaguing the market, many companies are investing in increased production of semiconductors.
In late 2022, the US federal government intervened to promote investment in and expansion of the semiconductor manufacturing industry. The new CHIPS Act (Creating Helpful Incentives to Produce Semiconductors) was passed in late 2022 and is expected to inject up to $52 billion USD towards funding new chip manufacturing projects.
The CHIPS Act and other sizeable investments in recent months will not produce immediate results. The global semiconductor shortage is still on. But the peak may well be behind us.
With the lessons learned, companies and governments around the world are taking a renewed interest in shoring up their supply of chips. Nations are discussing this as a national security matter. Currently, Asia produces about 75% of the semiconductors in the world, whereas the US produces only a tiny fraction. Mexico has begun ramping up investment for EV manufacturing, including chip production.
These changes aim to reshape the semiconductor market landscape long term. As a result of these investments and changes, the US and other countries will take a more active role in producing these critical components.
Signs are already on the horizon that the shortage will eventually let up. However, we must look to future growth on a macro level, and not to temporary measures or infusions of cash for immediate relief.
While the global semiconductor shortage has been a major challenge for businesses and consumers alike, and will persist for months to come, there is cause for optimism. Increased investment in the semiconductor industry and efforts to boost production and efficiency will eventually bring down costs and increase supply. However, manufacturers reliant on these components should remain flexible in the short term.
