There’s a shortage of electronic chips right now and it’s causing some major issues.
Shortages of microchips aren’t actually that uncommon and there’s typically a shortage roughly every four years. This phenomenon even has a name, it’s known as “chip famine”.
This year, the shortage is being caused by the shocks to supply that started early last year, and the current surge in demand.
The pandemic led to lockdowns, and generally that meant people couldn’t venture outside and spend money on things like going out for dinner or going on holiday. But instead, there was a surge in consumer spending on things like durable goods, which includes electronics.
For example, late last year we saw the anticipated launch of two game consoles from Sony and Microsoft, along with graphics cards from Nvidia, all of which had huge demand and sold out rapidly, with customers waiting for more stock.
Then we had the massive shift to working from home, which increased demand for other computer related products. This was a big contributor to China’s economic recovery.
On top of increased demand, supply chains obviously became disrupted. Manufacturers had been moving towards just-in-time manufacturing, which doesn’t make it so easy for producers to adapt to sudden surges in demand.
Now technically if all industries were served equally, the shortage would be equally spread across different types of business. But that’s not the case.
Companies that produce consumer electronics, such as Apple and HP, pay more for their chips than sectors such as the auto-industry. This has led chip manufacturers to holding reserves for the highest bidders.
Industrial production has also picked up at a quicker pace than expected, particularly in the auto industry which is seeing increased demand. It’s been reported that new vehicle stocks in US dealerships are 25% below normal levels with average prices increasing by 11% since last year.
Unfortunately, producers of semiconductors haven’t been able to keep up the pace and scale up production as quickly, which is resulting in a shortage. This means, for the auto-industry, there are lead times of up to nine months.
This is affecting most car companies, including Mercedes, Ford, Fiat Chrysler and Volkwagon who are all having to make manufacturing changes. For some companies that means temporarily closing factories to deal with the shortage.
Audi, which is part of VW, recently announced that they are going to have to furlough workers and lower production forecasts by 10,000 cars in Q1.
The two largest auto-part manufacturers, Bosch and Continental, also acknowledged the issue last month. This led to some car manufacturers threatening to take legal action against them, to cover the costs incurred due to the chip shortage.
However, ramping up production of chips isn’t as simple as it may sound. There aren’t actually many companies capable of producing the silicon required for them. Also, it can take weeks to even resume production after closing a factory, or even changing to produce a different product.
The reason behind this is because microchips are made from silicon wafers which come in a range of sizes. Typically, larger wafer sizes become more standard as time goes on, but some companies prefer to use smaller wafer sizes due to low costs and avoiding changes to manufacturing processes.
So, as 300mm wafers are most commonly used and manufactured, car manufacturers have been left behind. This is because they typically use smaller sizes such as 200mm, which has seen its manufacturing shrink to make room for the larger size ones.
Now we're at a point where those lower sizes have come in with high demand and we’re stuck waiting for producers to increase production of the smaller sizes.
It’s even got to the point where Germany has asked Taiwan to help with the matter and to prioritise chips for vehicles.
Nobody really knows when the shortage will end, but the supply of 200mm chips is expected to be tight for a number of months, possibly up until Q2. But if demand in the computer market cools off, that may make room for the automotive industry.
As a result, the bounce back in car sales could come under threat, but there’s not a lot that can be done as the semiconductor industry is currently running hot. And I think as the world becomes more dependent on electronics, this may not be the last we hear about semiconductor shortages.