5 Reasons for the 2021 Semi-Conductor Shortage
Dominated by companies from the United States, Taiwan, South Korea, Japan and the Netherlands, the global semiconductor industry tends to operate in a continuous state of growth, yet one that is often cyclical in nature with high volatility. This requires considerable flexibility and innovation, factors that have proven challenging over the past year with the COVID-19 pandemic.
How did this happen?
Beyond geopolitical tensions, here are five of the factors which converged to generate a serious global chip shortage:
The semiconductor market was already somewhat destabilized before the onset of the coronavirus. COVID-19 exacerbated supply chain issues by disrupting shipments as the global demand for electronic products surged. Plant lockdowns, the result of the pandemic delayed production in some facilities.
2. Inaccurate demand projections.
Semiconductor producers focused on projected demand during the COVID-19 pandemic. Most estimates favored a conservative approach, based on the belief that most consumers would significantly reduce their spending while locked down at home. This turned out to be completely wrong. Companies that cut back on orders early on during the pandemic then went to the end of the production line.
3. Increased demand.
Semiconductor chips are used in electronics such as personal and laptop computers, cell phones, tablets, vehicles, home appliances, gaming consoles and other goods were in high demand. In the early stages of the pandemic demand spiked for electronics, such as computers probably as consumers were setting up home offices and study areas for their children who were out of school. Last fall, the demand for home entertainment electronics surged.
4. Structural change in the semiconductor industry.
There are two primary types of semiconductor companies. The first is “fabless”, meaning a company that only designs the chips and technology in them without manufacturing those goods. The second type, known as “foundries”, are the companies that are contracted to manufacture the chips. Semiconductor foundries are run by companies like Samsung in South Korea were already working at full capacity.
Over the past twenty years, most semiconductor companies began to outsource front-end die manufacturing (fabrication) to share the high capital costs involved with new process development, design and fabs. Rather than impacting only one aspect of semiconductor manufacturing now the semiconductor shortage now extends throughout both the outsourced businesses as well as those in the core.
Back to Basics: Get the Scoop on Semiconductors
What is a Semi-Conductor?
Semi-conductors play a pivotal role in the fabrication of electronic devices. Devices and components of electronic devices that utilize semiconductors include computer memory, diodes, integrated circuits and transistors. Use of semiconductors has enabled manufacturers to produce electronic devices which are faster, smaller and more reliable.
Semi-conductors essentially are materials which are able to partially conduct electrical current between insulators (non-conductors) and conductors (usually metals). The name “semiconductor” describes the fact that it has electrical resistance and cannot fully conduct electricity. A semiconductor can be a pure element such as geranium or silicon or a compound, for example, cadmium selenide or gallium arsenide.
Who Makes Semiconductors?
The Top 10 Semiconductor Companies across the World* Include:
- Samsung Electronics
- Taiwan Semiconductor Manufacturing Co. (TSMC)
- SK Hynix Inc.
- Broadcom Corporation
- Micron Technology
- Applied Materials
- Nvidia Corporation
- Texas Instruments
*based on 2020 total revenue
5. Shifts in technology.
With the ramp up of new technologies including artificial intelligence, electric vehicles, cloud and 5g networks, global demand for semiconductor chips is soaring. Smartphones now require more chips to operate. More semiconductor chips=more demand.
Technology has invaded our everyday life. From cell phones, military and laboratory equipment, industrial control systems, televisions, computers and consumer electronics to electric vehicles, semiconductors play an essential role in the electronic devices we use. The utilization of semiconductors was instrumental in bringing the costs of technology down, making it affordable to mass populations of consumers and businesses.
Semiconductor chips are used to control and modify processes in a wide array of goods that we use in everyday life. From electronic game stations to automotive displays and components, now even washers and refrigerators, radar and weapons, semi-conductors are essential components of goods used in consumers’ homes as well as in commercial, industrial, and military applications. Electronic devices, even those that do not seem to be computers, often actually have systems that are controlled and monitored by electronic chips. It may seem crazy that such small items can have such vast uses and importance, however it is all too true.
Here are a few sobering facts:
- All semiconductor chips begin as a silicon wafer that takes approximately 90 days to process into a chip.
- American semiconductor manufacturing companies account for 47% of global chip sales but only 12% of the global manufacturing is accomplished in the United States.
- Demand for semiconductor chips has increased nearly 50%.
- In September 2020, Chinese telecommunications giant Huawei Technologies Co Ltd. was banned by the White House from buying computer chips made with American technology. Unfortunately, Huawei had already stockpiled chips before the ban became effective and its rivals did the same. China’s Semiconductor Manufacturing International known as SMIC similarly received U.S. government restrictions in December 2020. The result is the SMIC has found it challenging to sell its finished products to companies with U.S. ties, keeping it working below full capacity. With production capacity tight and demand soaring, chip manufacturers were challenged to absorb both shocks. Fear of having Chinese chip factories placed on an entity list subject to future restrictions or blacklisting is a result of the government action.
- The semiconductor shortage has caused a pause in production for numerous car makers including GM, Ford, Honda, Fiat Chrysler, Volkswagen, Nissan, and Mitsubishi.
- The Biden administration is seeking $37billion in funding to “supercharge” semiconductor chip manufacturing in the United States. At the present time, four new factories are planned in the U.S., one by Samsung in Texas, one by TSMC in Arizona and two by Intel Corp. Likewise, the Chinese government has been offering a variety of subsidies to the semiconductor industry in an effort to reduce its dependence on Western technology.
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