CIOInsider India Magazine

From smartphones to data centers, electric vehicles (EV) to aircrafts, pacemakers to weather-predicting supercomputers, inside of each is a tiny piece of tech that makes it all happen – the semiconductor microchip. Cleverly befitting the words, ‘little things make a huge difference’, these tiny pieces of tech most popularly go by the term 'chip', is the masterpiece behind the digitalization of the world.

Although tiny and unnoticeable by nature, a lot goes into the production of these chips, which now poses a shortage caused by a combination of factors. The first drop of the same began with the auto industries competing for chip supplies with the growing consumer electronics industry, followed by the pandemic that overthrew the economies worldwide, disrupting the supply chain and altering the consumer’s shopping habits. While the car makers began a strict diet with these chips, the many tech companies snatched up as many chips as they could.

Other factors like the US government’s restrictions on Chinese technology companies and extreme weather conditions have equally caused the shortage in supply. Of which, the shortage is taking a bad turn, where it’s not only starving car makers but everyday consumer electrical appliances as well.

According to Goldman Sachs Group Inc., semiconductors are used in 169 different industries in the United States. It implies that affected industries will face a 20 percent average shortage of computer chips, with some of the components used to produce chips in short supply until at least this fall, and probably into 2022.

To understand how chip shortage is affecting the economy, let’s start with cars.

Auto Industry in Hot Waters
When the pandemic forced shut the car maker factories, the chip makers redirected their surplus production capacity to companies that produce smartphones, tablets, and gaming devices, which are in high demand among housebound consumers.

Soon, car makers recovered faster than expected, prompting automakers to increase the production. Even so, they fell back in line, when it came to chips. Due to which, prominent automakers such as Volkwagen (VLKPF), Ford (F), Fiat Chrysler (FCAU), and Nissan (NSANF) are left with no choice but to change production and in some cases, idle plants. The issue is still wreaking havoc on the industry.

According to research firm IHS Markit, the chip shortage threatens the production of 1.3 million cars and vans globally in the first quarter.

But another big factor is that automakers have very few options for obtaining additional supply.

The 'Taiwan Semiconductor Manufacturing Company' (TSMC) is responsible for around 80 percent of the microcontroller units such as power windows, braking and headlights are all regulated by these components. To keep up with rising demand, TSMC is investing $100 billion in advanced chips over the next three years, as per the research by Bain & Co.

Looking at the circumstances, Canon Inc., Tokyo Electron Ltd and Screen Semiconductor Electron are in hopes to collaborate with TSMC to produce advanced 2-nanometer chips as part of a government-funded 42-billion-yen ($385 million) program in Japan. Japan also wants to make sure that it can manufacture advanced semiconductors in the future, so it's working with TSMC to build a test line near Tokyo.

Even India for that matter, hopes to capitalize on its strengths as a design hub for global chip companies and entice factories with new subsidy programs, despite the very little chip manufacturing infrastructure it holds.

Smartphones and Appliances are Already in a Pinch
Shortages are also affecting consumer electronics producers, where Samsung reported to analysts with analysts that it is working hard to reduce shortages of semiconductors and other main components, which could hurt smartphone sales.

Due to 'supply constraints', Apple (AAPL) expects sales to be $3 billion to $4 billion lower this year, according to chief financial officer Luca Maestri. This involves difficulties obtaining chips, which are anticipated to have an effect on the manufacturing of iPads and Macs.

Coming to household items, computer chips are used in almost every type of these items, thus, the shortage is so bad that it spares no common man as well. This could even account to the high cost in goods, which sure does not look good for the consumers’ pockets.

Siemens (SIEGY), a manufacturer of washing machines and refrigerators, told CNN Business that it is doing well so far, in terms of production constraints and extended delivery lead times, but that it is keeping a close eye on developments. "We continue to devote all of our resources to minimizing the risks associated with potential component shortages," it said.

What's being done to Cope with the Situation?
Intel (INTC) is in talks with companies that design chips for automobiles about producing them in its factories. According to Intel CEO Pat Gelsinger, if the project is successful, the company may begin producing chips in six to nine months.

The leading global chip maker earlier announced plans to support Europe by doubling its share of high-end chip production to 20 percent over the next decade.

“We've been far too reliant on a small foundation in Asia. We need a more balanced global supply chain. Intel is prepared to take it on. I announced the construction of two new fabs [chip manufacturing plants] in Arizona, and we're getting ready to build the next ones in the United States. It's important that the administration and Congress take action, have this funding in place and initiate the industry's acceleration, because these things take years to build up and we need to diversify our supply chains. We must act now”, said Pat Gelsinger, CEO, Intel.

"Europe fell out of this race a long time ago and no longer has the necessary local know-how," said Helmut Gassel, head of strategy at Infineon, a German chipmaker that specializes in power chips and is the industry's leading supplier.

The strain on supply chains has piqued the interest of the US President Joe Biden, who ordered a report in February to determine which goods used by Americans are at risk of disruption. According to Biden, this may lead to a rise in domestic production of those products, where the president has even requested $ 37 billion in funding for legislation to boost chip production in the country.

If world governments' plans came to fruition, the semiconductor industry might resemble that of the 1970s and 1980s, when each country saw chips as vital to its communications and defense.