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News: The semiconductor chip shortage, currently impacting the automobile industry, is likely to last longer.
How the semiconductor industry evolved in the mid-80s?
The semiconductor industry underwent a major change in the mid-80s as chips started getting commoditized.
– To protect against price risks and secure heavy investments that go into fabs, chipmakers started asked for purchase commitments at pre-agreed prices.
– And to cover for demand variability, excess capacity was maintained.
This means that now, around 80% of all production goes to pre-committed buyers, while the remainder is set for the traders.
Auto industry buys semiconductors from this remainder pool of low cost supplies.
| Must Read: Chipped & vulnerable: GoI must make public investments to encourage private manufacturing in strategic semiconductor industry |
What is the way forward?
Short term
In the near-term, the industry can revert to older systems, reducing features in vehicles, and delaying deliveries of vehicles.
Long term
A longer-term response has also started to emerge.
– Samsung has announced a new chip plant in Texas. Also, both Ford and GM have said they would get into long-term design and manufacturing arrangements.
– Further, national governments have also started treating chip supplies as a strategic imperative. For instance: India’s newly announced $10 billion incentive scheme for high-end chip-making can go a long way in establishing a strong electronics manufacturing base in India.
| Must Read: Semiconductor manufacturing in India – Explained, pointwise |
Source: This post is based on the article “Our semiconductor shortage is likely to persist for a long while” published in Livemint on 22nd Dec 2021.
