Our semiconductor shortage is likely to persist for a long while

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.

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.

Source: This post is based on the article “Our semiconductor shortage is likely to persist for a long while” published in Livemint on 22^nd Dec 2021.