The Global Semiconductor Shortage – Explained, pointwise

Introduction

The Semiconductor Industry is facing an acute crisis with a global semiconductor shortage. Multiple industries are dependent on semiconductor chips for their inputs. Hence, the shortage is expected to have a major impact on global manufacturing industry and consequently the economy. The shortage has persisted for almost a year now with no immediate respite in the foreseeable future. What is concerning is that the IMF has already predicted a slowdown in the global economy. The semiconductor crisis may exacerbate the slowdown further.

About Semiconductors

A semiconductor is a material which has electrical conductivity between a conductor and an insulator (less than that of conductors and more than insulators). Conversely, semiconductors have resistivity less than that of insulators and more than conductors. The resistance of the semiconductor decreases with increase in temperature and vice versa. Semiconductors are made from pure elements like silicon or germanium, or compounds such as gallium arsenide.

The conductivity of semiconductors can be changed through doping. It is a process of adding small amounts of impurities to these pure elements, causing large changes in the conductivity of the material. 

What is the significance of semiconductor chips?

Semiconductors are the building blocks of today’s technology. For instance, semiconductor chips are widely used in (a) Computers and laptops; (b) Phones, mobile devices and other electronic gadgets; (c) Automobiles; (d) Aviation; (e) Medical devices especially diagnostics; (f) Military equipment among others.

Semiconductors make the devices more compact, less expensive, and more powerful. For instance, mobile phones weighed about 2 lbs, cost thousands of dollars, and held a charge for only about 30 minutes of talk time during their initial phase in 1980s/90s. However today an individual can buy a smartphone for ~INR 5,000 with batteries lasting a full day.

Semiconductors will continue to enable the world’s greatest breakthroughs. They have already transformed industries ranging from Aerospace and consumer electronics to energy and medicine. With the evolving Internet of Things, the impact of semiconductors on our daily lives is going to become even more profound

What is the current structure of global semiconductor manufacturing Industry?

Semiconductor manufacturing comprises the front-end fab manufacturing and the back-end assembly, including packaging and testing. Globally, this entire value chain is seeped in interdependence between a handful of countries like the USA, Taiwan, Japan, China and some European nations. 

Semiconductor manufacturing is now dominated by Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan and Samsung Electronics in South Korea. 

Source: Semiconductors.org

Big brands like Apple and Qualcomm design their own chips using the ARM architecture but outsource them to companies like TSMC, the world’s largest contract manufacturer for chips. U.S Companies like Intel are also a key player in chip manufacturing. 

What is the magnitude of the current semiconductor shortage?

The global semiconductor shortage has affected many industries for more than a year. The shortage has caused a rise in the prices of chips as well as the waiting time has increased. This has impacted all industries in terms of their outputs. The shortage has affected smartphones, personal computers, game consoles, automobiles, and medical devices.

Recently, the Japanese automaker (Toyota) cut its global production target for the period between April and June by 1,00,000 to 7,50,000 vehicles in May 2022. Similarly, in October 2021, Apple said it lost US$ 6 billion to chip shortage in the last quarter. 

Furthermore, CEOs of AMD, Nvidia and Intel have said at different forums recently that the chip situation will remain tight for the rest of 2022.

What are the reasons behind current global semiconductor shortage?

Impact of Pandemic: The COVID-19 pandemic had a major impact on professional and personal lives. A whole lot of activities shifted from physical world to virtual media. A large workforce switched to work from home while the schools conducted their classes online. Even social gatherings happened over video calls. This shift led to a surge in demand for laptops and tablets. Further, the stay-at-home rules also made several people pick up console-based gaming. Each of these devices were in high demand and were run on thumbnail-sized semiconductors.

Thus, high consumer demand for low-end products, coupled with large orders from tech firms choked chip makers.

Moreover, the manufacturing facilities were shutdown due to the pandemic and lockdowns. 

Similarly, when the pandemic began, carmakers stopped requesting chips from suppliers due to low demand for new vehicles. And now, as they ramp up production to meet consumer demand, chip makers are down on supply because they have cut deals with other industries.

Russia- Ukraine Conflict: Russia’s invasion of Ukraine has strained exports of essential commodities used to make chip sets. Russia supplies rare materials like palladium, and Ukraine provides rare gases to make semiconductor fab lasers.

Shift to 5G Technology: Semiconductor companies have been gearing up to ramp up capacity for manufacturing advanced chips required by 5G Technology. They were already cutting down on the production of older chip systems. The pandemic and supply chain disruption exacerbated this shortage.

Complex manufacturing systems: Each segment of semiconductor manufacturing involves roughly 25 countries in the direct supply chain, and 23 countries in allied functions, according to a joint study by Global Semiconductor Alliance and Accenture. Due to this, the industry was unable to produce sufficient chips when the pandemic hit the world.

Manufacturing Practices: Many manufacturing firms that use chips (especially in the automotive sector) keep minimum inventory of semiconductor chips. They practice Just-in-Time (JIT) techniques of manufacturing in order to cut down inventory (storage) costs. After the pandemic, as car manufacturers ramp-up their production, they don’t have any spare chips.

How have the companies responded to the semiconductor shortage?

Companies like Intel which design and manufacture their own chips too have started outsourcing some manufacturing to Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract manufacturer for chips. Intel, Samsung, and TSMC have all announced new fabs in recent months but these will take years to build. This means the semiconductor shortage could linger for long, because companies are placing more orders and holding more inventory.

American carmakers Ford and GM are also getting into chip development to become self-reliant. Ford has signed a non-binding agreement with GlobalFoundries, whereas GM is working with a number of semiconductor companies like Qualcomm, STMicroelectronics, TSMC, and NXP Semiconductors.

How has India performed in the Semiconductor sector?

India has done well in design and verification for the semiconductor industry, with most of the global semiconductor companies having an R&D footprint in India. However, 100% of India’s chips, memory and display are imported. In 2020, India spent US$ 15bn on electronic imports, with 37% coming from China.

Although India has two fabs — SITAR, a unit of the Defence Research and Development Organisation (DRDO) in Bengaluru and a semiconductor laboratory in Chandigarh. These build silicon chips for strategic purposes like defence and space and not for commercial use.

What lies ahead?

First, the European Chips Act (€ 45 billion) and CHIPS for America Act (US$ 52 billion) would incentivise fab makers to set up their units in these regions and balance. Together, these two will enable the semiconductor manufacturers to have equal investments in the East and West by 2030, from the current tally at 80% in Asia, and 20% in Europe and the U.S.

Second, in Indian Context, the Government should support businesses in acquisition of semiconductor manufacturing units in other countries. This is easier than setting up a domestic facility and can be done swiftly for ensuring a continuous supply of chips.

Third, the Government should provide adequate funding to augment the research and development potential of technical institutes.  For instance, IIT Madras developed a microprocessor named ‘Moushik’ with funding support from the Ministry of Electronics and Information Technology. Microprocessor is an integrated circuit (IC) that contains a few millions of transistors (semiconductor-based electronic devices) fused on a semiconductor chip.

Conclusion

Countries must cooperate and collaborate with each other to boost the manufacturing of semiconductors. They are one of the most critical components to be used in the 21st century and it is almost impossible to imagine modern day living without them.

Source: The Hindu, Indian Express,