Why is there a semiconductor chip shortage?

Semiconductor chip shortage has snarled everything - from phones to cars. But, as the demand for chips continues to soar, supply chains seem to remain constrained in the foreseeable future.


No event has demonstrated more clearly how much the economy and life at large  depends on semiconductors, than the present global shortage. A series of events - the storm that brewed after the pandemic as well as the onerous supply chain bottlenecks, led to an acute shortage of semiconductor chips, which is expected to last well into next year. 

From PC makers and smartphone manufacturers to electronic device companies that use semiconductors, they are all cutting down production and trimming earning forecasts. From the very onset of COVID-19, these companies have voiced their concerns over the demand for semiconductor chips exceeding its supply. The situation has only become grave today, with many popular products that rely on chips, running in short supply.

What caused the chip crunch?

A semiconductor chip is a six-decade-old invention which is an expensive, but crucial component in almost every gadget that we use today. So, when the demand for commodities rose during the pandemic, it caused a near-term supply shock. 

This was due to the shut down of some major semiconductor chip making factories located in China, US, Japan and South Korea after the imposition of strict lockdowns. The Taiwan Semiconductor Manufacturing Corporation (TSMC), which is the world’s largest contract chipmaker and holds 56 percent of the foundry business of manufacturing chips was affected too.

As demand rose meteorically, this triggered an unprecedented global chip shortage. Even the factories that reopened subsequently were busy clearing older pre-pandemic orders. Manufacturing is not an activity that can be boosted at short notice. Besides, making chips is a long, complex process which takes more than a couple of months.

Automakers suffered the biggest hit

No sector has been hit as badly as the automotive industry due to chip shortage. The industry accounts for about 10 percent of global semiconductor sales and is expected to lose $60.6 billion in revenue in 2021.

Last year, automakers began cutting production, and in May 2021, several leading companies predicted that manufacturing will be affected through the year.  Automakers such as Ford, Volvo and Toyota have either had to slow or halt production temporarily in their manufacturing sites. This also caused the sales of used cars to go up.

One of the main reasons for the negative impact is the lack of lasting relationships between automobile companies and semiconductor suppliers. Despite the increasing importance of semiconductors in their products, they do not seem to have realised how critical a component it is. The automobile industry largely relies on third party suppliers instead of dealing with chipmakers directly, which in turn tends to cloud their understanding of the supply chain.

When the pandemic hit and car sales stalled, many companies slashed orders for electronic components to preserve capital, just as they did with orders for tires and other parts. Meanwhile, other semiconductor customers, especially the ones who had experienced chip shortages before, didn’t cancel orders. When demand for cars rebounded after the lockdown restrictions eased, automakers found themselves to be at the back of the line in a market which was already suffering from a severe supply/demand imbalance. 

Running out of playstations

If you are a gamer looking to buy a PS5 gaming console, but finding it impossible to grab one, you are alone. Jim Ryan, CEO of Sony Interactive Entertainment, told Reuters recently that the company is unable to match the high demand because of chip shortage. 

“We're some time away from being able to meet all the demand that's out there. But chip shortage is definitely a challenge that we are all navigating," he told the news agency.

Smartphone companies are also feeling the pinch, with Apple, the world's largest buyer of chips issuing a warning that the supply crunch could hit iPhone sales drastically. 

Crunch to last longer

Semiconductors have become an integral part of the supply chain in several industries. Today, semiconductor chips power everything from smartphones, industrial equipment to cars and can allow global adoption of emerging technologies such as quantum computing, artificial Intelligence and advanced wireless networks like 5G.

Given the increasing demand for semiconductors, the constraints are expected to continue for sometime because the demand is not likely to slow down. So, while the supply constraints and demand surges that caused the shortage are not one-off instances, the rising demand for electronics is not going away. 


Edited by Roshni Shroff


Some resources to help you understand the impact of chip shortage: 

The global chip shortage is starting to have major real-world consequences

Can Indian auto industry overcome the challenge of chip shortage?