Recently, as you may have heard, we’ve been experiencing an ongoing chip shortage. Almost daily, we hear about automakers having to reduce production because there aren’t enough chips available to complete their vehicles. Thousands of new vehicles have been sitting on automaker lots, half finished, waiting for the silicon needed to make them ready to sell. 

The scarcity has led to skyrocketing used car prices. It’s also hit companies that don’t rely on computer chips directly. If an automaker is turning out fewer cars, suppliers of automotive paint, steel, glass and plastics will suffer.

And it’s not just automobiles. According to an analysis by Goldman Sachs, “The semiconductor shortage touches a mind-blowing 169 industries in some way.”

Everything from your electric toothbrush to your refrigerator uses computer chips. Appliances are heavily electronic products these days, and chip scarcity has meant appliance shortages. And consumer electronics, responsible for consuming about 50% of chip output, have been hit hard. 

Video game consoles, gaming PCs and graphics processing units useful for not just gaming but cryptocurrency mining have all suffered. The automotive industry makes about 90 million cars each year, but the smartphone industry churns out 1.4 billion units every year. Even big players like Apple have had to cut back on certain products in order to make sure there are enough chips to go around for their priority lines.

Even the lifesaving medical equipment market is feeling the heat. Pacemakers, blood sugar monitors, magnetic resonance imaging machines and much more all rely on computer chips to function.

New technologies are also being delayed by the shortage. Applications like artificial intelligence and 5G require lots of computer chips. 

Why is this happening?

Well, there are several factors causing the current chip shortage… 

The computer chip, so familiar and necessary in our daily lives, isn’t the result of a single company’s expertise. It has innumerable antecedents contributing to the finished product that powers our world. For a finished chip to roll off the line at an Intel or Taiwan Semiconductor plant, the efforts of hundreds of firms across the globe are harnessed.

Some firms specialize in creating the ultrapure silicon wafers in furnaces running at thousands of degrees that serve as the substrate for the computer chips. Others supply the chipmaking and testing equipment needed to yield a final product. Others use these raw materials and advanced equipment to create a finished chip.

That balance among the members of a huge global ecosystem producing hundreds of billions of dollars in yearly value was disrupted by geopolitical considerations. Semiconductors are an industry of national security importance. As the United States and other nations have engaged in trade disputes with China and attempted to rehabilitate domestic semiconductor manufacturing, it’s disrupted that delicate cooperation among the world’s chip firms.

Then came the COVID-19 pandemic, shuttering factories amid locked-down populations, starting with China, which is a major supplier. 

There is also a series of freak accidents and events worsening the supply situation. For example, a fire at a Renesas chip plant in March in Japan knocked out production for a time. The plant supplies nearly a third of the global market for automotive microcontrollers. 

Taiwan, the source of half the world’s finished chips and over 90% of the most advanced ones, is undergoing a severe historic drought. Because of the tiny size of the features on a computer chip, labs must be kept meticulously clean. Chips are made in clean rooms and workers have to wear special suits. Large amounts of super-purified water are required to clean chip wafers and factories. 

At the same time that supply has become constrained, demand has surged. Chip demand spiked as stay-at-home workers and industries have turned to technology — enabled by computer chips — in order to cope with the COVID-19 crisis. 

And then there’s longer-term demand enabled by this decade’s technology explosion. Microsoft CEO Satya Nadella is on the record as believing that tech’s share of the economy will rise from 5% today to 10% by 2030.

Artificial intelligence, 5G communications, the metaverse, the internet of things, autonomous vehicle technology and much more require a steady supply of advanced chips to become reality. These forces are driving and will continue to drive a historic increase in chip demand as tech’s share of GDP doubles by the end of the decade.

And issues could make things worse. As I mentioned, Taiwan is the leading player in global semi production, especially when it comes to advanced chips. Right now, the island is at the center of a geopolitical tug of war between communist China, its own government and other countries like the United States. If peace in the Taiwan Strait goes up in smoke, we could see the technology equivalent of the 1970s oil crisis, when prices shot up to the moon and people had to wait in long lines to put gas in their tanks.

Fortunately, the industry is investing hundreds of billions to expand capacity and diversify geographically. So, while we might not have a clear end in sight just yet, global powers are committed to alleviating the issue. 

And we’ll be sure to keep you updated every step of the way. 

To a bright future,

Ray Blanco
Chief Technology Expert, Technology Profits Daily
AskRay@StPaulResearch.com