Posted by Major industries from global car manufacturers to computer makers are grappling with the shortage of semiconductor chips through the year so far in 2021. The early warnings of slowing the supply of semiconductor chips were first reported early this year.
However, it all started with the first COVID-19 wave in 2020, when the semiconductor industry initially experienced supply disruptions. At the same time, pandemic triggered an access buying and demands for chips soared during the second half of 2020.
“Causes started last year due to COVID supply disruptions and companies began building inventory higher than average in the second and third quarter of last year,” says Nina Turner, IDC’s Research Manager – Worldwide Semiconductor Applications Forecaster.
Unfortunately, manufacturers struggled with supply disruptions and were unable to meet the rising chip demands. A double whammy for chip makers as chip production slowed but demands continued to rise.
Certainly, the COVID-19 outbreak remains a big factor behind the laggard manufacturing and supply of chips into the markets globally. However, there are several factors as well that has impacted the semiconductor industry last year.
“Vehicle sales plummeted in Q1 in China and then in Q2 in a row as lockdowns occurred. The third quarter saw a surprise bounce back in sales for the automotive OEMs. But they had stopped their purchases in Q2 and Q3. And other industries filled in the production gap at foundries” points out Turner.
“High demand for computing (stay at home, remote work) and home electronics have also limited supplies of chips like GPUs and other processors. Trade policy by the Trump administration caused Huawei to fill their inventory. And the US also blocked off exports to SMIC which affected production in China,” adds Turner.
The scenario hasn’t changed much this year for the semiconductor industry compared to 2020. As the chip shortage has continued in 2021.
Shortage of chips and its impact on industries
COVID-19’s severity has continued to force lockdowns and restrictions on movements of people and goods this year too. And this has further hampered the manufacturing and supply of semiconductor chips in a big way. Overall this scenario has turned into a prolonged semiconductor chip shortage crisis.
The US automotive sector was the first major industry to be directly impacted by the chip shortage early this year. Ford, Nissan, Volkswagen, Fiat Chrysler, Toyota, General Motors and Honda have been forced to curtailed production of many of their models due to chip shortage.
With the worsening of chip supplies, many even shut their production units and factories in the US and other countries. “The global automotive industry is facing a variety of challenges that may lead the global automakers to reconsider their supply chain structures,” says Chris Rogers, Panjiva’s Research Analyst – a part of S&P Global.
“The lack of availability of semiconductors has been well established. But it appears to be worsening,” points out Rogers in a recently published report on supply chain options for dealing with chip challenges.
“The maximum disruption has been on the automotive market – even missing one part will halt or delay production. There has been some shortages or tight inventory for industrial markets and tight inventory, but not to the extent affecting the automotive supply chain,” says Turner.
“Although the semiconductor companies are in task force mode, working closely with automakers. It has affected companies globally, but a few automotive OEMs did not cut their semiconductor purchases last year and are not affected now,” adds Turner.
The automotive sector, as per estimates will suffer $110 billion losses in 2021. The impact has been visible on other industries and segments too.
For instance, Sony has struggled with the production and sales of its popular gaming console PlayStation 5 launched last November. Given the chip supply constraints, Sony reportedly has admitted to not being able to meet the PlayStation 5 demands in recent months and its sales have been disrupted. But the company expects the supply issues to ease in the second half of this year.
Even Samsung raised concerns over the global chip shortage earlier this year. The South Korean technology giant has called the chip shortage “ a serious imbalance” in supply and demand.
Samsung’s Co-Chief Executive Koh Dong-jin has reportedly said that the chip crunch posed a “slight problem” for the company in the second quarter. “There’s a serious imbalance in supply and demand of chips in the IT sector globally.”
India based Saankhya Labs CEO Parag Naik points out that the chip shortage has increased the lead time to procure components to unreasonable levels. “This will have a huge impact on the revenue of the electronic equipment industry cutting across various verticals,” says Naik.
Interestingly, the COVID-19 outbreak since 2020 has pushed more businesses and enterprises to adopt digital in a big way with online functioning.
With the new “work from home” norm, besides the business verticals, the demand and usage of computing devices among consumers witnessed a record surge this year. But this doesn’t mean the shortage of semiconductor chips has eased.
Though global PC shipments increased to 71.6 million units in Q2, 2021 from 69.9 million units in Q1 units this year, the growth rate has slowed, according to Gartner.
Despite the PC demand remaining above the pre-pandemic levels, the chip shortfall has slowed the global PC shipments by 4.6% Y-o-Y. This slump, according to Gartner marks the deceleration in growth against the record 35.7% Y-o-Y growth in Q1, 2021.
“The global semiconductor shortage and subsequent component supply constraints have extended lead time for some enterprise mobile PC models to as long as 120 days,” says Mikako Kitagawa, Research Director – Gartner.
Over the past years, the demands for semiconductor chips have been rising steadily across industries. But at the same time, the usage and applications of these chips have become more diverse, making the entire chip manufacturing process more complex and time-consuming.
The geopolitical aspect of the chip shortage crisis
Given this situation coupled with the COVID-19 outbreak has further put chip manufactures and suppliers under extreme pressures to ramp up productions. Moreover, the growing hostility between the US and China in recent times has added a “geopolitical” aspect to the prolonged chip shortage crisis.
“Global shortage of semiconductors is a matter of concern for equipment vendors like ourselves. The pandemic and geopolitical situation coupled with restrictions on the movement of the goods have triggered a global semiconductor chip shortage,” says Parag Naik, Co-Founder and CEO – Saankhya Labs.
India based Saankhya Labs uses semiconductor chips to build wireless communication solutions and equipment. The chip shortage, according to Naik has increased the lead time to procure these components to unreasonable levels, which will have a huge impact on the revenue of the electronic equipment industry cutting across various verticals.
Though semiconductors are in demand globally, the Asia Pacific region dominates in the world with 60% of global semiconductor sales. China accounts for more than 30% of the Asia Pacific market and exports chips worth around $100 billion.
And that’s where the need to decentralise the supply and manufacturing of chips outside China is being emphasized across industries in recent times. Besides China, Korea, Japan and Taiwan are the key players in the semiconductor industry in the Asia Pacific.
To be better prepared for such situations, industries need to relook at the supply chain management, according to Naik.
“This includes more investments to decentralize the supply side of the equation. Semiconductor design and manufacturing is becoming strategic for India. Indian government should seriously consider R&D linked PLI scheme to kickstart this ecosystem in India and make India a global hub for the semiconductor supply chain,” emphasizes Naik.
Addressing the chip shortage crisis with some strategic moves
The move to decentralise the supply and manufacturing of chips outside China may sound politically driven. But that certainly is one of the options for the global industries to closely evaluate and consider in near future.
Still, this doesn’t help in solving the semiconductor chip shortage crisis on an immediate basis. And this means that industries will continue their struggle with chip shortage or tight inventory at least in H1, 2021 and beyond.
“Companies having closer planning or partnership on the forecast with semiconductor manufacturers can help alleviate some of the inventory issues,” suggests IDC’s Turner.
“In the longer term, many companies are going to build higher inventory levels than previously due to supply chain security, and expected to develop closer supply chain relationships with their suppliers,” Turner concludes.
Probably, that’s how companies can take measures going ahead to deal with chip shortages in future. And industries perhaps can minimize the impact of the semiconductor chip supply crisis and manage their productions and manufacturing.