Giant car manufacturers, including Volkswagen AG, Subaru, Nissan, General Motors, and Ford have scaled down their production, thanks to the ongoing shortage of computer chips. Last year, Apple had to delay the release of the iPhone 12. Sony, which struggled with stock shortages in 2020, says they are not confident they’ll hit the target for this year’s sales. Microsoft’s Xbox Series X is not doing well either.

While these are but the top losers, every electronic manufacturer that depends on chips has its revenues hanging in the balance. In the meantime, every politician from Washington to Beijing is talking about crisis control. But why is there a shortage, what are the strategies in place to resolve the issue, and is there reason to worry? Let’s zoom in on the matter.

Why is there a shortage of chips?

The ongoing chips crisis is the result of a perfect storm of problems that can be traced back to the onset of the Covid-19 pandemic. As most people stayed at home, demand for consumer electronics such as laptops, phones, and gaming consoles spiked.

Markets such as the gaming industry ranging from the latest AAA game titles to online casino games experienced a boom during this period as people tried to find ways of staying occupied indoors. In the meantime, automotive sales went into a slump by up to 50% due to the uncertainty.

Vehicle manufacturers responded by reducing manufacturing and slimming down their orders for parts, including the numerous computer chips they use. Modern cars contain dozens of chips to monitor and control everything, from steering to braking and engine management.

You would think this move impacted cheap manufacturers. Well, it didn’t have a significant effect because they only shifted their production to wafers for tablets, mobile phones, laptops, and TVs. After all, the demand was higher than ever. Data shows that $40 billion worth of chips were sold in January 2021, having increased by 13.2% from the same month in 2020.

Car sales have now picked up again. As it turns out, vehicle manufacturers hugely overestimated the drop in sales. But the “fabs” are busy meeting the demand from the consumer electronics sector, and most of them are fully booked for months to come. 

For example, Broadcom, the US chipmaker, says 90% of its output in 2021 is spoken for already. As a result, the car-making industry giants have found themselves desperate for chips.

The problem was further exacerbated by a few other unforeseen crises. For instance, the fire that interrupted the Japanese chip-making company run by Renesas Electronics Corp, which is responsible for meeting 30% of the global car microcontroller demand.

Besides, Texas, home to Samsung’s NXP Semiconductors and Infineon, was hit by an unseasonable winter that forced the factories to shut down temporarily. TSMC was also dealt a double whammy as Taiwan faced droughts that shortened the supply of water to the factory. To add some perspective, TSMC uses about 156,000 tons of water a day, so a shortage here is a big deal. They now have to bring in water with trucks.

And there’s more to the story – the trade war between the USA and China. US chip firm Xilinx had to cease the supply of parts to Chinese electronics company Huawei following former President Trump’s blacklisting of Huawei over national security fears. The supply chain was, therefore, already disrupted.

What is being done?

The Chinese government is now offering subsidies to boost the production of chips in the country and reduce its dependence on technology from the West. On the flip side, US President Joe Biden has put together $37 billion in funding to help supercharge chip manufacturing in the USA. Also, TSMC is set to build a chip factory worth $12 billion in the US. Every major player is busy trying to guarantee their future supply of computer chips.

Just recently, Intel Corp disclosed their $20 billion plan to establish a foundry business. They have been manufacturing their chips, but this move is intended on enabling them to produce chips for other companies.

TSMC, too, increased its envisioned 2021 capital expenditure by about 63%, equivalent to $28 billion. Samsung is taking even bolder steps by dedicating approximately $116 billion on a mission to catch up with TSMC, its arch-rival, in a decade.

How long is the computer chips crisis expected to last?

Experts predict that it may take as much as a whole year for manufacturing to pick up speed again and six more months for various companies to normalize their stock levels. The high demand for chips that will support 5G technologies, which is more than anticipated, is probably going to put further strain on the industry.

What’s more, even with all the billions that rich companies are throwing into the rarefied chip manufacturing niche, the process of setting up a foundry is complicated and time-consuming. There are over 1,000 steps involved, and each chip takes as much as 26 weeks to complete. 

After building the new fabs, they also have to run extensive tests to ensure that each of these steps is completed without a hitch before they go into mass production. The entire process of setting up a new foundry may take up to two years! So, it might be a while before the balance is restored.

Should you be worried about the chips crisis?

The saying goes, “when the whole world suffers, an individual does not.” There is no much need for worry unless your life or business is highly dependent on computer chips or you expect to make a major electronics purchase soon.

The good news is that every industry authority is working round the clock to resolve the issue. They also have full support from various world governments. What’s more, this is not the first time we are experiencing a global chips shortage. It will pass.

In the meantime, expect the price of most electronics to rise, as experts believe there is an apparent imbalance in the so-called 200 mm wafers that go into lower-end chips such as display ICs and power management chips. You will have to pay more for your next electronics purchase, including TVs, gaming consoles, phones, and automobiles with many electronic components, which are all of them nowadays.